Corporate Governance

Definition: Corporate Governance, as the name suggests, is the framework of principles, policies, rules, relationships, industry practices and procedures that defines the way in which companies are to be governed, resources are to be used, legal rules to be complied with and organizational decisions to be taken, in an ethical, and socially responsible manner.

Corporate Governance suggests the relevant guidelines which describe the way company should be directed and regulated, such that it is able to meet the individual, societal and economic goals of the company, which not just adds value to the company, but also benefits the company’s stakeholders in the long run.

Need of Corporate Governance

A body corporate comprises of various stakeholders, such as shareholders, creditors, debtors, customers, suppliers, market intermediaries, competitors, employees, partners, government and society.

It needs to be fair and transparent in its dealings, so as to access the global market, attracting customers, retaining employees, developing associations with partners and also to survive and compete successfully in the market.

If a body corporate fails to implement and behave ethically, there are chances that it will fail in the long run. Corporate Governance is all about embracing and exhibiting ethical conduct in the business.

Importance of Corporate Governance

Corporate Governance is concerned with the corporate’s decision making and implementation thereon, which benefits the stakeholders. The structure describes the assignment of rights, responsibilities and authority among various members, i.e. board of directors, managers, shareholders, etc.

Moreover, it also specifies the rules, to take a decision on corporate matters effectively.

In this way, it defines the structure for setting out the company’s objectives, as well as the methods to reach those objectives and measures to evaluate the performance.

• Corporate Performance: Good corporate governance results in better decision making, as well as it promotes effective succession planning for the top management executives, so as to create a leadership funnel and ensure long term prosperity of the organization.
• Investor Trust: For investors, corporate governance is as important as a company’s financial performance, while deciding companies for investment. Those companies which provide necessary disclosures often attract more investors than the others in the market.
• Strategic Thinking: It enhances strategic thinking at the top level, by appointing independent directors who are not just experienced, but also have good thinking ability.
• Access to Global Market: Not only the national investors are interested in the companies which implement corporate governance, but the global investors also look for such companies for investment purposes. Hence, it gets access to the global market.
• Removing Corruption: Those corporations which have a transparent system, providing relevant disclosure, for the purpose of accounting, auditing and taxation, often reduces corruption. It helps the companies to compete fairly and discourage fraud and malpractices.
• Increase in organization’s value: When there is management accountability and transparency in the business operations, it tends to meet the expectations of the company’s investors, as well as it increases confidence and trust on the management, which increases its overall value.
• Mitigating Risk: A good corporate governance results in mitigation of risk of corporate crises and scandals. If the system is fair, transparent and accountable the company’s board of directors have the knowledge of different types of risks involved in the decision or strategy and in this way they can put control on it.
• Accountability: Investors entrust their money with the company, with an objective that they will get a fair return or value out of their investment. Therefore, it is the duty of the company to make timely disclosures so as to maintain good relations with them.

Corporate Governance is helpful in developing trust in the investors as it depicts the company’s transparency, integrity, accountability and fairness. Further, it influences the way in which organizational goals are established and attained, the way in which risk is monitored and also the way in which the company’s performance is optimized.