Corporate governance: definition, strategies and examples
Although corporate governance is often associated with large publicly traded companies, small and medium-sized companies are also interested in this topic. In this article, we’ll look at how to define corporate governance, what is good corporate governance and how to apply it within a company.
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What is corporate governance?
The corporate governance definition is essentially the set of rules that govern the way companies control and manage. It distributes and balances the powers among all the different stakeholders of the company (board of directors, shareholders, clients, suppliers, employees) and establishes the rules and decision-making procedures that must be followed.
The objective of a company is to create value. To do this, corporate governance is based on four fundamental principles:
Transparency: definitionTransparency ensures adequate and timely disclosure of all real information about a company, including its financial situation, performance, ownership and governance structure.
The aim of corporate governance is to improve the performance and profitability of the company by making decisions in a concerted, transparent manner and, above all, with the contribution of all the different stakeholders of the company.
Corporate governance structure
The structure of a corporate governance is likely to vary from one company to another but in general it is broken down as follows:
- Family council or partners and shareholders;
- Board of directors;
- General management or senior management.
How to implement corporate governance?
Implementing corporate governance in a company begins by setting objectives such as:
- Establish an organisational structure;
- Define a governance strategy in accordance with the missions, values and vision of the company;
- Identify opportunities and risks to consider;
- Use resources in a sustainable way;
- Respect the interests of stakeholders and take their points of view into account in the decision-making process;
- Evaluate the level of achievement of the objectives and make the necessary adjustments.
The benefits of corporate governance are therefore evident: a vision of long-term goals, effective risk management, responsible running of the company and a synergy between the different stakeholders that creates value.
Examples of good corporate governance practices include:
- Calculation of the company's carbon footprint;
- Respect for human rights in the company;
- Transparency of executive salaries;
- Implementation of a code of conduct for employees.
Corporate governance in the UK
Modern corporate governance in the UK started with the publication of the Cadbury Report in 1992 after a number of high-profile company failures led to the belief that free enterprises would be more stable and secure within a set common standards and with more accountability and transparency.
What was the Cadbury Report?Chaired by Adrian Cadbury, the report looked at the management of companies in the UK and set out a number of recommendations including the make up of company boards, financial reporting and accounting systems, and improved corporate governance structures. The OECD, European Union, US and World Bank have all since based their corporate governance code on this report in some way.
The most important recommendation of the report was the need to establish the UK Corporate Governance Code. The code, which has been updated on a frequent basis ever since, ensures business in the UK is conducted within the full protection of the law regarding best practice, and guarantees company executives are held to accountability by other stakeholders when running a business.
UK Corporate Governance Code
Last updated in 2018, the corporate governance code focuses on 5 core principles:
- Leadership: Every company should be headed by an effective board which is collectively responsible for the long-term success of the company.
- Effectiveness: The board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively.
- Accountability: The board should present a fair, balanced and understandable assessment of the company’s position and prospects.
- Remuneration: Executive directors’ remuneration should be designed to promote the long-term success of the company. Performance-related elements should be transparent, stretching and rigorously applied.
- Relations with stakeholders: There should be a dialogue with shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place.
Corporate Insolvency and Governance Act 2020
In addition to the corporate governance code, the UK government introduced the Corporate Insolvency and Governance Act last year. The act, rushed through Parliament in order to help businesses through the Covid-19 pandemic, represents the most significant changes to the insolvency framework since 2003.
The three key elements of the Act are:
- A moratorium: Companies are able to apply for a moratorium meaning creditors are prevented from taking certain action against them for a specified period of time.
- A ban on termination provisions (or so called ipso facto clauses): This prohibits the termination of any contract for the goods and services of a company if it enters an insolvency procedure.
- The introduction of a new pre-insolvency rescue and reorganisation: This allows companies to propose a restructuring plan to its creditors.
OECD principles of corporate governance
The Organisation of Economic Cooperation and Development (OECD) first published its set of corporate governance guidelines in 1999. They were developed and endorsed by ministers of each member country with the aim of creating legal and regulatory frameworks for corporate governance across the world.
While the guidelines are revised and updated, there remain six core principles. These are:
- Ensuring the basis of an effective corporate governance framework.
- The rights of shareholders and key ownership functions.
- The equitable treatment of shareholders.
- The role of stakeholders in corporate governance.
- Disclosure and transparency.
- The responsibilities of the board.
Corporate government and corporate social responsibility
The ISO 26000 standard, published in 2010 by the International Organisation for Standardization (ISO), defines the main issues of corporate social responsibility. It places corporate governance among the central issues of CSR and defines it as "the system by which an organisation makes and implements decisions in order to achieve its objectives."
CSR: definitionCorporate social responsibility (CSR) refers to the positive impact that companies have on society and the environment, while being economically viable.
Today, CSR concepts are increasingly important in governance strategies. Two key areas that have become increasingly visible in company CSR efforts are sustainability and the environment, and social responsibility. Regarding sustainability and the environment, many companies have implemented policies on matters such as waste management, pollution and the business carbon footprint. And in the area of social responsibility, there have been many advances in issues such as diversity, fair wages and benefits, and respecting basic human needs.
The integration of CSR in the management of the company has a direct impact on the economic results of the company and its competitiveness. In effect, it increases the levels of trust and perception of investors and consumers, attracts and retains employees, and maintains employee motivation and commitment.
In this way, corporate governance allows companies to guarantee their economic development while integrating sustainable development into their strategies.