Introduction to corporate governance
Corporate governance is defined as a system of law, procedures and processes by which an organization is governed and controlled. Corporate governance fundamentally involves ensuring a balance in the interests of several stakeholders in an organization. These stakeholders include customers, financiers, suppliers, shareholders, government, management and the community. Governance ensures that the financiers of organizations get returns on their investments. Corporate governance also provides the framework for organizations to achieve objectives. It also covers all management spheres like action plans, performance measurement and internal controls.
The way in which a company sets its policies can also be referred to as corporate governance. Companies establish their own policies, regulations and customs as a governing methods. The policies set the foundation upon which the organization functions. Corporate governance is meant to increase the organizations accountability and set place preventive measures to avoid ruin. In some companies, managers, entrepreneurs and the key financiers may abscond with the profits or returns made from investments. Through corporate governance such instances can be avoided due to the need for accountability. Those involved in absconding with the companys finances faces consequences set by the policies governing the institution. A well-working corporate governance body can be equated to the internal affairs unit of a police department, whose role is to weed out and eliminate issues without bias.
This paper seeks to highlight several aspects of corporate governance. The thesis will give an overview on the meaning of corporate governance and highlight general objectives and importance. The paper will also discuss corporate governance mechanisms, forms, world systems and risk management. There will be special focus on management structure including executive performance, role of directors and effectiveness of the board. Other related topics in review include auditing mechanism, executive compensation and institutional ownership. Corporate governance as a subject is important especially in the practical application of advanced market economies.
Importance and general objectives of corporate governance
Having a collective authority framework plays a significant role in assisting boards to get a better comprehension of their intended role. The framework should possess characteristics that contribute to operative governance and tools for dealing with risks involved. A framework also gives a more rational concept for the evaluation of managerial responsibilities. Management responsibilities should be in line with the boards unwritten duties. Having objectives is important because objectives set in motion the governing process, which enhances performance and accountability of corporate organizations. Objectives of corporate governance can he highlighted as shown below.
Risk Intelligent Enterprise
As earlier mentioned, the foundation of an operational governing program lies in effective risk management. Governing bodies have therefore set an objective to create a risk intelligent enterprise. The people involved in risk management include board of directors, executive management, business units and complementary functions. The board of directors plays the role of setting the working tone and overlooking from the top. The executive management is responsible for driving risk management practices throughout the entire company. Most of the risk activities occur at the business unit and supporting function level, therefore playing a key role in the overall governance plans.
Tool for Dealing with Governance Risk
One of the main objectives of companies in governance is to find tools that deal with governance risks. Boards and managements of companies need a governing framework due to various reasons. An outline defines various roles played by the board and management. It also helps in the definition of duties to prevent duplication of roles and overlooking of important aspects of the organization. A governance framework also enables the board to execute core procedures by providing organization to policies and various tools. For example, the use of annual calendars, setting up meeting agendas and committee charters among others. Using the framework, the board is able to focus on specific issues and prioritize them according to urgency. A framework is also useful in providing an organized way for management to work together with the board. Working together minimizes risks and promotes productivity in organizations. The framework is therefore used as a tool for dealing with governance risk.
The Boards Unique role
There are five essential elements that describe how a governance program should work. These include talent, strategy, integrity, performance, and governance. These elements are unique to the role of the board. This is because the management structure is limited to perform this duty. For example, the General Manager of an organization does not have enough authority to appoint the CEO. Such appointments are left entirely to the board. The manager can, however assist in the maintenance of effective governance programs. All organizations should therefore aim at defining the unique roles played by the board. Under the boards unique role, the following elements are objectives of governance in companies.
To promote good governance: the board plays a key role in establishing structures to fulfill different responsibilities. The duties fulfilled should put into consideration views of investors, management and regulators. Selection of the board members occurs under a comprehensive process that is in line with the organizations strategies.
To execute planned strategy: under strategy, the board advises management on the generation of planned priorities that are in line with the organizations mission, focus and mutual stakeholders interests. The board also plays the role of monitoring the execution of plans by management, ensuring transparency and promoting internal and external communication if the strategic plans.
To enhance performance: the board assumes the responsibility of reviewing and approving organizational strategies, operating plans and financial requirements. Reviewing an organizations operations enhances performance. The board is also responsible for monitoring any execution policies that management carries out. The board should ensure that budgets are established along objectives set for the organization.
To promote integrity: to promote integrity, the board sets ethical guidelines for the organization. These guidelines are then handed over to management for adoption and implementation. All policies are designed to endorse authorized compliance and suitable standards of integrity, honesty and ethics that are transferred to all branches of an organization.
To promote talent: in every organization, the board is responsible for the selection, evaluation and compensation of the CEO. The board is also tasked with the duty of overseeing talent programs, especially those related to leadership and succession. The talent found is groomed for potential leadership through various programs.
To deal with risk governance: the board is tasked with the duty of monitoring organizational operations in order to avoid, prevent and manage risks. The board works together with management in setting risk expectations, exposures and tolerances.
Corporate Governance as Risk Mitigation
When execute effectively, corporate governance has the ability to prevent scandals, fraud and any form of liability of the organization. This makes it of paramount significance to any organization. It is also useful in the enhancement of an organizations brand and image in the public view. Imaging plays an important role in the attraction of shareholders and debtholders. Corporate governance is the tool by which a company avoids trouble, thus mitigating risks. An organizations shared philosophies are responsible for creating a work culture. When the philosophy is broken down, the organization becomes defective and management becomes relaxed and corrupted. Complacency in management may result to a fall in the company in the form of auditing financial reports, bankruptcy, and unethical dealings. Any public knowledge of such activities may lead to loss of shareholders due to mistrust. Therefore, the corporate governance plays an important role in preventing this by enforcing risk prevention methods.
Principles of Corporate Governance
There are five principles that direct corporate governance. They also form the basis upon which corporate governance performs its duties. The five principles include:
This is defined as the key process in which an organization maintains its stock price. Focus is put on larger shareholders as opposed to small shareholders who lack the power to dictate stock price. The board is tasked with the responsibility of focusing on the major shareholders interests first. A good board will ensure that all shareholders opinions are heard and their participation allowed via various forums.
Corporate governance should also recognize stakeholders interests. This is important mainly in establishing a good and positive relationship with the public, press and community.
All duties and responsibilities for each member on the board must be clearly outlined to the major shareholders. The board members should also share the same vision and mission of the organization. Having mutual interests and vision makes it easier for the board to carry out the organizations mission effectively.
Behavior violations have the potential to destroy the organization and cause legal problems. Corporate governance plays the role of setting guidelines in which ethical boundaries should not be crossed. This is done mostly by establishing a code of conduct for board members.
Transparency is the key to upholding shareholder trust in the organization. To be transparent, an organization needs to keep financial records and reports. The reports should be done without exaggeration, alterations and falsifications. Falsifying financial records is grounds for a company to be investigated, and the results of any discrepancies found are punishable by law.
Status, antagonism and corporate governance
The agency theory concept is used to explain the association of status between agents and principals in the business. The theory is concerned mainly with solving issues between the principals like shareholders and agents like executive members in an organization. Problems faced in the agency theory can be categorized into two: those arising from conflict of goals between the shareholders and executives, and those arising from the difference in attitudes of the executives and shareholders towards risk. Each of the parties in conflict may be persuaded to take different courses of action depending on the nature of risk involved. Because of different risk tolerances, the principal and the agent may each be inclined to take different actions. In any case of misconduct by any board member, the others are tasked with deliberation and making a decision on the step of action to take. A board member can either be suspended, demoted or expelled according to the offense conducted.
Responsibility and ethics of corporate governance
Ethics in corporate governance can be defined as the way in which an organizations stakeholders manage action in the interest of the majority to avoid destructive behavior. It forms one of the foundations upon which corporate governance...
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