Benefits of a corporate governance framework November 16, 2017

Benefits of a corporate governance framework

Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place.

The approach to corporate governance globally varies, and is constantly evolving as economies expand and contract, and business practices develop.

Similarly, the approach adopted by individual companies will vary depending upon the nature, size and risk profile of the business in question. As a business grows, so too may its requirement for corporate governance systems that enable the owners and managers to keep track of that growth, and ensure that it is managed in a sustainable way.

Core Values of Corporate Governance framework

Fairness: The corporate governance framework should protect shareholder rights and ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violations of their rights.
Responsibility: The corporate governance framework should recognize the rights of stakeholders as established by law, and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.
Transparency: The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the company, including its financial situation, performance, ownership, and governance structure.

Benefits of Corporate Governance Framework:

Increases Trust - Businesses do not exist in a vacuum. Organisations that are cognisant of the role they play in wider society will typically seek to behave in a transparent manner by providing clear and accurate information to their stakeholders on a regular basis. When all stakeholders feel able to rely upon the data provided by companies this leads to increased levels of trust and organisations are able to develop stronger, longstanding relationships with their stakeholders. The benefits that can be reaped are numerous and varied - from favourable credit terms to repeat business.

Fewer Fines, Penalties & Lawsuits - Corporate governance includes instituting policies that require the company to take specific steps to stay compliant with local, state and federal rules, regulations and laws. For example, as part of corporate governance, an executive management team or board of directors might conduct a review of the company’s hiring practices if it falls under the guidelines of the Equal Opportunity Employment Commission. You might require that your accounting department undergo an external audit by an independent auditor every quarter or year.

Lowers The Cost Of capital - In today’s volatile environment, the implementation of good governance practices may lead to a reduction in a company’s cost of capital. An organisation that is seen to be stable, reliable and able to mitigate potential risks will be able to borrow funds at a lower rate than those with no, or weak governance systems. Companies with debt or equity investors may find that their investors pay a premium for the comfort they obtain in knowing that the company has a sound governance framework.

Decreased Conflicts and Fraud - Corporate governance limits the potential for bad behavior of employees by instituting rules to reduce potential fraud and conflict of interest. For example, the company might draft a conflict of interest statement that top executives must sign, requiring them to disclose and avoid potential conflicts, such as awarding contracts to family members or contracts in which an executive has an ownership interest. The company might forbid loans to officers and family members or the hiring of family members. External audits or requiring checks over a certain amount to be approved and signed by two people help reduce errors and fraud.

Minimises Waste, Risks, Corruption and Management - Companies committed to implementing and maintaining good governance practices will likely find that certain risks are drastically minimised. This is because strong governance practices typically increase levels of transparency, trust and integrity, all of which create an environment conducive to reducing risks, opportunities for corruption and any source of mismanagement.

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