About Corporate Governance

Corporate governance refers to the structures and processes for the direction and control of companies. Corporate governance concerns the relationships among the management, Board of Directors, controlling shareholders, minority shareholders and other stakeholders. Good corporate governance contributes to sustainable economic development by enhancing the performance of companies and increasing their access to outside capital.
The Relationship Between Corporate Governance & Business Performance Corporate governance includes the formal structures and the affiliations that direct and oversee the administration of the organization. The corporate governance of an individual organization is influenced by the board of directors, shareholders, managers and all other stakeholders in the company. While the corporate board may have the greatest influence on the direction of the organization, other stakeholders, including employees, customers and the community, can affect the governance and the performance of the business.
1. Significance o It can be difficult to balance compliance needs with business performance. Regulatory compliance is a major focus for corporate boards since the 2001 collapse of Enron and other major corporations due to poor ethical compliance. Since then, strict regulations have been enforced to avoid a similar crisis. This increased focus on compliance is not without its disadvantages. For example, investors are often more concerned with profits than compliance. According to Alex Todd, founder and CEO, TE Research, investors want "to see evidence of proactive corporate initiatives that improve business performance." The relationship between corporate governance and business performance is thus a complex issue that often revolves around managing compliance without damaging performance. 2. Types o There are a few main types of corporate governance. Each type affects business performance in a different way. The controlled board is controlled by management and often offers the benefit of rapid sales growth. Increased share valuations are a benefit of the trusted board that places a high priority on building trust to attract investors. Sovereign boards consist of board members who are independent of management and stakeholders. This independence from the influence of those who work within the organization often leads to increasing profitability for the overall corporation. Independent boards that are influenced by management generally result in increased cash distributions to investors.

3. Best Practices o Corporate governance best practices are not always best for business performance. For example, high institutional investor ownership, which is commonly considered a best practice in corporate governance, can have a negative effect on business performance. A 2010 report entitled, "Corporate Governance in the 2007-2008 Financial Crisis: Evidence from Financial Institutions Worldwide," says higher levels of institutional ownership during the economic crisis "were associated with greater risk taking, which ultimately resulted in greater losses."

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When evaluating the relationship between the corporate governance of an organization and its business performance, it is important to balance regulatory compliance with business performance needs. Of course, the organization must comply withe all relevant laws and regulations. However, there must also be a concerted effort to form a strategic plan to comply without damaging business performance. Corporate governance should be developed with a focus of monitoring the organization's activities and refining individual best practices that allow for compliance while also improving business performance.

Corporate Governance Effects Corporate governance is the internal structure of a corporation from its lowest level workers all the way up to its executives. The term is also used to describe how a corporation makes its decisions regarding business-related activities from reaching its short-term and long-term goals to communicating with shareholders. Corporate governance has far-reaching effects not only for the business itself but for the financial market as a whole. 1. Shareholder Confidence o Effective corporate governance can have a positive affect on shareholder confidence by reassuring them that the company is making smart business decisions and is well organized internally. Confident shareholders are likely to invest larger amounts of money in an effectively governed company because a positive return on the investment is likely. This can lead to increased market confidence in the company, which can serve to increase its overall stock value. When the stock value of a company rises, so does its overall value.

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Business Growth and Development o As the value of a corporation increases, so does its ease in generating capital to make purchases aimed at sustaining growth. Corporate governance can have a positive effect on business growth by making it easier for a corporation to raise the necessary capital to acquire new territories or develop new products. Raising capital is easier because investors believe they are extending money to a well-run company with the secure infrastructure necessary to make smart financial decisions.

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Economic Effects o A corporation with poor corporate governance strategies can have a negative influence on the business market and the larger economy. A lack of effective corporate governance at the executive and management level can lead to bad business decisions, which can lower the overall value of the company and make it more difficult for the business to meet its financial obligations. This was seen during the economic crisis of 2009 when poor corporate decisions lead to cascading failures in the real estate and automobile markets, which in turn caused large-scale job layoffs and economic slowing.

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Public Perception of Business o Corporate governance strategies can have an impact on the public perception of a corporation. A company with strong corporate governance strategies relating to responsible spending, treatment of workers and environmental concerns can generate a large amount of good will

among the people. Likewise, a company with little concern for the environmental impact of its business practices or the health of its workers can generate a large amount of public distrust. This lack of faith also can manifest itself as increased government oversight of a company as federal and state departments closely monitor the corporation to ensure it is adhering to all appropriate regulations.

Seven Characteristics of Good Corporate Governance In 1992, the King Committee of Corporate Governance was formed in South Africa with the intent of laying down recommendations for highest standards in corporate governance with a South African perspective. The Committee published its first report in 1994 which established recommended standards for the board of directors of certain listed companies. In 2002, the second King's report was published which updated the Code of Corporate Practices and Conduct. The second King's report also listed seven characteristics of good corporate governance. 1. Discipline o 2. Discipline in corporate governance means that the senior management should be aware of and committed to adhere to behavior that is universally recognized as correct and proper.

Transparency o Transparency is the measure of how easy it is for outsiders to find out and analyze a company's financial and non-financial fundamentals. Companies should make this information available in timely and accurate press releases to give outsiders a true picture of what is happening within the company.

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Independence o For good corporate governance, it is important that all decisions are made objectively with the best interest of the enterprise in mind and without any undue influence from large shareholders or an overbearing chief executive officer. This requires putting in place mechanisms such as having a diversified board of directors and external auditors to avoid any potential conflict of interest.

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Accountability o People who make decisions in a company must be held accountable for their decisions and mechanisms must exist to allow effective accountability. In public companies, investors hold individuals running the company accountable for their actions by carrying out routine inquiries to assess the actions of the board.

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Responsibility o In a corporation, managerial responsibility means that the management be responsible for their behavior and have means for penalizing the mismanagement. It also means putting in place a system that puts the company on the right path when things go wrong.

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Fairness o The company must be fair and balanced and take into the account the interest of all of the company's stakeholders. In this sense, the rights of each of the groups of stakeholders must be recognized and respected.

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Social Responsibility

A well-managed company must also be ethical and be responsible with regard to environmental and human rights issues. As such, a socially responsible company would be non-exploitative and non-discriminatory.