CORPORATE GOVERNANCE

The method through which firms are directed and governed is known as corporate governance. The governance of their companies is the responsibility of their boards of directors. The shareholders' governance responsibilities include appointing directors and auditors, as well as ensuring that an appropriate governance framework is in place.

The board's responsibilities include setting the company's strategic goals, providing leadership to implement them, managing the company's administration, and reporting to shareholders on their stewardship. Corporate governance thus refers to what a business's board of directors performs and how it determines the organization's values, as opposed to the day-to-day operational administration of the company by full-time executives.


KEY PRINCIPLES OF CORPORATE GOVERNANCE: 


  • SHAREHOLDER PRIMACY: The acknowledgement of shareholders is perhaps one of the most essential aspects of corporate governance. There is a two-fold recognition. The importance of shareholders to any firm is first recognized — people who buy the company's shares support its operations. One of the most common sources of finance for firms is equity. Second, the notion of shareholder accountability stems from the basic awareness of shareholder importance. Allowing shareholders to elect a board of directors is a crucial policy. The "primary directive" of the board is to always lookout for the best interests of shareholders. The board of directors appoints and supervises the executives that make up the team in charge of a company's day-to-day operations. This effectively means that shareholders have a direct say in how a firm is run.
  • TRANSPARENCY: The protection of shareholders' interests is an important aspect of corporate governance. Shareholders can reach out to people of the community who may not have a financial stake in the company but can benefit from its goods or services.Reaching out to community members provides open channels of communication, which promotes organizational transparency. It means that all members of the community, including those who are directly or indirectly impacted by the firm, as well as members of the press, have a thorough understanding of the company's objectives, techniques, and overall performance. Transparency indicates that anyone can choose to review and verify the company's actions, whether inside or outside the company. This builds trust and is likely to attract more people to patronize the business and, eventually, become shareholders.
  • SECURITY: Security is becoming an increasingly significant part of corporate governance. Shareholders and customers/clients must have confidence that their personal information is not leaked or accessed by unauthorized individuals. It's also critical to keep the company's proprietary procedures and trade secrets private. A data breach is not only costly but also dangerous. It also erodes public trust in the company, which can lead to a significant drop in its stock price. When investors lose faith in a company, it loses access to the funding it needs to grow. Everyone in a corporation, from entry-level employees to board members, must be familiar with corporate security measures including passwords and authentication techniques.


CONSEQUENCES OF POOR CORPORATE GOVERNANCE: 

One of the most important goals of corporate governance is to establish a system of rules, policies, and practices for a corporation, or to hold people accountable. Each main component of the "government" - the shareholders, the board of directors, the executive management team, and the company's employees – is held accountable by the others. The fact that the board of directors reports financial information to shareholders regularly, which embodies the corporate governance principle of openness, is part of this accountability.


EXAMPLES OF BAD CORPORATE GOVERNANCE:  

VOLKSWAGEN: 

Bad corporate governance can cause doubts about a company's credibility, honesty, or obligation to shareholders, all of which can harm the company's financial health. Tolerance for illegal behaviour can result in scandals like the one that plagued Volkswagen AG in September 2015.

The specifics of "Dieselgate" (as the scandal was dubbed) revealed that the manufacturer had purposefully and systematically manipulated engine emission technology in its cars for years in order to manipulate pollution test results in America and Europe. In the days following the commencement of the scandal, Volkswagen's stock lost over half of its value, and global sales fell 4.5 per cent in the first full month after the announcement. VW's board structure was a contributing factor in how the emissions rigging occurred and was not detected sooner. 

In contrast to the traditional one-tier board system employed by most companies, VW employs a two-tier board structure that comprises a management board and a supervisory board. The supervisory board was supposed to keep an eye on management and approve company actions, but it lacked the independence and authority to do so. A high number of shareholders were represented on the supervisory board. Members of the supervisory board had control over 90% of shareholder voting rights. There was no actual independent supervisor; the supervisory board was controlled by shareholders, which negated the supervisory board's duty of overseeing management and personnel and how they operated within the corporation, which included, of course, fixing emissions.


ENRON: 

The easiest way to describe bad corporate governance is to provide an example, and there is no greater example than Enron Corp. Enron's dilemma was that its board of directors waived many conflict-of-interest laws by enabling Andrew Fastow, the company's chief financial officer (CFO), to form separate, private partnerships to do business with the company. In reality, these private partnerships were utilized to conceal Enron's debts and liabilities, which would have considerably decreased the company's profits. What happened at Enron was the result of a lack of corporate governance, which should have prohibited the formation of these shell companies to hide the losses. The organization also had a corporate culture that included dishonest personnel from the top down to traders who conducted unlawful market moves.


CONCLUSION: The guiding principles that a corporation establishes to direct all of its activities, from compensation to risk management to employee treatment to reporting unfair practices to its impact on the environment, and more, are referred to as corporate governance. A firm with strong, transparent corporate governance makes ethical decisions that benefit all of its stakeholders, allowing it to position itself as an appealing investment option if its financials are in good shape. Bad corporate governance causes a company's collapse, which often results in scandals and bankruptcy.


REFERENCES: 

https://corporatefinanceinstitute.com/resources/knowledge/other/corporate-governance/

https://www.icaew.com/technical/corporate-governance/principles/principles-articles/does-corporate-governance-matter#:~:text=Corporate%20governance%20is%20the%20system,governance%20structure%20is%20in%20place.

https://www.investopedia.com/terms/c/corporategovernance.asp


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