Corporate Governance

What is Corporate Governance?

Corporate Governance is a set of systems or rules or practices through which an entity is directed and controlled to achieve the objective of increasing the wealth of shareholder by way of increasing the economic value for the entity and which is concerned about its relations with various stakeholders of the entity.

Corporate Governance is concerned with the relationship among various stakeholders such as the Board of Directors, shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares.read more, management of the entity, customers, suppliers, employees, bankers, and the government. It covers certain critical issues such as the role of the Board of Directors, composition of the Board of Directors, roles of the Chairman and the CEOCEOChief Executive Officer is the full form of CEO. He is the most senior member of a corporate organization, an executive who oversees the whole administration and operations of the company and reports directly to the board of directors and chairman, with the sole purpose of generating wealth for the company's stakeholders and shareholders. read more, risk management for the entity, assurances over control mechanism, etc.

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For eg:
Source: Corporate Governance (wallstreetmojo.com)

Objectives

The primary of corporate governance is to increase the value of shareholders’ wealth and to protect the interest of various related persons of the business entity (i.e. its stakeholders). Good corporate governance ensures compliance of laws, regulations & self-accepted practices. This makes the firm to acquire high-quality resources such as human capital, which, in effect, enables the entity to perform efficiently.

The other objectives include constituting the board of directors which will take independent decisions for various affairs of the entity and to arrive at procedures & practices which are transparent to the stakeholders.

Corporate Governance Examples

Amazon has one of the highest market capitalizations in the world. The website of the giant company states that it started with “1997 letter to Shareholders”. The said letter states that “the fundamental value of the company will be the shareholder value that the company creates in the long-run”. It’s corporate governance objectives as follows:

  • Customer-centric approach
  • The objective of increasing the cash flows
  • Maintaining a lean culture over the entity & spending the cash resources wisely.
  • Continuous hiring of a talented workforce.
  • Long term considerations have more value than short term profits.

As depicted by the clear message from Amazon, the company is a well-settled image of its corporate governance. The satisfied employees over the globe are clear proof of good corporate governance. Since their employees worked hard in the middle of pandemic (COVID-19), Amazon provided huge performance bonuses over the globe for delivering values to the potential customers.

Structure of Corporate Governance

It is structured as follows:

#1 – Board of Directors (BOD)

  • Board of Directors is the apex body in the structure of corporate governance. Hence, BOD is also called as “Those Charged With Governance” (TCWG).
  • The Board of Directors has control over the management of the entity. All its decisions are made for fulfilling the long-term objectives of the entity.
  • The BOD is responsible for monitoring the performance of the CEO of the entity. It must ensure that conflict of interest does not arise due to any of its decisions.
  • It is further responsible for taking care of the interest of various stakeholders. BOD defined the visions & mission statement of the entity, which guides the team.

#2 – Management

#1 – Shareholders

Principles of Corporate Governance

  • Communication of important information to the stakeholders other than shareholders, i.e. vendors, customers, financers, employees or members of an affiliated association.
  • The Board of Directors will define an ethical code of conduct for the business of the entity.
  • Appointment of new directors is made transparently & ethically with all due procedures.
  • There should be crystal clear transparency in the policies adopted by the entity.
  • Fair treatment to be given to all stakeholders.
  • The management is accountable, transparent and fair in its operations for the business of the entity.
  • Periodic review of management decisions is done & auditor can report directly to the Board of Directors (i.e. those charged with governance).

Regulation

Rules

Corporate Governance Benefits

  • Good governance is reflected in the positive outlook of the share price of the entity.
  • It reduces the cost of capital for the entity.
  • It reduces corruption within & around the entity.
  • It provides proper management of the entity.
  • Interests o various stakeholders are secured.
  • No issue with the Company to raise capital effectively.
  • Company will always be flourished with investors.

Consequences of Weak Corporate Governance

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