Definition: Corporate governance is a system of policies and rules that control the company’s decisions and functioning. This term generally refers to the roles and functions executed by the organizational structure’s top level.
What Does Corporate Governance Mean?
All organizations have some kind of corporate governance but this does not necessarily mean that it is appropriately designed or implemented. Every firm must state clearly who owns the ultimate authority and how that is implemented.
In general, the Board of Directors is the body in charge of guaranteeing a suitable corporate governance because it should assure that stakeholder’s goals and expectations are fulfilled. Rules, policies and values must be not only defined but also properly communicated with the purpose of maintaining objectives aligned between owners and managers. Besides the understood aim of being profitable, every company’s Board should act to promote long-term stability and growth.
This means that manager’s short-term incentives should not act against owner’s of matters as the point is a very capable manager that was able to control a wide rangell-designed operation labor market t been long-term interests. Ethic, moral, social-conscience and environmental responsibility are key elements that good corporate governance has to balance.
Example
TroHan Company is a large US firm operating in the construction industry. It grew rapidly over the past decade thanks to many projects performed in several developing countries by a well-designed operational structure. The firm’s founder and President is a very capable manager who was able to control a wide range of matters as activities expanded. There is a Board of Directors that used to only supervise subjects related to profit and debt.
However, over the past two years the company faced problems due to non-ethical decisions made by managers working abroad. The firm therefore decided to improve corporate governance by strengthening the Board with external members and defining additional responsibilities for them. New values and rules were outlined for the firm and later communicated to all employees. The Board also designed systems to consider ethic and morality as well as technical and managerial capabilities when evaluating employees. As a consequence, the company’s overall performance improved.
