Corporate Governance in Business – A Comprehensive Overview-FBT
Gordon B. Hinckley once said, “You can’t build a great building on a weak foundation”, and in business, corporate governance is that bedrock.
Corporate governance is the system of regulation and instructions that guide how the company is governed and directed by its top management. It encloses the association between shareholders, stakeholders, management, the board of directors, suppliers, and the community.
Here a question arises, why do the shareholders not take the company’s decisions on their own?
That is because, usually they don’t have the experience or adequate knowledge about the company they invested in, and for the company’s best interest they hire experts of the field as the Board of directors, This concept is more relevant for large companies where there is a greater degree of separation between the Owners and Board of Directors. The board of directors comprises of 2 kinds, Executive Directors and Non-Executive Directors, both are answerable to the shareholders if the company is subjected to fraud or any other misconduct. For that matter, what is the difference between EDs and NEDs?
How do the executive directors and non-executive directors differ from each other?
Executive Directors are the ones who have dual roles i.e. They are part of decision-making in the board meeting as well as the ones who implement the decisions taken by the board. Executive directors include the CEO, who is elected by the shareholders but shortlisted by NEDs, first. The CEO is the leader of the executive team and is responsible for the day-to-day management of the organization. Secondly, the CFO and other operational heads are hired by the CEO.
However, NEDs are the experts that only come for the board meetings to evaluate decisions, advise new strategies beneficial for the business as well aware the EDs about the Risks of certain actions they do or plan on doing as a company since NEDs according to good governance are neutral bodies and have no management responsibilities or investment in the company hence no personal interests. They, however, broaden the experience and perspective available to the board as they have greater experience and idea about the market than EDs might have due to NEDs greater exposure to the outside world.
Domination by a single individual
What happens when one individual dominates the board? It can have several significant effects. Interest is one of the main reasons. Dominance by a single person can increase the conflict of interest. The individual may have some personal or financial relations with the company’s operations, its management, and its suppliersThe corporate governance structure relies on checks and balances to prevent any single entity or individual from making one-sided decisions.
The primary objective of corporate governance in business
The key objective of corporate governance in business is to make sure that a company performs in the best interest of its stakeholders and there owners. Directors must ensure that they do not only pursue their interests. Corporate governance provides a framework for decision-making processes, instructions, regulations, and guidelines for shareholders, executives, and non-executive directors to run the business effectively.
Goals and Objectives of Corporate Governance
1. Long-term sustainability
Companies should rely on renewable energy sources, encourage staff to use sustainable materials, and reduce greenhouse gas emissions. In a business that does not handle this factor effectively, the chances of profitability and long-term growth are reduced. Investors also invest in businesses that are sustainable over the long term and that they think are profitable. Moreover, customers are the main focus of businesses. What they need is satisfaction. They value long-term customer relationships over short-term gains. This reflects a practice that extends far into the future.
2. Protection of Stakeholder Interests
Corporate governance in business is influential in safeguarding the rights of stakeholders. The corporate governance framework ensures appropriate protection of the interests and rights of its stakeholders. Stakeholders are employees, customers, suppliers, investors, etc. Management has not only a duty to their owners but some duty of care towards stakeholders as well. In recent times, stakeholder principles have gained increased recognition in corporate governance.
3. Compliance with Rules and Regulations
Due to some high-profile scandals, the need for corporate governance in business is increasing rapidly. Here are a few scandals that raise the need for principles and practices of corporate governance.
Role of Chairman and Company Secretary in Board Meetings
Amongst the NEDs there is one person appointed as the Chairman who ensures that the board operates efficiently and effectively, promoting regular attendance at meetings, and full involvement of all members but he also has a single vote like all other board members thus, cannot take a decision on his own or overpower
Remuneration and Audit Committees
The remuneration committee which comprises 2-3 NEDs is responsible for setting payment policy and specific packages for EDs and Senior management. The objective of the Remuneration Committee is procedures for determining remuneration are formal and transparent(fair)
Audit Committee is also a 2-3 NEDs committee from which one of whom must have relevant financial experience. So that he could make sense of Internal Auditor reports and explain to other NEDs
Agency and Stewardship Theory
Stewardship theory is kept forward reflecting Controllers/BOD working in the best interest of Shareholders. In Agency theory Shareholders are known as ‘Principals’ that hire the ’Agent’ to act on their behalf known as BOD.
Public company accounting oversight board
Through PCAOB government monitors the company’s accounts taking measures even in the presence of external auditors
Corporate governance used as a marketing strategy
Reporting on Corporate governance is also a source of marketing and attracting foreign investors. Finally, this sum of corporate governance and its importance for an organisation to eliminate risk factors and attract greater foreign investors hence, greater profits and sustainability in the growing market
Shareholders in shaping the structure of corporate governance
The Role of Dividends, basically, is the distribution of earnings to company shareholders who own a company’s shares. Shareholders have the right to receive dividends, which are a portion of a company’s profits.
- Voting rights: Shareholders also have the right to vote on certain matters, including the election of the board of directors, important corporate decisions, and issues that may impact the company. These should be discussed at the annual general meeting. (a meeting between the shareholders and the company directors)
- Shareholders will hold the board of directors accountable if anything immoral transpires in the company. To monitor and check their actions, shareholders should act as a check and balance on the resolutions of the company’s management. Shareholders play an important role in structuring corporate governance by having the right to access every important piece of information.
Contribution of the nomination committee and its impact on corporate strategy
The nomination committee plays a vital role in corporate governance by ensuring that the directors are experienced and qualified individuals who can effectively handle consequences and make decisions that are better in the long term for the company.
At first, the nomination committee is responsible for nominating individuals who are qualified to serve as directors on the company’s board. They should assess their skills and independence to make sure that they are effective for the firm.
The committee should review directors’ independence. They have to ensure that the board can make impartial decisions without conflicts of interest. Because independence allows them to make decisions based on the best interests of shareholders and stakeholders, The nomination committee should have a hand in shareholder meetings. Such as special shareholder meetings to engage with shareholders regarding the nomination process.
The significance of corporate governance in business: why is it needed?
- The first and foremost reason is that this system helps establish a clear chain of accountability within the company.
- Ethical behavior is promoted by corporate governance; it includes integrity, fairness, honesty, and punctuality.
- Lastly, there should be transparency and disclosure, which are vital for attracting international investors and maintaining positive relationships with employees.
Frequently Asked Questions (FAQ’s)
Q1: Accountability, ethical behavior, or transparency? Which one has a significant influence on a company’s favorable outcomes?
They are interrelated with each other. As accountability is one of the most important factors in business, management is responsible for their actions. On the other hand, ethical behavior aligns with moral principles, and the last one is transparency, which is a manner of carrying out both ethical behavior and accountability.
Q2: Are there modern companies that prospered due to strong systems of corporate governance?
Unilever recognizes the importance of good corporate governance and behavior. Their vision is to grow their business without impacting the environment and to create a positive impact on society.
Walmart is maintaining a majority of an independent board of directors, as independence is needed so that conflicts of interest can be prevented. They promote ESG (environmental, social, and governance) strategies.
Q3: How can corporate governance in business benefit small and medium-sized businesses?
A good system of corporate governance in business can improve the reputation of the business in people’s eyes, which can boost sales, attract customers, and build trust among stakeholders. Long-term strategic planning and compliance with laws can contribute to the long-term growth of small and medium-sized businesses.
Dear students, at Mirchawala’s Hub of Accountancy, you will always be supported both in the academic world and in the creative world. Blog writing offers a striking opportunity to not only express your ideas and thoughts but also earn income through it, for further information visit here !
-Written by Alishba Sheikh and Ruqaiya Imran – students of Mirchawala’s Hub Of Accountancy