Corporate governance defines a set of rules and best practices, along with a series of associated processes that determines how an organisation should be managed and controlled.
Corporate governance ensures that the interests of the stakeholders of an organisation are appropriately balanced, ensuring that the various parties’ interests are met. The stakeholders may include:
- Board members
- Community interests
The board of the organisation and the board of directors are the primary, but not sole, influencers of the governance of an organisation.
The responsibilities of the board include setting the strategic goals for the company as well as providing the leadership to effect these strategies. The CEO, who usually – but not always – sits on the board is then responsible for the management of the of the business, taking direction from the board.
Corporate governance, therefore, defines what the board of a company does, setting it’s values, culture, direction, etc. Typically, the board, apart from the CEO, does not take an active part in the day to day operations of the business.
In the past few years, boards have been coming under increasing scrutiny. There is also increased responsibility for both the board and the individual directors on the board. Therefore, good governance is having a wider impact on all types of companies, including charities, PLC’s and private organisations. All businesses are having to ensure that they are fully accountable to their shareholders.
As a result of the increased awareness of how businesses operate – within society as a whole as well as within a specific locality – is that some of the most recent research suggests that well governed companies perform better.
Our review of selected academic studies found that:
- companies with strong governance operationally outperform those with weak governance
- companies with strong governance generate more value for the company, shareholders and lenders.
Want to learn more? Check out this Diploma in Corporate Governance.