What is Corporate Governance?
“The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company.” – ICAEW
When it comes to the system used to direct and control an organisation, there is no ‘one size fits all’ recipe. Governance models and structures are tailored individually to the organisation, based on a number of different factors that relate specifically to that business; businesses are dependent on the legal, regulatory and financial requirements within their specific environment.
In most cases, there are 2 key teams responsible for effective corporate governance: the Board of Directors and the Shareholders of that organisation.
The responsibility of the Board
The Board of Directors are responsible for the governance of their companies. This means, that they oversee the management and governance of the Company and monitor senior management’s performance. The Board delegates to the Chief Executive Officer, who then in turn, delegates through the business hierarchy. It is also the Board’s responsibility to:
- Review and approve the Company’s financial statements and financial reporting.
- Review and approve significant actions within the business
- Review and monitor the implementation of the management team’s strategic plans
- Select, monitor and evaluate senior management performance.
- Oversee the organisation’s management of risk
- Oversee and monitor relations with shareholders, employees and the communities and markets in which the business operates.
- Review and approve all financial statements and financial reporting for the business.
- Review ethical standards and legal compliance programs and procedures.
The responsibility of the Shareholders
Shareholders are the owners of an organisation. After all, one of the primary reasons for going public is to raise funds from investors. But because they aren’t directly involved in the day-to-day management of the business, their role within corporate governance is limited, but certainly not exempt. Institutional shareholders have a responsibility to exercise their ownership rights, for example by entering into dialogue the company they have invested in based on a mutual understanding of objectives, and therefore play a key role in corporate governance.
Here are just 3 ways that Shareholders contribute to an organisation’s corporate governance, as broken down by Chirantan Basu:
Shareholders play both direct and indirect roles in a company’s operations. If they are part of the Board, they are directly involved in electing directors who appoint and supervise senior officers. However, if they’re not, they take on a more indirect role through the stock market. Potential investors stay away from companies that cannot meet earnings expectations but invest in stocks that consistently beat expectations. And if existing Shareholders continue to hold their place within the organisation, future investors see this as a reason to invest and become involved themselves.
Public companies usually have formal corporate governance policies, such as the composition and roles of different board committees, the role of the chairman, codes of conduct and business ethics. Boards of Directors answer to shareholders, not to management. And the role of the Shareholders, in this case, become directly responsible for the actions and decisions taken by the Board.
Shareholders usually determine who controls a public company. A widely held company, in which there is not a single majority shareholder, is vulnerable to hostile takeover attempts. Shareholders can block such moves if they are satisfied with the current management or if they believe the offering price is insufficient.
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