Alan Calder, in his book, “Corporate Governance: A Practical Guide to the Legal Frameworks," states, "Effective corporate governance is transparent, protects the rights of shareholders, includes both strategic and operational risk management, is as interested in long-term earning potential as it is in actual short-term earnings and holds directors accountable for their stewardship of the business." These guidelines include most objectives of a corporate governance policy in any organization.
Transparency and Full Disclosure
Good corporate governance aims at ensuring a higher degree of transparency in an organization by encouraging full disclosure of transactions in the company accounts. Full disclosure includes compliance with regulations and disclosing any information important to the shareholders. For example, if a manager has close ties with suppliers or has a vested interest in a contract, it must be disclosed. Also, directors should be independent so that the oversight of the company management is unbiased. Transparency involves disclosure of all forms of conflict of interest.
Jean Du Plessis, James McConvill and Mirko Bagaric, in their book, "Principles of Contemporary Corporate Governance," point out that a corporate governance structure encourages accountability of the management to the company directors and the accountability of the directors to the shareholders. Through hiring independent directors, a company aims to create good corporate governance. The compensation of the chief executive officer has to be approved by the company directors to ensure that the compensation structure is fair and in the best interests of the shareholders. Any discrepancies in the company accounts or malfunctioning of the company is closely watched by the board of directors. The board has a right to question strategic decisions.
Equitable Treatment of Shareholders
A corporate governance structure ensures equitable treatment of all the shareholders of the company. In some organizations, a particular group of shareholders remains active due to their concentrated position and may be better able to guard their interests; such groups include high-net-worth individuals and institutions that have a substantial proportion of their portfolios invested in the company. However, all shareholders deserve equitable treatment, and this equity is ensured by a good corporate governance structure in any organization.
Corporate governance allows firms to evaluate their behavior before they are scrutinized by regulatory bodies. Firms with a strong corporate governance system are better able to limit their exposure to regulatory risks and fines. An active and independent board can successfully point out the loopholes in the company operations and help solve issues internally.
Increasing Shareholders' Wealth
The main objective of corporate governance is to protect the long-term interests of the shareholders. Ira Millstein, in his book, "Corporate Governance: Improving Competitiveness and Access to Capital in Global Markets," mentions that firms with strong corporate governance structures are seen to have higher valuation premiums attached to their shares. This shows that good corporate governance is perceived by the market as an incentive for shareholders to invest in the company.
- "Corporate Governance: A Practical Guide to the Legal Frameworks;" Alan Calder; 2008
- "Corporate Governance: Improving Competitiveness and Access to Capital in Global Markets;" Ira Millstein; 1998
- "Principles of Contemporary Corporate Governance;" Jean Du Plessis, James McConvill and Mirko Bagaric; 2005