Three Types of Corporate Governance Mechanisms

Corporate governance is the policies and procedures a company implements to control and protect the interests of internal and external business stakeholders. It often represents the framework of policies and guidelines for each individual in the business. Larger organizations often use corporate governance mechanisms to manage their businesses because of their size and complexity. Publicly held corporations are also primary users of corporate governance mechanisms.

A board of directors protects the interests of a company’s shareholders. The shareholders use the board to bridge the gap between them and company owners, directors and managers. The board is often responsible for reviewing company management and removing individuals who don't improve the company’s overall financial performance. Shareholders often elect individual board members at the corporation’s annual shareholder meeting or conference. Large private organizations may use a board of directors, but their influence in the absence of shareholders may diminish.

Audits are an independent review of a company’s business and financial operations. These corporate governance mechanisms ensure that businesses or organizations follow national accounting standards, regulations or other external guidelines. Shareholders, investors, banks and the general public rely on this information to provide an objective assessment of an organization. Audits also can improve an organization’s standing in the business environment. Other companies may be more willing to work with a company that has a strong track record of operations.

Balancing power in an organization ensures that no one individual has the ability to overextend resources. Segregating duties between board members, directors, managers and other individuals ensures that each individual’s responsibility is well within reason for the organization. Corporate governance also can separate the number of functions that one division or department completes within an organization. Creating well-defined roles also keep the organization flexible, ensuring that operational changes or new hires can be made without interrupting current operations.