Corporate Governance

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CG3What is corporate governance?

Corporate governance is the set of rules and regulations by which business organizations are directed and controlled.  It establishes the rights and responsibilities in business organizations and is setting the rules and procedures for making business decisions.

Corporate governance is the framework of rules and practices by which the company is assuring fairness, transparency, and accountability in the company relations with its stakeholders ( customers, management, employees, government, community)

The corporate governance framework consists of (1) explicit and implicit contracts between the company and the stakeholders for the distribution of responsibilities, rights, and rewards, (2) procedures for reconciling the sometimes conflicting interests of stakeholders in accordance with their duties, privileges, and roles, and (3) procedures for proper supervision, control, and information-flows to serve as a system of checks-and-balances.

Does it help?

Corporate governance became a very important topic for many corporations following the 2002 introduction of the Sarbanes-Oxley Act in the U.S., which was ushered in to restore public confidence in companies and markets after accounting fraud bankrupted high-profile companies like Enron and WorldCom.

Corporate governance is used by companies to lay out the principles, rules, and regulations for its employees. Every corporate governance policy is customized to the specific business organization and reflects uniquely the values and mission of the organization.

Any policy of corporate governance should be based on the following principles :

  1. ethical approach – culture, society; organizational paradigm
  2. balanced objectives – congruence of goals of all interested parties
  3. each party plays his part – roles of key players: owners/directors/staff
  4. the decision-making process in place – reflecting the first three principles and giving due weight to all stakeholders
  5. equal concern for all stakeholders – albeit some have greater weight than others
  6. accountability and transparency – to all stakeholders

CG2Based on the above principles the defined governance policy should actually be nothing else but a healthy management policy that supports (1) business ethics, (2) alignment with business goals and targets, (3)strategic business management , (4)proper set up organization and (5)reporting system that provides transparency and clear accountability.

Some companies have been forced to have more transparency starting with 2002 through the Sarbanes-Oxley Act and some have had this kind of framework already but they called it otherwise.

Good corporate governance brings clarity within mid-sized and big business organizations and can mean a very healthy sustainable growth foundation for smaller companies. Fact is that the bigger the organization is the more complex the government policy is.

The TopCFO view is that a properly defined and implemented governance policy is needed and mandatory for any size of a company. The policy should safeguard and support the achievement of your business strategic vision, mission and values by assuring transparency for all stakeholders, accountability and traceability for company actions and profits for shareholders.  Corporate governance can help a lot but also bring major hurdles to the daily business if not approached correctly.

Do not overdesign and overregulate your governance policy, you should always have a balance between costs and benefits.

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