What is corporate governance?

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Corporate governance describes the processes, structures, and mechanisms that influence the control and direction of a corporation. Corporate governance ensures that the interest of stakeholders in a company corresponds, and a company’s board of directors is the driving force behind its cooperative governance. Corporate governance distinguishes owners from managers. There should not be any conflict between the owners and managers of a company if good corporate governance is to be maintained.

THE PRINCIPLES OF CORPORATE GOVERNANCE

Transparency

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All stakeholders in a company should be informed about the activities taking place in a company. Good corporate governance requires transparency; the company should be willing to be sincere in its dealings with stakeholders. No information should be kept undisclosed. Investors should be informed in real-time about the performance of the company.

Responsibility

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The Board of Directors is the core decision-maker in a company. With this power comes full responsibility and authorization. The Board of Directors is responsible for overseeing the management of the business, and affairs of the company, appointing the Chief Executive, and monitoring the performance of the company. In doing so, it is required to act in the best interests of the company.

Accountability

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Accountability goes hand in hand with responsibility. The Board of Directors should be made accountable to the shareholders for how the company has carried out its responsibilities. Corporate accountability refers to the obligation and responsibility to give an explanation or reason for the company’s actions and conduct. The board of directors should minimize waste, risk, mismanagement, and corruption. Set up the company to deliver long-term success and economic growth, and ensure they maintain investors’ confidence, to raise capital efficiently and effectively. Constantly improving control over management and information systems, and keeping the goals and objectives of the company at the forefront of their decisions.

Fairness

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All stakeholders should have equal treatment. Make sure your company’s management considers the best interests of all involved, from employees to investors, suppliers, and others. Fairness strengthens the trust among stakeholders and makes them more resistant to the pressure of interested third parties.

OBJECTIVES OF GOOD CORPORATE GOVERNANCE

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A good network of cooperative governance separates the management from the owners of a company. The corporate owners (shareholders) feel assured that management works in the best interests of the company and their ownership. Transparency and fairness are essential qualities a company must possess especially in recent times to have a good reputation in the global market.

In today’s global economy, companies with a high level of transparency and efficiency are better in gaining the credibility and trust of the global market. It is essential to focus your business transactions on your company’s values.

BENEFITS OF CORPORATE GOVERNANCE

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• Good corporate governance ensures corporate success and economic growth.
• Strong corporate governance maintains investors’ confidence, as a result of which, the company can raise capital efficiently and effectively.
• Capital cost is reduced.
• It increases the prices of shares.
• Corruption, risks, and mismanagement are kept in check under good governance.
• It promotes inclusive management with the interest of everyone at heart.

Bad governance can be very detrimental to the reputation of a company, an example of such is that of Volkswagen AG. Bad corporate governance can downgrade a company’s integrity, reliability, and overall trustworthiness to shareholders; all of which can damage the finances of a company. Engaging in illegal activities can cause scandals like the one Volkswagen AG was involved in September 2015.

Details of what eventually became known as the “Diesel Gate” showed that the company had intentionally rigged the engine emission equipment in its cars to manipulate pollution test results in America and Europe. Volkswagen experienced nearly a 50% reduction in its share value in the days following the news of the scandal.

VW’s board structure was a major part of why the emission rigging was able to take place for so long. VW has a two-tier board system unlike the one-tier board systems of most companies, which consists of a management board and a supervisory board. The supervisory board was meant to keep an eye on management and endorse corporate decisions; however, it lacked the independence and authority to be able to carry out these ascribed roles.

About 90% of shareholder voting rights were controlled by members of the supervisory board. The shareholders being in control of the supervisory board defeated the whole purpose of the board, whose objective was to oversee management and employees and how they operate within the company.

CONCLUSION

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Good corporate governance is required for the efficient running of a company as this will affect the overall image and financial status of a company. Companies with good governance have been able to enjoy the benefits that come with it, especially in today’s global market where transparency is of utmost importance.