Understanding Corporate Governance

What is Corporate Governance?

Corporate governance is the set of procedures, customs, laws, policies and institutions which affect the way a corporation is directed, controlled or formally administered. Furthermore, corporate governance will also include the relationships among the stakeholders of a company or those who are involved in or profit from the company’s long term growth. For a contemporary business corporation, the primary external stakeholders are composed of debt holders, shareholders, trade creditors, customers, communities and suppliers—each of these groups of stakeholders is directly affected, in one way or another, by the corporation’s activities. Internal stakeholders, a term commonly used when analyzing and observing corporate governance, refers to the board of directors, executives and other employees who are influential in deciding the company’s day-to-day policies.

Corporate governance, using the above description as a basis point, is a multi-faceted subject. A primary aspect of corporate governance is the general nature and extent of accountability, particularly in regards to individuals of the organization, as well as the mechanisms that try to mitigate the principal-agent problem. Due to the high-profile collapses of a number of large corporations, the majority of which involved accounting fraud or corporate scandal, the field of corporate governance and the practice of the field has gone through a renewal of interest.

Corporate Governance Process:

Although it is common to suggest that corporate governance lacks a universal definition, the terms refers to the set of processes, customs, laws and institutions that affect the way a corporation is managed. The field evaluates and defines the relationships among the stakeholders involved in the particular business model and the goals of the entity. Because of the fluctuations of these generalized processes, corporate governance is a broad term that evaluates and regulates the manner in which the rights and responsibilities are shared among stakeholders, shareholders, owners and managers of the respective organization.

In essence, corporate governance will elucidate upon what rights and responsibilities are granted to each of the corporation’s participants and to what degree each individual may enjoy such rights. Within a corporation, the presence and structure of corporate governance will begin with the laws that impact the operation of any company within the particular jurisdiction—companies may not legally operate without a corporate structure that meets the respective areas minimum requirements.

The theme of corporate governance revolves around the preparation and submission of documents that must needed for approval before incorporation can legally take place. Such documents help form the basis for the final expression of the company, particularly the balance of power between shareholders, stakeholders, management and the board of directors. Furthermore, the bylaws, articles of incorporation and the specific company charter will include details that determine who possesses what authority in the decision making process of the company. Along with the laws that govern a corporation in the particular jurisdiction and the founding documents, corporate governance is further refined through the drafting of formal procedures that not only assess the distribution of powers in accordance to the corporate charter, but also to further define how those powers may be enforced. This process enables the company to maintain an affirmed balance of power as the company evolves and grows; the rights and privileges and the flow of responsibility is not tampered with nor refuted.