What Is the Purpose of Corporate Governance?

by Osmond Vitez; Updated September 26, 2017
Business people looking at laptop screen in office

Corporate governance is the framework companies use to outline the specific operations and guidelines for their employees. Corporate governance is often a unique framework built around the organization’s mission and values. Large corporations and publicly held companies often use corporate governance to create internal business policies due to the layers of management involved in the company.

Facts

Although corporate governance is usually unique to each company, it has a few universal elements. Corporate governance controls the internal and external actions of managers, employees and outside business stakeholders. This framework also outlines the duties, privileges and roles of board members or directors to ensure these individuals do not take advantage of the company’s resources. Companies may also include information on the role of shareholders in the organization and their responsibilities for voting on corporate issues.

Features

Corporate governance usually outlines the goals and objectives of each business contract. The rate of return, length of the contract, individuals who can approve contracts and other obligations are usually included in the corporate governance framework. Corporate governance also creates a checks and balances system to govern internal business departments. This system ensures no one individual or department dominates business decisions or operates outside the company’s mission and values.

Considerations

Publicly held corporations may require shareholder approval when setting up their corporate governance framework. Shareholders are the individuals who have invested money into the business and expect a significant return on their capital. Rather than allowing the board of directors or executive officers the ability to create and implement corporate governance, shareholder approval may be required to ensure that these individuals understand how the company expects to generate financial returns. Shareholders may also be required to approve any changes to the corporate governance framework during the annual shareholders' meeting.

Benefits

Companies using corporate governance may be able to streamline business operations and increase the potential for maximizing profits. Creating guidelines that must be followed by individuals working in the business can help companies ensure a minimum set of operating standards exists in the company. Organizations may also be able to discipline employees or correct inappropriate workplace situations using the rules or procedures outlined in the company’s corporate governance framework.

Expert Insight

Management consultants, public accounting firms, law firms or other professional organizations may be used by a company creating corporate governance. These individuals or groups can help companies ensure that the corporate governance design for the company meets the expectations of all parties involved. Law firms may be used to ensure that the company’s corporate governance framework meets all legal requirements regarding its business operations.

References

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