The Importance of Good Corporate Governance

In recent years the public has become more disillusioned with institutions, including government, law enforcement, religious groups, civic organizations, the media, and business. The public’s cratering trust in the people who run these institutions has had a destabilizing effect on society and the economy. In order to build their brands and succeed in the current environment, company leadership needs to work harder to create the impression of ethical behavior, stability, organization, and accountability. One way to do this is to make good corporate governance a priority.

What Is Corporate Governance?

The most simple definition is “how a company is governed,” but there’s plenty of complexity in this term. Corporate governance encompasses all laws, regulations, codes, practices, and processes that work to maintain control over the organization. These work in tandem to administrate the running of the company, determine which shareholders have which rights and responsibilities, attract financial and intellectual capital, provide value to shareholders, increase profitability, and live out the company’s mission. 

When a company is properly governed, it will thrive and become more valuable. In fact, shares of companies that are perceived as well governed are high as investors are willing to pay more money for something they believe will remain well run and profitable over time. Financial institutions extend more credit based in part on corporate governance. Well run companies receive higher business valuations

The inverse is true too. Whenever a company is revealed to be badly run or riddled with corruption, its stock price drops precipitously even when the company has a solid financial history. Everyone flees a sinking ship. 

Who Is Involved in Governing Corporations? 

When people think about corporate governance, they usually visualize a board of directors, but there is much more to good governance than one group of people. These include:

  • The board of directors
  • Shareholders
  • Company management

All the above interact together to influence the way the company operates in order to maximize performance and profitability while holding each other, and the company itself, accountable. We tend to think of these interactions as dramatic as we’ve seen on television and in movies, but processes play a big role too in governing.

Any well governed organization will have periodically scheduled financial auditing, both internal and external. The results of those audits give the company’s leadership information they can use to make decisions and changes. Internal auditing should occur and be reported continuously. External auditing is necessary to provide an objective perspective and ensure what the internal audits report is, in fact, accurate.This is the “Trust, but verify” approach. It works to keep everyone honest. 

All of the leadership roles within the company should be defined and filled according to a system that company leadership creates. Separating executive function into different positions sets up checks and balances that keep individuals accountable and also minimizes the risk that should one or two people leave the company, either voluntarily or involuntarily, leadership would collapse

It should be entirely clear to all what the company’s ownership structure is and what duties stakeholders have to the company. When stakeholders understand their rights and responsibilities, there is less internal conflict and corporate politics subside.

What Good Corporate Governance Looks Like

When a company has its leadership roles defined and and understood by all parties and those parties take their responsibilities seriously, this results in:

  • An active and engaged, well-functioning board of directors
  • Accountable company management
  • Managed risk
  • Transparency of information
  • A stronger, more profitable company 
  • Higher shareholder value

All of the above result in a company that is stronger and less vulnerable to shock if something within the leadership structure changes. Any business owner who is interested in maximizing profitability and improving the company’s valuation towards an eventual exit should be concerned about implementing the best corporate governance structure possible within his company. 

If your company does not have a functioning, shock-proof corporate governance structure, Prometis Partners can help you make the changes you need to make now so that any transition down the line will go more smoothly and everyone involved has their needs met. Call us today to talk about any issue related to transition planning. We are here to help you. 

 

VINCENT MASTROVITO

vincent@prometispartners.com
(616) 622-3070
250 Monroe Ave. NW, Suite 400 
Grand Rapids, MI, 49503