May 19, 2021
A renewed focus on corporate governance
Corporate governance is an important aspect of every business. Simply defined, it refers to the system by which companies are directed and controlled. It is precisely for this reason that the importance of corporate governance cannot be understated together with the need to enforce and consistently apply practices, policies and procedures that are conducive to good corporate governance.
Organisations are complex in nature and are in essence constructs between different agents with different roles and responsibilities. Seen from this angle, corporate governance is the framework that defines the business relationships that exist between company shareholders, management teams, the board of directors, and all other key stakeholders. Distinguishing the roles and responsibilities of each stakeholder is key for a better understanding and implementation of good governance. The responsibility for good corporate governance rests squarely with the board of directors who are also responsible for setting the company’s strategic vision. Shareholders on the other hand are responsible for appointing the directors and auditors who in turn ensure that there is an appropriate governance structure in place.
Corporate governance is at the heart of the successful running of an organisation. It not only improves the overall performance, but also promotes trust among the shareholders and other stakeholders. In order to build corporate governance, organisations need to design, create and maintain internal structures, policies and procedures designed at complying with external regulatory requirements. Good governance should not be seen as a cost but an investment that yields a number of returns, including but not limited to enhanced financial performance. However, governance also supports the organisation in a number of other areas, including:
Adopting an effective corporate governance frameworks enables companies to mitigate risks, thereby safeguarding shareholders’ interests through an effective board and management team. A good governance frameworks also provides for exit strategies, giving prospective shareholders deciding whether to proceed with an investment, additional comfort.
Transparency in a company’s internal policies, control mechanisms and how it deals with its suppliers, vendors, media, employees and government bodies will boost its reputation and thus its brand value.
Effective decision-making processes
Creating a clear delineation of roles between owners and management allows for a faster and more effective decision-making process. For boards this means having effective board documentation. Boards perform best when they receive good quality reports that contain sufficient information for them to make well-informed decisions and to develop business strategies for short and long-term growth and overall sustainability of the organisation.
Corporate governance is built on having internal policies and guidelines They ensure compliance with laws and regulations, reflect the culture of the organisation, give guidance for decision-making, risk appetite and streamline internal processes. These policies and guidelines should be current and in line with legislation/regulations as well as with the goals and strategy of the organisation. Additionally, these should be made easily available to ensure that everyone understands the way things should be done and how they are expected to behave.
Limitation of disruptive behaviour and conflicts of interest
This is achieved by establishing rules to reduce potential fraud and malpractices amongst employees, whilst avoiding conflicts of interest namely through minority shareholders being given their share of voice by being represented by independent directors
Strong and effective corporate governance is more than just a motto or a cliché. It helps to cultivate a company culture of integrity, leading to positive and sustainable performance. Essentially, it exists to increase the accountability of all individuals and teams within a company, working to reach the same aim and reach the vision of the company. When a company enjoys a strong corporate governance culture, it signals to the market that the organization is well managed and that the interests of management are aligned with external stakeholders. As a result, the organisation will benefit from a strong competitive advantage.
Applying the principles of corporate governance and instilling such a culture within a company has become a pre-requisite to reaping shareholder confidence and unleashing shareholder value. It is more important than ever for companies to operate in accordance with their core purposes and values in order to protect their reputation and trust. Corporate governance is a vital mechanism through which boards can ensure that the behaviours of their workforce are aligned to the organisation’s purpose, principles and strategic vision.
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