How does a large corporation actually determine who is in charge, and when significant decisions come along, who is involved with evaluating and making those decisions? Most large corporations have executive management, a board of directors and a number of shareholders and investors who have an interest in the company’s direction. How does a company determine the relative ranking as well as the process they’ll use to make decisions? This can be achieved by putting a system of corporate governance in place, which dictates how the company will be run.
What Is Corporate Governance?
Corporate governance is the term for the system of rules, practices and expectations that determines how the company is directed and controlled. The board of directors is responsible for the governance of the business and thus is responsible for building a framework within which it will operate to ensure the needs of the stakeholders are being met.
This set of processes highlights the various responsibilities the board of directors has to a variety of other parties — shareholders, investors, managers, auditors — and how those responsibilities will be filled. It also details the rights each party has in terms of making decisions and directing company policy.
Role of Corporate Governance
Corporate governance structure is necessary to resolve any conflicts of interest or conflicting desires among the different stakeholders in the business. For example, shareholders are interested in profit, whereas upper management may prefer to reinvest revenue into the company to improve efficiency, working conditions or salary schedules.
Alternatively, executive management may prefer to make decisions in their own interest rather than the company’s interest. Shareholders need a way to check this kind of activity to keep the company’s business on track. The corporate governance document would detail the process the company will use to align the interests of executive management with the shareholders to obtain a workable compromise.
Corporate governance strategies are often developed by the board of directors, involving the shareholders and executive management as necessary to ensure buy-in. Together, the company’s operations policies are determined, and measures are put in place for conflict resolution in cases where major stakeholders might disagree. The corporate governance framework should also ensure that all business decisions are made ethically and as required by regulations and laws. These rules and policies are also meant to increase transparency and accountability within the company’s leadership structure to ensure ethical business operations by all parties.
Why Is Corporate Governance Important?
The corporate governance agreement is as critical to success as the overall business plan for the company, and this is because it’s meant to create enough checks and balances among all of the owning and governing bodies of a company so that decisions can be made peacefully and ethically. The benefits a good corporate governance policy can offer include:
- Integrity and ethics: Creating a good governance policy sets the tone at the top of the company, which encourages employees at every level to make good, ethical choices. It helps to create a company culture where employees feel proud of their behavior and makes it easier to identify cases of fraud, scandal or other inappropriate business behavior.
- Equal treatment of shareholders: The corporate governance framework ensures that the shareholders maintain a voice at the table and are not overrun by executives looking out for their own self-interest, for example. It balances the power between the groups at the top, creates a set of checks and balances and ensures that the board of directors can operate as an independent body, making the choices it feels are best.
- Visibility of errors: A good, transparent governance process will make it clear when parts of that process aren’t working, meaning the company can then spend resources to make itself run more smoothly.
- Compliance: Companies that ensure their corporate governance strategy includes compliance with all related governing agencies are at far less risk of regulatory punishments and fines since the process will ensure that products, goods and services all meet the required expectations.
Effective Corporate Governance Policies
A corporate governance policy that works will filter down into the company culture and help to strengthen and improve it. Employees will feel encouraged to speak out against potential wrongdoing or decisions with which they may not agree.
Awareness of relevant regulations will increase, leading to better performance in audits and better reporting of data. Efficiency will improve overall as employees build better, more transparent processes to fulfill their daily tasks.
Basically, the corporate governance policy sets an example for the rest of the company to follow with regard to fair, disciplined, methodical processes used for decision making.
Strategies of Corporate Governance
Strategic management occurs when a company develops a set of goals and objectives and then creates a set of strategic initiatives, steps and tools the company will use to achieve these goals. The management strategy often comes from the top of the company, as it’s the job of executive management to execute this strategy and keep the company on course to meet its objectives. Strategic planning is incredibly important to a company’s success.
Developing a strategic management plan requires executive management to look at not only the business as it operates now but the market landscape in which it operates as well. These are then projected to form a picture of future success for the company. This involves developing a picture of the company’s current strengths and weaknesses both internally and externally, and this provides a starting place for the strategic paths that will lead to the future vision.
From there, management evaluates the external conditions that will affect the company’s bottom line both now and in the future. This includes upcoming regulation changes, competitor behavior, market growth or stagnation, raw material pricing swings and new market entries — all the external pieces that come together to help shape the business’s path that management cannot control. From all of this information, the strategy is formed: a set of goals and the steps that will be taken to meet those goals.
Importance of Strategic Management
Strategic management is meant to answer a series of questions about the company: What is its business, who are the target customers, what is its value proposition and what skill sets will it need to be successful in the future? It sets up the organization to grow by detailing how it will grow. All other project and people-management decisions in the company are made to align with the overall corporate strategy, which should be clearly understood by employees at all levels.
The corporate governance policy will certainly have an impact on the way that strategic management plan is developed and implemented. Corporate governance will determine which strategic decisions must be brought to the board of directors and the shareholders for approval and which can be made by the executive managers independently.
This ensures that the strategic plan developed by a company will benefit all of the company’s interests: the shareholders, the board, the executives, the employees and the customers.
Importance of Corporate Governance
Corporate governance often regulates the capital spending a company can choose to reinvest into its business. Capital comes from investors and from profits, so shareholders are directly affected by capital decisions and may want a say in how these decisions are made.
In cases like this, the board of directors may set an overall capital budget for individual facilities, and management could then approve spending up to a certain value. Projects more expensive than this value would then be sent to the board of directors for discussion with the shareholders and eventual approval or rejection. This allows managers to get projects completed without taking the time of the board but also lets the shareholders have a stake in how money tied to them is spent on the company.
This would then affect the way the company chooses its capital projects, which would tie into the overall strategic management of the business. Additional approval levels on large projects takes time, resources and effort, which managers would then have to balance with other projects and resources. Thus, rather than undertaking one large project at once, the organization may decide to do projects in smaller pieces or to drastically downsize project scopes. Middle and top management are responsible for making sure that these changes in project approach still align with the management strategy for the business.
Overlap of Governance and Strategy
The overlap of the corporate governance process and the strategic management plan ensures that the company doesn’t forget about one important stakeholder who is hard to represent at the table: the potential customer. Historically, boards of directors have reined in company executives to ensure the expectations of the shareholders (stocks, bonds and other investments) are met in terms of dividends, returns and profits.
However, the voice of the customer has become increasingly important in today’s marketplace as the internet continues to globalize businesses and increase competition. Thus, boards of directors must manage the corporate strategy to ensure that value doesn’t just go to shareholders and executives but to customers as well.
In addition to customers, a new stakeholder has come into play in recent years as a company’s brand image becomes more and more important to its business: The concept of corporate social responsibility, or CSR, represents the ways a company is good for the people and community around it and how that company gives back to the people who support it. This kind of social visibility has become part of many companies’ marketing strategies because it can allow them to build trust and interest in their brand. The board of directors is also responsible for holding the rest of business operations accountable to this new stakeholder as well, making sure the company’s CSR goals are included in the strategic management plan.
Aligning With Goals
The corporate governance process must also ensure that the members of the board have the power to do their due diligence and occasionally check that current operations are working toward the management strategy. For example, if one of the company’s goals is to become the leader in a particular market, then all projects should be in line with this goal and should be measured by their ability to further the company’s progress toward that goal.
Any projects that don’t appear to be supporting that particular goal may require additional questioning by the board of directors to make sure management’s decisions still align with the corporation's vision rather than individual opinions. The board of directors requires a method to do these sort of checks to ensure everything remains in balance, and it’s the corporate governance structure that allows it to do so.
A company’s corporate governance document is the heart of its decision-making process and thus should continually evolve as the business grows and changes. Meeting certain points of the strategic management plan may require a review of corporate governance to ensure that the policy still meets the company’s current and future needs.