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. T
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.
Effective Corporate Governance Benefits All
The result of effective corporate governance is that all stakeholders and leaders understand the mission of the business and commit to pursuing it using agreed upon standards. This has impacts on:
Business Goals – All stakeholders participate in making decisions about the company and what its short-term and long-term goals are.
Ethical behavior – Increased transparency and accountability ensure that the company’s ethical practices apply to everyone, top to bottom and that any deviances are corrected promptly before problems can spiral out of control and create a scandal or a legal or public relations disaster.
Reporting – Part of good governance is setting up both internal and external auditing processes so that leadership knows that the entire company is following their directives, behaving ethically, and practicing financial responsibility. Reporting is a vital part of the feedback loop. The information gleaned helps the board and company leaders to make adjustments so company goals continue to be pursued and met.
Company stakeholders will always have their own interests and will work toward those interests, but good corporate governance compels all the various actors to communicate, work together, keep each other in check, and advance the goals of the company as a whole. After all, a stronger, more profitable company benefits the most number of people, including stakeholders, management, employees, customers, and the greater community.
If you believe that your company leadership structure could be more effective but do not know where to start making changes, call Prometis Partners. We have experience bringing people within a company together to discuss the challenges the business faces. We know that change is hard and makes people uncomfortable, but we have had great success helping business owners improve their communication and make changes that strengthen their companies, lessen internal tension, and increase profitability.