Corporate Governance Effects

Corporate governance is the internal structure of a corporation from its lowest level workers all the way up to its executives. The term is also used to describe how a corporation makes its decisions regarding business-related activities from reaching its short-term and long-term goals to communicating with shareholders. Corporate governance has far-reaching effects not only for the business itself but for the financial market as a whole.

Effective corporate governance can have a positive affect on shareholder confidence by reassuring them that the company is making smart business decisions and is well organized internally. Confident shareholders are likely to invest larger amounts of money in an effectively governed company because a positive return on the investment is likely. This can lead to increased market confidence in the company, which can serve to increase its overall stock value. When the stock value of a company rises, so does its overall value.

As the value of a corporation increases, so does its ease in generating capital to make purchases aimed at sustaining growth. Corporate governance can have a positive effect on business growth by making it easier for a corporation to raise the necessary capital to acquire new territories or develop new products. Raising capital is easier because investors believe they are extending money to a well-run company with the secure infrastructure necessary to make smart financial decisions.

A corporation with poor corporate governance strategies can have a negative influence on the business market and the larger economy. A lack of effective corporate governance at the executive and management level can lead to bad business decisions, which can lower the overall value of the company and make it more difficult for the business to meet its financial obligations. This was seen during the economic crisis of 2009 when poor corporate decisions lead to cascading failures in the real estate and automobile markets, which in turn caused large-scale job layoffs and economic slowing.

Corporate governance strategies can have an impact on the public perception of a corporation. A company with strong corporate governance strategies relating to responsible spending, treatment of workers and environmental concerns can generate a large amount of good will among the people. Likewise, a company with little concern for the environmental impact of its business practices or the health of its workers can generate a large amount of public distrust. This lack of faith also can manifest itself as increased government oversight of a company as federal and state departments closely monitor the corporation to ensure it is adhering to all appropriate regulations.