Corporate governance encompasses the policies, initiatives and practices a corporation uses to accomplish its business goals and develop its infrastructure. The functions of corporate governance begin with a corporation's shareholders and are passed to the elected board of directors, who are then in charge of developing governance strategies for the company as a whole.
Goals and Risk Management
A corporation's board of directors sets policies and procedures to effectively meet the business' short- and long-term investment goals while working to manage risk. Each investment decision is made with the goal of securing long-term company growth and profitable returns. The board of directors manages the risk involved with each new investment opportunity through careful examination of the opportunity's value while determining what problems are the most likely to occur. This allows the company to plan ahead for potential trouble spots and develop strategies to avoid them.
Another function of corporate governance is to ensure accountability within the board of directors as well as the company's larger management structure. This provides a system of checks and balances to make certain company procedures and initiatives are being carried out properly. The board of directors can stay well informed as to the progress of investments and business projects because of this greater level of accountability and communication among the company's management structure. This allows for greater mobility in adjusting goals or project methods should an investment opportunity or business venture produce smaller returns than expected.
Effective corporate governance requires shareholders to remain well informed of the company's financial health and the status of its ongoing business initiatives. To keep shareholders informed, a corporation's board of directors schedules regular meetings where the board shares the company's level of profitability, its strategies for achieving goals and any problems it foresees in the market that may cause them to fall short of meeting those goals. Shareholders who are kept well-informed of company practices are more likely to trust the board of directors and remain as corporate investors as opposed to selling company stock.
An integral component of corporate governance is to ensure transparency in relation to government corporate regulations. These rules involve a wide variety of required procedures, including regular financial reporting, ethical treatment of workers, safe environmental practices and handling of hazardous materials. The BP Deepwater Horizon oil spill of 2010 is an example where a lack of corporate governance led to substandard building practices, which contributed to a large-scale environmental disaster affecting a large portion of the United States.