What Is Corporate Governance?

When a company grows large enough, it becomes complex, almost like a small city. Like cities, corporations need strong leadership at the top to run smoothly. Corporate governance is the structure that makes it happen. According to the Corporate Governance Institute, corporate governance is defined as “a set of rules, practices, and processes used to direct and control an organization.”¹

A company’s board of directors typically oversees corporate governance. Board members help identify and mitigate risks, keep company leaders accountable, promote ethical behavior, and protect shareholder interests. Corporate governance is a key component of keeping your company’s good reputation intact.

This post will introduce you to corporate governance, explore why it is important, and help you understand how it works.

Key Principles of Corporate Governance

There are four key principles associated with corporate governance.²

Transparency

Well-run companies are open and willing to share accurate information truthfully. Businesses that are willing to be honest with their employees about company management, financial forecasts, and other important information see higher employee retention rates.³ This transparency also involves being willing to let the board work with independent agencies who perform financial and regulatory audits. It inspires a trusted relationship with customers and strengthens brand reputation.

Accountability

Corporate accountability means that a company and its leadership hold themselves responsible for their non-financial performance.⁴ A company’s leaders aren’t responsible only to shareholders. They are also responsible to their employees and to the communities in which they do business. Companies committed to accountability agree to uphold legal and ethical business practices. Corporate accountability also covers sustainability practices and social responsibility policies such as making charitable donations or volunteering within the community.

Fairness

In corporate governance, fairness refers to how a company treats its shareholders and all interested parties. These include employees, leadership, the community, and public officials within the community. A dedication to fairness helps companies run smoothly by weeding out unjust policies and behaviors such as the following:

• Favoritism
• Corruption
• Negligence
• Fraud

Practicing fairness also enhances a company's reputation as a trustworthy business.

Responsibility

Responsibility in corporate governance involves the board of directors’ duty to make decisions that align with a company’s best interests.⁵ The board is responsible for providing oversight and insights to the management team. They help strategize goals and objectives and monitor progress. The board of directors also hires the CEO, develops the code of conduct, and assesses various risks.

The Importance of Corporate Governance

Corporate governance is important for public and private companies alike because it sets the foundation for how each company approaches business. Governance informs everything from risk management to cybersecurity and social policies. Although private companies don’t have a responsibility to shareholders, they also benefit from corporate governance.⁶ Strong corporate governance enhances a company’s reputation with investors, potential employees, and customers.

Components of a Strong Governance Framework

Effective corporate governance sets the foundation for a successful business. A company’s corporate governance framework will define roles and responsibilities for the board of directors. Board members should be independent—that is, not employees or relatives of management—so they can objectively oversee company leadership. Ideally, the board chair and the company CEO should be different people to prevent conflicts of interest.⁷

A board of directors functions best when roles and policies are clear, so an effective framework will include strategies for identifying and managing risks. A company’s framework will also include details for internal and external auditing procedures and a code of conduct that guides and promotes ethical behavior.⁸

Benefits of Corporate Governance

In a world rife with corporate scandals, people feel more comfortable doing business with brands they trust. According to Deloitte, companies seen as trustworthy outperform their competition by as much as 400%.⁹ Investors are also attracted to these companies since they are usually more stable.

Business governance is a key component of building this trust. If you serve on a company’s board of directors, you play a key role in protecting shareholder interests and minimizing the risk of fraud. Whatever your position in a company, the board of directors sets up and implements the system of checks and balances that keeps company leadership honest.¹⁰ The board outlines oversight roles to make sure company leadership is following outlined protocols and procedures. The board is governed by shareholders who can vote them out.

Challenges in Corporate Governance

Managing Multiple Stakeholder Interests

Large companies function with an intricate network of interested parties. From the ground-level employees interacting with customers every day to the vendors supplying inventory, each business has multiple moving parts. Employees, company leadership, customers, suppliers, and shareholders often have conflicting interests.

For example, shareholders likely want a company to maximize profits. Company leadership can do this by buying from suppliers with lower prices or paying employees on the lower end of the industry scale. However, these practices go against employee interests. A manager who is shopping for the cheapest supplier may end up overlooking unethical behavior. Corporate governance outlines clear guidelines for principled behavior, so any cost-cutting mechanism must also be ethical.

Managing Conflicts of Interest

Conflicts of interest are also common in corporate governance. A company’s board members have likely been industry professionals for some time, and they all have different social networks. Common situations that lead to conflict of interest include doing business with competitors of the company or taking advantage of a board position for personal gain.¹¹

For example, if one of your board members has a family member who is a board member for a competing company, it would likely be considered a conflict of interest. The two board members would likely be privy to each company’s trade secrets and other confidential information and could end up disclosing this information.

Conflicts of interest also arise in the workplace itself. Your board of directors is responsible for making detailed conflict of interest policies, outlining disclosure requirements and recusal processes. They also set up training materials and sessions, so everyone in the company understands what constitutes a conflict of interest and what is to be done when one arises.¹¹ Conflicts of interest at any point throughout the business are a challenge to corporate governance, and proper education and training can inform and assist in avoiding and resolving these issues.

Navigating Regulatory Shifts

Most industries are regulated by local and federal governments to some degree. Industries such as finance and healthcare have more governmental regulations than others, to protect customers and to help businesses maintain stability. The financial industry, for example, tends to adopt new regulations following large financial crises.¹²

Technological tools such as artificial intelligence also bring new risks, which often usher in new regulations. Corporate governance involves staying on top of these regulations to make sure your company is compliant.

Corporate Governance and Sustainability

As customers focus on climate change, many are leaning on businesses to take the lead in fighting it.¹³ Sustainability has become a differentiator for businesses in multiple industries. It’s not limited to environmental impacts and also refers to economic and social sustainability.¹⁴

All of these pillars are linked. For example, making business processes more energy-efficient reduces utility bills, which can help improve a company’s economic sustainability. Corporate governance can influence a company’s sustainability by establishing and upholding policies and procedures that align with these principles. Board members are also responsible for making sure company leaders and other employees are following through on sustainability practices through regular audits.¹⁵

Prepare for Successful Leadership in Corporate Governance

Corporate governance positions companies for success in a global economy. As you progress through your career, you will interact with your board on many levels. You may even join a board to oversee a company. Learn everything you need to become a successful leader by enrolling in the Online MBA program from the Leavey School of Business at Santa Clara University.

Delve into our exciting curriculum with guidance from our dynamic mix of faculty from diverse industries including big tech and healthcare. Our Online MBA faculty will share their experiences to put you in a position to govern high-performing companies in any industry. Build your network with faculty, classmates, and alumni who are thriving at top companies.

Contact an admissions outreach advisor today to learn how we can help elevate your career.