Corporate Governance is the art of directing and controlling the organization by balancing the needs of the various stakeholders. This often involves resolving conflicts of interest between the various stakeholders and ensuring that the organization is managed well meaning that the processes, procedures and policies are implemented according to the principles of transparency and accountability.
Whenever one speaks about corporate governance, it has to be borne in mind that the organizations have duties and responsibilities towards their shareholders and stakeholders and hence they need to be governed in accordance with the law and keeping in mind the interests of the stakeholders and shareholders.
The next aspect of corporate governance is that the notion of economic efficiency must be followed when directing, managing and controlling organizations. For instance, it is truism that corporations exist to make profits and hence the profitability and revenue generation ought to be the aim for which the corporates must strive for.
Of course, this does not mean that corporates can cut corners in their pursuit of profit and power and hence taken together with the principles in the previous paragraph, corporate governance means that a corporation must strive to generate revenues and make profits in a transparent and accountable manner. What this means is that the way in which corporations are managed and directed have to be done in accordance with standard norms and procedures that apply to ethical and normative conduct.
Corporate Governance has been in the news for the last decade or so following a spate of scandals that engulfed companies like Enron which led to their collapse because of mismanagement. This prompted regulators all over the world to implement various acts and rules to rein in irresponsible corporate behavior that would mar the prospects of the corporations and cause harm to their shareholders and stakeholders.
Acts like the Sarbanes Oxley were passed to enforce greater oversight over corporations and ensure that they did not overreach themselves in their relentless pursuit of profits. Indeed, it can be said that the Enron debacle was a wakeup call for corporate America to set its house in order. It is unfortunate that some of the lessons learnt during the early years of the last decade were forgotten leading to gross abuse of corporate power in the run up to the global financial crisis.
Broadly speaking, corporate governance can be said to encompass the tenets of rights and equitable treatment of the shareholders and the shareholders and following ethical business behavior along with practice of integrity.
But good governance can have wider impacts to the non listed sector because it is fundamentally about improving transparency and accountability within existing systems. One of the interesting developments in the last few years has been the way in which the ‘corporate’ governance label has been used to describe governance and accountability issues beyond the corporate sector. This can be confusing and misleading as UK Corporate Governance has been built and developed to deal with the governance of listed company entities and not designed to cover all organisational types that may have different accountability structures.
Source: Management Study Guide