25 Aug 2022 ANKIT CHADHA

What is Corporate Governance and It’s Importance?

Importance of Corporate Governance | TRC Consultant

What is Corporate Governance?

Governance is concerned with the amount of time you devote to working 'on' your business rather than 'in' it. This includes all of the safeguards you put in place to ensure your company runs smoothly, meets its goals, and stays out of trouble. Governance also entails receiving expert advice on topics about which you do not yet have sufficient knowledge, as well as support when making major decisions. 

The set of rules, practices, and processes that guide and control a company is known as corporate governance. Balancing the interests of a company's numerous stakeholders, which include shareholders, senior management executives, customers, suppliers, financiers, the government, and the community, is what corporate governance entails. 

Because corporate governance also serves as a framework for achieving a company's goals, it covers nearly every aspect of management, from action plans and internal controls to performance measurement and corporate disclosure. 

Acknowledging Corporate Governance

Governance is the set of rules, controls, policies, and resolutions put in place to govern corporate behavior. Although proxy advisors and shareholders are important stakeholders who have an indirect impact on governance, they are not examples of governance. The board of directors is critical in governance, and its decisions can have a significant impact on equity valuation. 

Investors value corporate governance because it demonstrates a company's strategy and business integrity. Businesses that practice good corporate governance can build trust with their investors and the community. As a result, corporate governance promotes financial viability by providing long-term investment opportunities to market participants. 

Most companies strive for good corporate governance. Many shareholders believe that a company must demonstrate good corporate citizenship through environmental awareness, ethical behavior, and sound corporate governance practices in addition to profitability. A transparent set of rules and controls with aligned incentives for shareholders, directors, and officers constitutes good corporate governance. 

Why is Corporate Governance important?

Strong and effective corporate governance contributes to the development of an integrity-driven company culture, which leads to improved performance and a more sustainable business overall. Essentially, it exists to increase the accountability of all individuals and teams within your company, working to prevent mistakes from occurring in the first place. 

When a company has strong corporate governance, it communicates to the market that the organization is well-managed and that management's interests are aligned with those of external stakeholders. As a result, it can give your company a significant competitive advantage. 

  • Reduces Agency Issues

When one entity acts as another entity's agent, this is referred to as agency. A type of agency relationship exists in businesses when management acts on behalf of the shareholders. In some cases, the board of directors may not act in the best interests of the shareholders. Corporate governance addresses this issue by ensuring that the objectives of both shareholders and management are aligned. 

  • Gains Investors

Corporate governance provides a system for best practices for businesses. This ensures that a company's operations are efficient. It also safeguards the rights of shareholders and other stakeholders. When looking for companies to invest in, investors will always prefer those with good corporate governance. Corporate governance can thus attract new investors in this manner. 

  • Accountability is encouraged

A sound, transparent, and credible financial reporting system is ensured by a good corporate governance system. In this way, corporate governance promotes accountability in a business. This accountability can also help with the aforementioned aspects, such as attracting more investors or protecting stakeholders. 

  • Enhanced organizational effectiveness

Corporate governance is a key factor in determining industrial competitiveness. Many questions have been raised recently about how a company is governed. Better governance ensures improved corporate performance and economic outcomes. Corporate governance establishes the foundation for the company's behavior, resource utilization, product/service innovation, and overall corporate strategies. 

  • Maintains Compliance

Companies are intricate business structures. As a result, they must follow a variety of rules and regulations. Corporate governance is also relevant in this context because it ensures that companies meet their obligations. Compliance with rules and regulations is also part of the risk management process at a company. Companies can avoid unnecessary problems by adhering to rules and regulations. 

  • Risk Reduction

Corporate governance also focuses on risk management for businesses. The audit committee or risk committee is one area that can help with this. These committees are in charge of managing and mitigating the risks that a company faces from various sources. Corporate governance ensures that the risks that companies face are minimized by establishing such committees. 

 

Benefits of Corporate Governance

Implementing effective corporate governance can be difficult to achieve in its entirety right away, but there are ten specific aspects to consider when implementing corporate governance in your organization: 

  • Establish a suitable board

If you want to achieve success through corporate governance, your board should be balanced, competent, and diverse. Aim for qualified directors who understand the business well but can also provide a fresh perspective.

  • Regularly review the Board

The composition of your organization's Board of Directors is critical and can make or break the success of its corporate governance. Regularly reviewing your Board can help you identify any potential flaws quickly, allowing you to make timely improvements and stay on track. 

  • Create Stable Foundations for Oversight

It is critical to supervise the work of both the Board and management. Create a systematic foundation for establishing, monitoring, and evaluating their roles and responsibilities. The Board must be aware of management actions and available during all key decision-making processes.

  • Attempt to create long-term value

Orienting key performance indicators toward long-term value creation rather than short-term success will ensure your company's long-term success. 

  • Risk management should be prioritized

Establish a risk management process and internal control framework that are both effective and appropriate for your company's needs, and aim to evaluate its effectiveness on a regular basis. Disaster recovery plans are critical to any business venture, so keeping them up to date is always a good idea.

  • Maintain Reporting Integrity

Corporate reporting is important, but so is ensuring its overall integrity. Aim to implement safeguards throughout the reporting process, such as external audits of the company

  • Provide accurate and timely information

Transparency with key stakeholders is critical, and this can only be achieved by aiming to provide information on a regular basis, both in good and bad times. This increases stakeholder trust in the business and eliminates the risk of them losing faith and withdrawing.

  • Place a premium on overall integrity 

Integrity practices do not end with reporting. Maintain consistency in your promotion of ethical behaviors, and consult shareholders on their interests and concerns regarding your company's integrity. 

  • Deal with Stakeholders Equitably

Respect your shareholders' rights and be willing to change your plans to accommodate them if necessary and appropriate. 

  •  Make Certain Adequate Disclosures

This refers to the disclosure of all transactions involving related parties as well as the other interests of all directors involved. External financial interests outside of the company may influence a director's decision-making. 

Conclusion 

Corporate governance is a system that aims to instill policies and rules that help an organization maintain its cohesion. It exists to hold a company accountable while also assisting them in avoiding financial, legal, and ethical pitfalls.  

 

 Frequently Asked Questions 

1. What are the objectives of corporate governance? 

Transparency, accountability, and security are the primary goals of corporate governance. To ensure good corporate performance, all three are critical in successfully running a company and forming solid professional relationships among its stakeholders, which include board directors, managers, employees, and, most importantly, shareholders. 

2. What are the features of corporate governance? 

Good corporate governance establishes a clear set of rules and controls that provide shareholders, directors, and officers with the desired incentives. Most businesses strive for excellent corporate governance. Many shareholders believe that a company must demonstrate good corporate citizenship through ethical behavior and a variety of corporate governance practices in addition to being productive. 

3. Which corporate governance model is followed in India? 

The Company Act of 1956 governs Indian corporations, which is modelled after the UK model. The majority of private companies are closely held or dominated by a founder, his family, and associates. 

 

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