Corporate governance is an established set of rules, procedures and relationships that an organization utilizes to manage its business. Its purpose is to ensure the company is run responsibly with clear responsibilities for shareholders and other stakeholders.
A sound corporate governance system is essential to the success of any company. Transparency and accountability as well as fairness are its elements. Keeping these principles in mind can help companies avoid embarrassing scandals, encourage economic growth, and cultivate trust with investors, lenders, employees, and the public at large.
It’s not uncommon for concerns about corporate governance to wax and wanes, but widely reported scandals of misdeeds can spark interest in the topic. The Enron scandal and other shady business practices around the turn of the century were major factors in the Sarbanes-Oxley Act, which increased the oversight requirements for public-traded corporations.
The best method to avoid problems with corporate governance is to ensure that a transparent and formal procedure is followed for board member nominations and elections. It is imperative that a board adopts guidelines that allow the directors to leave if they do not receive a majority vote. The board should also establish an official position for an executive director, also called a presiding director and be an independent leader of the board.
A board must also ensure that it is diverse enough in terms of age, gender and ethnicity. This is vital to ensure that the board can reflect the concerns and interests of all stakeholders, while also protecting against unconscious bias.