Why Is Good Corporate Governance So Important?

The Value of Good Corporate Governance

The term corporate governance refers to the checks and balances within an organization, the rules, practices, and processes used to run a company.   A company’s corporate governance establishes the company’s direction and business integrity, promotes financial viability, and builds trust with investors and the community. 

Corporations achieve good corporate governance by balancing the interests of the company’s stakeholders, which can include shareholders, senior management executives, the board of directors, customers, suppliers, and the community.  Proper corporate governance is important because it can help ensure long-term shareholder value.  A company with strong corporate governance informs the market that the organization is well managed and that the interests of all stakeholders are aligned.  In turn, the company builds strong brand reputation and becomes more resilient, positively impacting its share price.

How do Corporations Achieve Good Corporate Governance?

Corporations achieve good corporate governance by ensuring the board of directors follow “The 4 Ps of Corporate Governance,” “The Basic Principles of Corporate Governance,” and implement the company’s governance strategically and fairly.   

The 4 Ps of Corporate Governance

  • People – It has to start with people.  People determine the purpose to work towards, develop the process to achieve it, and evaluate the performance outcomes.
  • Purpose – Every piece of governance exists for a purpose, bringing the company closer to achieving its mission statement.
  • Process – People achieve the company’s purpose through its processes.  
  • Performance – Processes are evaluated through performance to determine their success.

The Basic Principles of Corporate Governance:

  • Accountability of Leadership
  • Transparency of Governance Policies
  • Documentation of Policies and Procedures
  • Sound Decision-Making Within the Organization

The Role of Board Members in Corporate Governance

The board of directors carries out a company’s corporate governance.  A board is required to have a code of conduct to set out the rules, practices, and processes the company will follow.  It should also ensure there are no conflicts of interest that will harm the company.  The board is expected to set the standard and model the company’s values as part of the corporate culture. 

A board should consider input and concerns voiced by all stakeholders.  Some concerns that shareholders may voice include:

  • Excessive board compensation
  • Granting of excessive stock options to board members that could dilute shareholder investments
  • Potential and actual conflicts and interpersonal relationships among board members
  • Inadequate risk management and disclosure policies
  • Auditor independence
  • The company’s lack of concern for social and environmental obligations
  • Lack of diversity on the board or at the management level

How Can Shareholders Ensure Corporate Governance is Working? 

Ask questions.

If the company is not performing as strongly as shareholders believe it should, shareholders are wise to ask questions. All shareholders, regardless of the amount of shares owned, have a voice at the general annual meeting. This is an opportunity to voice concerns, ask questions, and get the information needed to make sure the organization is on the right track.

One potential area of concern is the board member’s dedication to the organization. Frequently, directors serve on more than one board. Ask how many boards the directors are on and check to ensure they have adequate time to dedicate to this organization.

Review financial documents.

It is important that financial documents are clear, accurate, and accessible for shareholders to review. Shareholders can review these documents for any discrepancies.  If they spot any or if the company is sliding in a negative direction, shareholders can question whether there may be a potential conflict of interest for a member on the board of directors. This could include a review of any interpersonal relationships between board members and management as well as a review into a board member’s ownership interest in the company.

Did a Company Violate Your Shareholder Rights?

Good corporate governance values all shareholders equally, no matter the difference in ownership stake. However, good corporate governance is not always a given. Even with good corporate governance, wrongdoing can still occur. This wrongdoing can be harmful to shareholders and the overall corporation’s health. A violation of shareholder rights can be cause for action to remedy the issue and establish better corporate governance. 

If you believe a company violated your shareholder rights, you may benefit from speaking with an experienced team of attorneys.  Contact us for more information on corporate governance and ensuring your shareholder rights are protected.

Having information at your fingertips is easier than ever. Enroll in Robbins LLP’s free investment monitoring service, Stock Watch, for notifications of corporate misconduct impacting the value of your investments, advice on how to hold corporate officers and directors accountable for their misconduct, and to receive information about class action settlements.