Corporate governance is the system of rules, practices, and processes that direct and control a company. Corporate governance involves balancing the interests of a company’s stakeholders, including the shareholders, board, management, and employees, as well as those of the communities and society in which the corporate operates.
Effective corporate governance demands an efficient system of document management and procedural transparency so that everyone from the top down understands what the corporation is doing and why things are being done.
Developing Good Corporate Governance
Corporate governance involves allocation of power among the shareholders, board, and management that controls the daily operation of the corporation. Some of the factors that influence the corporate governance structure include:
- Internal stakeholders, such as the board of directors, officers, senior management, and employees
- External stakeholders, including shareholders, investors, customers, vendors and outside agencies
- Governing principles of the corporation: the laws, bylaws, guidelines, charters, codes of conduct, and other policies the corporation has developed to outline its own delegation and allocation of authority
- Regulatory agencies, both governmental, such as the SEC and IRS, and internal, such as various industry self-regulatory agencies
Good corporate governance cannot be a “one size fits all” policy. Each company must reflect the requirements and industry needs of its individual niche and location. A large corporation with many offices and subsidiaries may need to have multiple “identities” for different locales. What works in Dayton may not work in Dhaka.
Measuring corporate governance requires both accurate measurement tools and a good feel for corporate culture at the top. When a company becomes too large for efficient communication, it needs a one-stop communications hub that can coordinate everything in one location for easy access by everyone with a stake in the company.
Corporate Governance: The Board of Directors
The board of directors sits at the top of the corporate ladder, and are the ultimate decision-making body for the company, in terms of long-term interests and orders. Shareholders vote on who sits on the board, and management runs the day-to-day operations, but the board makes all other decisions about corporate governance.
The board must act with the best interest of the corporation and long-term shareholders in mind. They are tasked with assigning managers and granting authority to act on behalf of the company in daily operations. The board is responsible for regulatory compliance and adherence to state, federal, and international laws as applicable.
The board and corporate officers have fiduciary duties to the shareholders which are an important part of the culture of good corporate governance. Fiduciary duties are clearly spelled out in corporate law when a company incorporates, and generally include:
- Duty of Care. A duty to act in the same manner that an ordinarily prudent person would act under similar circumstances with the same knowledge.
- Duty of Loyalty. Officers are expected to act in a manner reasonably believed to be in the best interest of the shareholders and the corporation.
- Duty of Good Faith and Fair Dealing. Officers are expected to be open and honest with one another in all their dealings with each other and with the corporation, and not to use corporate business for personal gain.
- Duty of Obedience. Officers must carry out their responsibilities within the scope of their authority.
- The duties may differ slightly depending on the state or country where the company incorporates
In cases where corporate officers find themselves in legal difficulties, courts apply the “business judgment rule.” Although this is not encoded into law, courts presume that officers have complied with their fiduciary duties and will defer to the board’s actions unless there is evidence otherwise. The only exception is “interested party” cases where the prosecution seeks to prove “alter ego” transactions.
Corporate Governance: Shareholders
The shareholders are the owners of a corporation, but under corporate law “ownership” and “management” are separate activities and cannot be mingled. Shareholders may not be part of the day-to-day operations of the corporation.
Shareholders’ rights are limited to formal voting that will affect the corporate governance structure, such as:
- Election and removal of directors
- Amendments to the certificates of incorporation
- Fundamental chances to the corporate identity such as mergers, acquisitions, and sale of substantial assets
- Equity issuances such as stock rights and preferences
Shareholders have a right to sue corporations for wrongdoing, in so-called derivative lawsuits. In a derivative lawsuit, shareholders sue executives or board members for actions they believe harmed the company and therefore the shareholders. The purpose of a derivative lawsuit is to recover the lost revenue caused by the officers’ malfeasance.
Shareholders are entitled to access the same corporate records and databases as the officers and board. In some cases, minority shareholders may have difficulty accessing these records.
Corporate Governance: Management
Senior management is responsible for the daily business affairs of a corporation, and reports to the board of directors. Management must provide the board with timely and accurate information about operations costs and financial data so the board can give effective oversight to management.
Management duties are prescribed by corporate by-laws, and by board resolutions. Companies may have their own proprietary internal matrix which assigns managerial authority within the corporate structure.
State and federal case law establishes that senior management has the same fiduciary duties as directors. Each state has its own specific laws about the authority and agency allotted to senior management in a corporation.
For management to function effectively for a corporation, information must flow smoothly in all directions. Management is the through-point of a corporation, where data either reaches the intended recipients or is choked off at its source. Companies must have a functional data management system in place for their corporation to have good corporate governance.
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