Question

Corporate governance is a tough process for me to grasp. Please help me understand this by discussing the relevance of corporate governance. What does it look like? How can a company benefit from governance systems; i.e. what benefits are provided to decision makers?

If possible please provide an industry example of corporate governance that you know of or have been involved in from research to further help explain this concept. Thanks!

Answer 1

What is Corporate Governance?

Corporate Governance is broader concept. It encompasses both social & institutional aspects. Corporate governance is the system by which companies are directed and managed to achieve

Corporate governance is the interaction between various participants (Shareholder, Board of Director and Company Management) in shaping corporation’s performance and the way it is proceeding towards its goals & objectives.

It ensures transparency which ensures strong and balance economic development. This is also ensures that the interest of all shareholders (Majority as well as minority shareholder) are safeguard.

What are the advantages of Corporate Governance?

Reputation of Company is improved -

More stakeholders ready to work with the company which officially publicizes, the corporate governance policies and how thse companies work.e.g Lenders which see strong policies & internal controls, govt agencies, debtors, etc. Transparency is acheived as internal information is shared within the stakeholders which help build confidence & accountability.

lLegal Compliances adhered

CG helps the firm to stay compliant with the local, national & state rules. This includes compliance to corporate, economic & taxation laws & other laws applicable to entities. It helps to set robust mechanism to ensure compliance, avoid penalties & litigations and taking prompt actions on the defaulters.

Possibility of conflicts & frauds checked

Corporate governance limits the potential for irregular behavior of employees by instituting rules to reduce potential fraud and conflict of interest. For example, the entity may draft a conflict of interest statement that top executives must sign, requiring them to disclose and avoid potential conflicts, such as awarding contracts to family/close associates or contracts where executives have a mutual/pecuniary interest. The company might forbid loans to officers and family members or the hiring of family members. External audits or requiring checks over a certain amount to be approved and signed by two people help reduce errors and fraud.

Reducing the borrowing cost

In today’s dynamic environment, the implementation of good governance practices can lead to a reduction in a company’s cost of capital. An organisation that is seen to be stable, reliable and able to mitigate potential risks will be able to borrow funds at a lower rate than those with weak corporate governance. Companies with debt or equity investors may find that their investors pay a premium to work with a company that has a sound governance framework. e.g Companies with good credit score are able to bo rrow at lower rate as compared to others with bad credit ratings.

Assuring internal controls. By implementing corporate governance correctly across the organisation, the board may be certain that an adequate and effective control environment is in effect, with the level of assurance associated with each important component of governance, the board or lthe board committee is better positioned to take action when the controls signal non-compliance.& take immediate actions wherever such signals are highlihted.