Governance

Governance is the system of rules, practices, and processes by which a company is directed and controlled. Establishing and implementing these practices involves balancing the interests of a company's many stakeholders, including:

  • Employees
  • Shareholders
  • Senior management
  • Customers
  • Suppliers
  • Lenders
  • Local, state, and federal governments
  • Community members and groups

Governance encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.

Understanding Governance

Governance refers to the set of rules, controls, policies, and resolutions put in place to direct corporate behaviour. A board of directors is pivotal in governance, while proxy advisors and shareholders are important stakeholders who can affect governance

Benefits of Governance

Governance that is carefully thought out and implemented creates transparent rules and controls. It can serve as a guide to leadership, aligning the interests of shareholders, directors, management, community members, and employees. When implemented across all company levels of management and operations, good governance can:

  • Build trust with investors, the community, and public officials
  • Give investors and other stakeholders a clear idea of a company's direction and business integrity
  • Promote long-term financial viability, opportunity, and returns
  • Facilitate the raising of capital
  • Contribute to rising share prices
  • Improve a company's reputation and customer retention
  • Reduce the potential for financial loss, waste, risks, and corruption

The Principles of Governance

There can be as many governing principles guiding a company as its founders and directors believe make sense. However, there are several that are common across companies and industries.

Fairness

The board of directors must treat shareholders, employees, vendors, and communities fairly and with equal consideration.

Transparency

The board should provide timely, accurate, and clear information about such things as:

  • Financial performance
  • Conflicts of interest
  • Risks to shareholders and other stakeholders
  • Risk Management

The board and management must determine risks of all kinds and how best to control them. They must act on those recommendations to manage risks and inform all relevant parties about the existence and status of risks.

Responsibility

The board is responsible for the oversight of corporate matters and management activities. It must be aware of and support the successful, ongoing performance of the company. Part of its responsibility is to recruit and hire a chief executive officer (CEO). It must act in the best interests of a company and its investors.

Accountability

The board must explain the purpose of a company's activities and the results of its conduct. It and company leadership are accountable for the assessment of a company's capacity, potential, and performance. It must communicate issues of importance to shareholders.

How to Assess Governance

For investors, selecting companies that practice good governance can decrease the likelihood of losses and other negative consequences, such as bankruptcy. Investors can research certain areas of a company to determine whether or not it's practising good governance. These areas include:
  • Disclosure practices
  • Executive compensation structure
  • Risk management
  • Policies and procedures for reconciling conflicts of interest (how the company approaches business decisions that might conflict with its mission statement)
  • The members of the board of directors (their stake in profits or conflicting interests)
  • Contractual and social obligations
  • Relationships with vendors
  • Complaints received from shareholders, employees, and community members, and how they were addressed
  • Audits (the frequency of internal and external audits and how any issues that those audits raised have been handled)

Bad Governance

Just as good governance in business exists so does bad governance. This refers to how decisions are made in government and business that have a negative impact on the enterprise. 

It is also characterised as the polar opposite of good leadership. Bad governance entails systemic corruption a lack of openness and accountability, arbitrary policymaking, and deception. 

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