The Importance of Corporate Governance in an Organization

In today’s complex business environment, organizations face increasing scrutiny from stakeholders, regulators, and the public. Effective corporate governance has emerged as a critical foundation for organizational success and sustainability in this challenging landscape. Corporate governance includes the rules, procedures, and practices that dictate how a company is managed and controlled. A strong corporate governance protects a company from many types of risks and enforces accountability and transparency in business practices, which contributes to long-term stability.¹

According to the global consulting firm PwC, good corporate governance is important for sustainable economic development because it increases access to capital and improves the public’s confidence in the market. By guiding ethical decision-making, corporate governance prevents mismanagement and fraud.²

This article will explore the importance of corporate governance and how it promotes ethical business practices and helps companies avoid fraud, mismanagement, and compliance violations.

Core Principles

Strong corporate governance benefits a company’s stakeholders, including investors, employees, customers, suppliers, leaders, and the public. Businesses are free to set their own corporate governance policies as long as they comply with all applicable regulations, such as the reporting requirements for publicly-traded companies.

There are, however, some core principles that almost all businesses include in their governance policies:¹

• Accountability: The board of directors and other senior leaders have to answer for the company’s decisions and for communicating them to stakeholders 
• Transparency: All business records should contain clear, accurate, and timely information about financial performance, risks, and potential conflicts of interest
• Fairness: Shareholders, employees, customers, vendors, and other stakeholders should all be treated equitably 
• Responsibility: The board of directors has an obligation to oversee the company’s activities and promote its success

The Role of the Board of Directors

The board of directors are not involved in the daily operations of the business. Instead, they have an overarching role in directing a company. More specifically, the board is responsible for providing independent oversight when needed, selecting the best CEO for the company, providing strategic leadership and direction, and aligning corporate policies with shareholder interests and company objectives. Board members are responsible for developing clear, written policies to deter fraud and promote the principles of corporate governance. The board has to consider many different, and occasionally competing, interests when deciding on corporate governance policies.³

Risk Management and Compliance

Risk management is a structured method of identifying, assessing, and mitigating potential risks. Although it’s impossible to eliminate all risks completely, implementing a risk management framework can help companies create a plan for avoiding, minimizing, and responding to risks. Corporate governance policies are tailored to help companies avoid risks that can lead to decreased customer or investor trust, lost revenue, or legal or financial penalties.⁴

Compliance risks include the legal and financial penalties a company may face for not abiding by all applicable laws and regulations. These include regulations relating to data protection, financial reporting, or audit requirements.⁵

Ethical Culture and Leadership

Although corporate governance policies and practices are necessary, they aren’t sufficient for ensuring ethical behavior. According to an article in The Journal of Business Ethics, there’s an inverse correlation between a company’s use of trust words, such as “character,” “ethics,” and “honesty,” in its earnings statement and its corporate responsibility score.⁶ This demonstrates the need for setting ethical standards from the top down in practice, rather than merely going through the motions of creating a report.

When leaders set the example, they encourage ethical decision-making at all levels and create a culture in which everyone takes the code of conduct seriously.⁷

Stakeholder Engagement

When you’re creating a corporate governance policy, include stakeholders, such as employees, customers, shareholders, and the community. Including a diverse set of perspectives gives you more opportunities to identify benefits and risks and creates a culture of collaboration and shared accountability.

Stakeholders are also more likely to trust in policies they’ve helped create. Your corporate governance policy should be a living document that can adapt to new risks and values. Keep the lines of communication open to encourage an ongoing dialogue with your stakeholders.⁸

Benefits of Strong Governance

By mitigating risks and building consumer trust and investor confidence, strong corporate governance policies can benefit your company in the following ways:⁹

• Improved reputation: When you’re transparent about your business practices and financial reporting, it will build up your company’s image and influence
• Investor confidence: Investors are more willing to invest in companies with a lower risk profile and clear ethical behavior policies that reduce the likelihood of fraud and conflicts of interest
• Sustainable growth: If you have policies that align with your obligations to your stakeholders, you’re less likely to pursue risky business decisions and more likely to uncover and take advantage of opportunities that lead to growth
• Better access to capital: Strong financial controls and reporting policies will help you create more accurate financial records, which make it easier to obtain loans or sell equity
• Stronger financial performance: Avoiding risk and taking advantage of growth opportunities can increase your revenue

Best Practices and Frameworks

Following a framework and implementing best practices will help you create a corporate governance policy that effectively permeates your entire organization. A corporate governance handbook serves as the central source of truth for all the principles, policies, and procedures that guide your decision-making.

Your corporate governance handbook should include the following:

• The structure and composition of your board of directors 
• The roles and responsibilities of the board and committees
• Ethical standards and code of conduct
• Internal controls and risk management
• Shareholder engagement and communication 
• Continual governance, performance reviews, and regular audits

Prepare to Become an Ethical Business Leader 

Modern businesses face challenges from all directions. An Online MBA program through Santa Clara University will prepare you to lead innovative companies in an ethical manner. You’ll learn from experts in the field who will guide you through the rigorous curriculum. You can learn on your own schedule and complete your coursework around your other obligations. With a strong alumni network and a community of peers, you’ll make connections that will last throughout your career.

Schedule a call with one of our admissions outreach advisors today to learn more.