Corporate governance is the system in which companies are directed and controlled to achieve their purpose. It identifies seamless internal controls for a company on power sharing and accountability in decision making. Essentially, it balances a company’s interests with those of its shareholders, top management, customers, suppliers, and other stakeholders.
Corporate governance tools ensure the following responsibilities are met:
- Setting the company’s strategic goals
- Providing the necessary leadership structure
- Supervising the management
- Reporting to shareholders on their stewardship
Theories of corporate governance are defined by the causes and effects of variables such as the configuration of the board of directors, the audit committee, the independence of managers, the role of top management, and their social relations beyond the legal framework. Effective corporate governance requires applying a combination of existing corporate governance theories rather than applying an individual theory.
Corporate governance encompasses every aspect of a business model. It addresses company goals across diverse industries by offering the foundation for achieving them. Internal control processes are tailored to create a conducive working environment as well as performance assessment and evaluation tools as elements of the management realm of corporate transparency.
An institution’s governance is structured to provide long-term corporate benefits. The structure is anchored on the following principles of governance:
- Fairness – addresses the suppression of members within an institution. Shareholders should at all times receive equal treatment and consideration in receiving information during decision making.
- Transparency – as part of a company’s business strategy, stakeholders should be kept up to date on the company’s current status, plans, and risks. This information should be accurate and timely. Essentially, corporate transparency enhances confidence in decision-making.
- Accountability – the pillar of accountability refers to the obligation and responsibility to provide a substantial explanation of reasons for a series of actions. The board is tasked with being accountable for the following issues:
- A clear understanding and assessment of the company’s financial performance.
- The extent of risk the company is willing to take.
- Having monitoring and improvement measures for internal control systems
- Transparent financial reporting and risk management reporting to stakeholders.
- Continuous communication with stakeholders on clear and understandable assessments of the company’s goals
- Responsibility – board is required to exercise full authority in growing a company. A responsible team facilitates management monitoring. Responsibility should be structured to optimize synergy but also avoid overlap of responsibility.
Business pillars of governance ensure business resources are used optimally towards the strategic objectives. Corporate management is encouraged to implement the above pillars for effective management.
A company is run through different corporate relations; such relationships are categorized as theories of corporate governance.
- The agency theory – explains the relationship between the principals and agents. The theory is characterized by a separation of ownership and control. The agent must make their best decisions for the principal and be held accountable for tasks and responsibilities.
- The stewardship theory – the theory concentrates on preserving and maximizing shareholders’ capital. The theory emphasizes the importance of working independently in order to optimize shareholders retained profits.
- The stakeholders’ theory – the theory encompasses firms that have broader management accountability due to a wider range of stakeholders. Stakeholder theory focuses on managerial decision-making where all interests have intrinsic value. All interest groups are treated equally.
- The resource dependency theory – the theory ensures that resources are available and examines the functions of directors. The directors facilitate the availability of resources and improve organizational effectiveness, skills, and access to essential stakeholders. Directors leverage external connections in pooling resources relevant to capacity building.
The application of the pillars of good governance creates a conducive environment for corporate growth, while theories account for quality and efficiency in business operations. Companies must seek good corporate practices to achieve their long-term potential.