Principles of Corporate Governance: Building a Foundation for Organizational Success

Corporate governance encompasses how companies manage their entire processes from the board to the community. With good corporate governance, tracking your company’s growth and gaps is easier. It also helps increase the predictability of your success — whether you are investible or not. Stakeholders such as shareholders, clients, vendors, investors, and your employees play important roles in sound and efficient corporate governance.

Building a solid corporate governance foundation will require several discussions, advancements, and effective use of procedures. Environmental awareness, ethical behavior, business strategy, compensation, and risk management are all aspects of corporate governance that you will need to assess. In this article, we dive into the theoretical foundations, structure and framework, and challenges to help you build a strong foundation of corporate governance for your success.

Theoretical Foundations of Corporate Governance

These theories aid in figuring out how to successfully achieve effective corporate governance. It also attempts to make sense of the existing corporate governance methods predominant in various decades.

Agency Theory

In agency theory, the assumption is that shareholders treat corporations as agents that handle their investments. This way, corporations are entrusted to manage and run the business while ensuring growth and stability. In some cases, principal shareholders and the agent might develop a conflict of interest. With the agency theory, corporations can draft policies for both the principal and the agent to resolve the conflict and avoid such in the future. This ensures the continuity of strong corporate governance.

Stakeholder Theory

Stakeholder theory puts the same, if not equal, value to all stakeholders from employees to executives. This theory aims to remove the centralization of power into one, which is usually vested in shareholders. It assumes that stakeholders are divided into two: internal and external stakeholders. These two play some role in the way a company runs itself with the hopes of returns in value or expectations. With this theory, your corporate governance policies should create value for all stakeholders.

Shareholder Value Theory

Shareholder value theory posits that the main goal of management is to increase shareholder value. This theory assumes that there are two measurable metrics in shareholder assets, namely, dividends and share price. Companies are then encouraged to make decisions that will maximize these two metrics. When developing your policies, shareholder value should be considered important but other factors such as stakeholders’ interests should be considered as well.

You can explore these theories to fully understand how your overall management works. This can be used as a stepping stone to draft plans for your long-term corporate governance.

Corporate Governance Structure and Framework

Your company’s corporate governance framework identifies the policies, objectives, and associated culture for security and risk management. Alongside it is the need for a structure that classifies the distribution of rights and responsibilities in the business such as deciding on the hierarchical powers of decision-making.

Board of Directors

The Board of Directors play an important role in corporate governance as they oversee the entire business and management. Board governance ensures proper delegation of roles and responsibilities to other stakeholders for the continuity of the business. As the primary decision-makers of businesses, they can also assign powers to the CEO or CFO.

Executive Management

Under the Board of Directors is the Executive Management and the CEO. For strong corporate governance, the Executive Management should develop and execute strategic plans for the company. Some of their other responsibilities are handling business operations, capital allocation, identifying and mitigating risks, and business resiliency. As relevant stakeholders, they can also influence the governance structure of your organization.

Shareholders

Shareholders have varying rights depending on the company they invested in. Some of the most common shareholder rights include voting power on major issues, ownership in a portion of the company, right to transfer ownership, entitlement to dividends, and bring legal action for wrongdoing. Shareholders with a higher number of shares may have a bit of influence in some of the decisions companies make. Studying a company’s corporate governance policies helps shareholders gain insight into their rights and mitigate risks on their end. On the other hand, properly-defined shareholder rights give more assurance to shareholders.

Transparency and Disclosure

Transparency means disclosing all relevant information to the public. Organizations worldwide gain more trust with transparency. As one of the pillars of corporate governance, it ensures that financial fraud is less likely to happen. For example, corporations disclose financial information as well as an analysis of their strengths and weaknesses which allows investors and other relevant stakeholders to be informed of past and future risks and opportunities.

Corporate Governance Best Practices

Implementing the framework and structure is the stepping stone toward sound corporate governance. But to further improve governance, your company can adopt best practices. Here are some to start with:

Establishing Codes of Conduct and Ethics

Businesses thrive if a solid code of conduct and ethics governs internal and external stakeholders. Usually, this document contains the measures, rules, and responsibilities of internal stakeholders on how to conduct fair and honest business procedures. Some of the best practices to include are making it comprehensive, and easily accessible, and carefully planning it out based on company branding. This usually includes your core values and vision, confidentiality procedures, community involvement, etc. The committee assigned to draft this must write it in such a way that stakeholders will easily understand it.

Setting Risk Management and Internal Controls

Businesses and organizations alike need risk management and internal controls to ensure business continuity. This helps reassure investors, vendors, and other stakeholders that the company is financially stable, follows regulations, and operates effectively. Without both, there is little to zero chance of investors trusting you.

The internal goals of your firm and its internal stakeholders are the primary focus of internal control mechanisms. As defined by the Internal Control-Integrated Framework, a reliable internal control system consists of risk assessment, control environment, control activities, information and communication, and monitoring. Consider evaluating your organization’s internal controls with this framework.

Evaluating Board Effectiveness and Performance

An effective board creates and develops its understanding of the organization’s mission, culture, values, and behaviors it wishes to promote in conducting business. To avoid stagnancy in your business operations, it is ideal to hold board evaluations from time to time. This is one of the best practices in effective corporate governance as it helps quantify the effectiveness of the current board. It also helps measure the relationship it has with the executive management. This is a good idea if you plan to grow your revenue and ensure stability long-term consistently.

Managing Stakeholder Engagement

Involvement and fairness both play important roles in corporate governance. Boards that create spaces and initiatives to serve the stakeholders such as investors, shareholders, and employees, help increase engagement. Similar to what stakeholder theory assumes, it is crucial to treat stakeholders as elements holding the same value that contributes to how a company operates. This also helps ensure that all interests are balanced by getting relevant information from stakeholders.

Challenges and Future Trends on Corporate Governance

Since the only constant thing in this world is change, it is imperative to consider how your company will face corporate governance challenges and future trends. Here are some challenges and future trends to look out for:

Globalization and Cross-Border Governance Issues

In trading, cultural ideologies, technologies, attitudes, and even social networks are passed on to one another, which may impact governance both directly or indirectly. This could either enhance or deflate the knowledge economy which also affects globalization. In globalization, goods, services, and capital are freely moved. Some companies are dependent on this form of exchange, which is why it is important to monitor and have contingency plans in case negative issues arise.

Take immigration challenges and local job loss for example. If a certain region tightens immigration rules, it is difficult for immigrants to find jobs in new countries. If local job loss is prevalent, the economy will somehow be affected one way or another. A company with strong corporate governance will find ways to minimize losses and protect stakeholders at a time like this.

The Increasing Scrutiny on Environmental, Social, and Governance (ESG)

ESG reporting is now mandated worldwide and is constantly evolving to suit current and future business processes and sustainability needs. ESG considerations are important in formulating corporate governance policies as these are usually used to screen investments. The US Securities and Exchange (SEC) has also issued mandatory reporting measures for ESG, putting more pressure on companies to up their ESG and sustainability game.

ESG underperformance may affect stock performance as well. Societe Generale quantified such data and identified which companies experienced high ESG controversy contributing to the stoppage of a stock’s price rise. To avoid this, companies have started investing more in ESG and sustainability practices, which directly added to their financial viability.

At present, more companies are realizing the need to upgrade their ESG reporting tool as some of them have been manually monitoring their ESG data. Manual processes could be tedious and require more time to accomplish compared to adopting digital tools. To strengthen your corporate governance strategies, ESG considerations help evaluate your company’s ethical and sustainability practices, giving more insight to all stakeholders.

Technological Advancements and Cybersecurity Risks

Technology can positively impact corporate governance. Technological advancements are even better as they will help improve accountability, decision-making, and transparency. Board management portals serve as an example as it automates time-consuming tasks for meetings and information dissemination. This is a must-have if your company seeks to improve its governance.

Alongside such advancements are cybersecurity risks that may impede your company’s everyday operations. One of the effects of lacking cybersecurity is data breaches. In just the first few months of 2023, several data breaches have occurred such as the Intellihartx data breach wherein hackers stole over half a million data of patients. To avoid such, a highly-secure software can be adopted. It is also important to understand company cyber damage in economic terms to have concrete contingency plans enterprise-wide.

Empowering Corporate Governance with Board Portals

Building a strong governance foundation will help secure your organization’s future as it will help you sustain both financial integrity and efficiency. Well-governed companies will outperform those with poor corporate governance as investors are more attracted to companies with financial security. High standards in corporate governance will help ensure further growth and organizational success.

Since your board makes the most important decisions to help achieve good corporate governance, board portals will make their lives easier. A board portal like Convene will not only digitalize your processes but will also help efficiently distribute relevant information in just a few clicks, saving time and effort. With Convene, you can easily handle corporate governance as it has its own task management and meetings modules. Book a free demo today!