Understanding Corporate Governance

Corporate governance refers to the set of policies and procedures that guide the way an organization is managed and controlled.

Without these systems in place, business owners may struggle to scale their companies and may also find it difficult to connect with investors. For example, a recent study from McKinsey found that “governance-related demands by investors around the world rose from just 27 in 2009 to around 1,400 in 2019”, with the numbers continuing to grow.

As such, corporate governance is something that business owners should take seriously to ensure both the longevity and stability of their companies.

What is corporate governance?

As outlined above, corporate governance refers to the policies, procedures and systems that are established to ensure a business is governed correctly. This can help to ensure that the best interests of all involved, including stakeholders, employees and customers, are protected and the proper ethical standards are maintained.

There are various government regulations in place which relate to the need for effective and ethical corporate governance, such as the Sarbanes Oxley Act, the Securities Act of 1933 and the Securities and Exchange Commission (SEC).

Why is corporate governance important?

Corporate business is important because:

●     It ensures businesses are run strategically, effectively, and perhaps most importantly, ethically.

●     It ensures that business owners comply with all local, state and government regulations, protecting the best interests of all parties and preventing fraudulent activity and misconduct.

●     It establishes a sense of trust between business owners, stakeholders, and investors by encouraging transparency when making crucial decisions.

Beyond this, corporate governance is also critical to ensure that all industries and markets can function fairly and efficiently.

What are the consequences of poor corporate governance?

Business owners could face various consequences if corporate governance is not taken seriously.

It could significantly limit growth due to mismanagement. This, in turn, could lead to reputational damage that can dissuade potential investors, meaning that business owners are unable to gain access to the funds they need to develop.

Companies that do not take corporate governance seriously could also face serious legal ramifications. For example, regulatory bodies can impose fines on companies that do not properly disclose their actions and procedures or violate laws. In cases where poor corporate governance has left the door open to criminal activity, criminal charges can be filed.

Corporate Governance: Best Practices.

The key components of effective corporate governance structures are often called the “four pillars of corporate governance.”

●     Accountability.

●     Transparency.

●     Responsibility.

●     Fairness.

As such, those looking into the best practices for corporate governance must work to ensure that all business operations are built upon these pillars.

For example, both accountability and responsibility can be established by ensuring that everyone, from board members to stakeholders, has a clearly defined role within the company.

This encourages individuals to act or to hold themselves accountable, as it is clear precisely what they are responsible for. If these lines are blurred, individuals are more likely to make mistakes or to attempt to pass the blame onto another party instead.

Corporate transparency can be established by maintaining open communication channels with stakeholders, disclosing any necessary information or reports, and complying with all governmental regulations.

Both transparency and fairness can be established by working to ensure your business operates as ethically as possible. A clear code of ethics can ensure that all involved parties are aware of this.

Ready to improve upon your Corporate Governance Policy? Get in touch today!

While corporate governance is crucial in terms of both business success and longevity, many are simply unsure of where to begin. However, that’s where we can help.

At Bingham Hess, we have years of experience in providing business owners with the legal support and guidance they need. This ensures that corporate governance worries become a thing of the past, and you can rest easy knowing that your policies and procedures are up to current standards.

If you would like to find out more, please contact our Corporate Law experts today for feedback and advice regarding your current corporate governance strategy.