What is Corporate Governance?

Corporate governance is the process and rules under which a company is

managed on the behalf of shareholders and stakeholders. The board of
directors is primarily responsible for applying and maintaining a company's
corporate governance.

How Does Corporate Governance Work?

Corporate governance is all about ensuring that companies act in the best
interests of their owners -- the shareholders -- who have invested
their savings, their children's college funds or their retirement funds in the
company. Corporate governance is also about considering the interests of
other entitites impacted by the company -- employees, the environment and
even communities.
Corporate governance is not just a set of ideas or value statements. There are
a significant number of very technical legal requirements that companies must
follow in order to demonstrate that they have good corporate governance. In
particular, the Sarbanes-Oxley Act, officially named the Public
Company Accounting Reform and Investor Protection Act of 2002, introduced
new governance standards for board conduct to ensure that directors are
aware of and accountable for the financial condition of the companies they
manage. All companies, foreign and domestic, that have
registered equityor debt securities under the Securities Exchange Act of 1934
are subject to the 2002 act. Foreign public accounting firms must also comply
with the Sarbanes-Oxley Act if they perform work for companies subject to the
act.
This is most evident in the Sarbanes-Oxley Act's requirement that the board of
directorsof most public companies have an audit committee, which must
appoint, inspect, regulate and control the actions of the company's auditing
firm. Additionally, the CEO and CFO of any company subject to the Sarbanes-
Oxley Act must certify in writing that the company's financial disclosures
comply with the law and fairly represent the company's condition. The CEO
and CFO also must certify that they have inspected the company's internal
financial controls. To prevent directors and officers from issuing
misleading financial statements in order to obtain personal benefits, the
Sarbanes-Oxley Act makes it a federal crime for a company officer to
pressure or manipulate an auditor into rendering a company's financial
statements misleading. Further, if a company is forced to restate its financials,
in most cases the CEO and CFO of the company must give back any
bonuses, compensation or profits made on personal trades of the company's
securities during the year after the faulty documents initially were disclosed.
To discourage deceptive compensation practices, the Sarbanes-Oxley Act
outlaws most kinds of loans to company directors and officers and prohibits
officers and directors from trading their company's securities during periods
when other employees or retirement-plan participants may not. In addition,
any changes in ownership by those owning at least 10% of the
company's stock now must be publicly disclosed within two business days.
As part of its eye toward reforming corporate governance, the act toughened
the consequences for financial misconduct. Violations of the act can range
from censure to prison sentences and multimillion-dollar penalties.
The Securities and Exchange Commission (SEC) has the authority freeze any
payment to an officer, director, partner or agent during an investigation.

Why Does Corporate Governance Matter?

One of the most important goals of corporate governance is to ensure that
company directors and officers are aware of and accountable for the financial
condition of the companies they manage. The board of directors lays at the
heart of the notion of corporate governance -- it has a fiduciary duty to the
shareholders. This can be difficult, especially when the vast majority of
information boards receive about corporate performance comes from
management, but nevertheless, the board is ultimately responsible for the
integrity of a company's financial statements and internal controls.

Financial Management
One of the main applications of corporate governance to small businesses is
transparency of financial practices and controls placed on how transactions occur. If
the business has investors or partners, your governance practices should include
preparing and distributing regular financial updates. This might include providing
monthly or quarterly reports, or allowing key stakeholders access to view reports such
as the business’s balance sheet, cash flow statements or profit-and-loss reports.
Placing restrictions on how much money an individual can spend on a single
transaction, requiring internal and external financial audits and requiring multiple
signatures by owners on checks over a certain amount are other examples of
corporate governance.

Conflict of Interest
Board members, partners, owners and key executives should sign conflict-of-interest
disclosure statements as part of any company’s corporate governance. In addition,
they should agree to abide by conflict-of-interest policies, such as disclosing outside
business relationships with vendors, suppliers, clients and customers and personal or
family relationships to these parties or job applicants.

Hiring Practices
As part of good public relations, corporate social responsibility and meeting any state
or federal hiring guidelines, corporations should write and publicize hiring statements
that assert the company’s commitment to fair hiring practices and non-discrimination.
This statement should be the basis for providing the company’s hiring manager with
goals for recruiting, screening and hiring staff. Using guidelines from the Equal
Employment Opportunities Commission is a good way to start developing governance
policies for hiring practices.

Board Role
Board members cannot claim ignorance of illegal behaviors by their employees if they
do not exercise reasonable care in the exercise of their duties, which includes
monitoring the activities of the company’s management and setting policies to limit
negative behaviors. Board members should also place limits on their own activities.
For these reasons, corporate governance includes specifying the roles and
responsibilities of the board of directors. This might include spelling out the duties of
individual board members; their role in the day-to-day management of the company or
limiting that role; their authority over the company CEO or president; ethics, code-of-
 conduct and conflict-of-interest rules; and authority to make major strategic decisions,
such as acquiring new businesses or closing the business.

Simple Definition of Corporate Governance in Business

Corporate governance in the business context refers to the systems of rules, practices,
and processes by which companies are governed. In this way, the corporate
governance model followed by a specific company is the distribution of rights and
responsibilities by all participants in the organization.
Governance ensures everyone in an organization follows appropriate and transparent
decision-making processes and that the interests of all stakeholders (shareholders,
managers, employees, suppliers, customers, among others) are protected.
 

 Related:
 Stakeholder Engagement Definition
 “Responsible” Companies Perform Better On The Stock Market

 
OECD Official Definition of Corporate Governance in Business
The purpose of corporate governance is to help build an environment of trust,
transparency and accountability necessary for fostering long-term investment, financial
stability and business integrity, thereby supporting stronger growth and more inclusive
societies.
 
Corporate Governance Today – What Does It Mean?
 

 
 Corporate Governance deals with the way the investors make sure they get a fair return
on their investment. In Corporate Governance, there is a clear distinction between the
role of the owners of a company (the shareholders) and the managers (the executive
board of directors) when it comes to making effective strategic decisions.
 
In today’s market-oriented economy and with the effects of globalization, the
importance of corporate governance is growing. This is due to the fact of governance
being an important way of ensuring transparency that makes sure the interests of all
shareholders (big or small) are safeguarded.
 

 Related:
 Consumers Want Transparent Businesses That Care For People & Planet
 What’s The Ideal Working Time To Be The Most Productive?

What Is The Purpose Of Corporate Governance ? What

Are Its Benefits?
9 Positive Impacts of Corporate Governance in Companies
A good corporate governance system:

 Ensures that the management of a company considers the best interests of everyone;
 Helps companies deliver long-term corporate success and economic growth;
 Maintains the confidence of investors and as consequence companies raise capital
efficiently and effectively;
 Has a positive impact on the price of shares as it improves the trust in the market;
 Improves control over management and information systems (such as security or risk
management)
 Gives guidance to the owners and managers about what are the goals strategy of the
company;
 Minimizes wastages, corruption, risks, and mismanagement;
 Helps to create a strong brand reputation;
 Most importantly – it makes companies more resilient.
Education

Education resources in corporate governance are

available primarily through university classes and conferences held by professional associations
KEY CONCEPT

Through the use of four archetypes, a team of researchers describes the impact of different
corporate governance systems on company decisions involving human resources. The
team also argues that a corporate sustainability mental frame can overcome the inherent
contradictions and challenges in each archetype.

IDEA SUMMARY

Corporate governance systems are the systems through which a company is controlled and
directed. Public corporations will have boards of directors responsible for ensuring that
management is acting in the best interests of the company.

Strategic human resource management (SHRM) is based on the belief that human
resource decisions must be aligned with the strategy of the company.

How does corporate governance impact the decisions related to strategic human resource
management? To answer this question, a team of researchers developed four archetypes
of corporate governance systems:
The shareholder value model. In this model, market logics dominate: the interests of the
shareholders are paramount. The culture is unitary: the firm is a harmonious team (top to
bottom) united in the pursuit of shareholder value.

The communitarian stakeholder model. Pluralist, democratic logics drive this model,

which recognizes and focuses on the legitimate interests of other stakeholders — from
employees to the community at large.

The enlightened shareholder value model. This is a hybrid model that represents a

tempered version of the shareholder value model. The unitary culture built on shareholder
value dominates, but with some (enlightened) recognition for the business case of other
interests (e.g., stakeholder interests, social values).

The employee-ownership model. This is a second hybrid that represents a tempered

version of the communitarian governance model. Employees own or partially own the
firm. They recognize the needs of all stakeholders but are also focused on gaining a return
on their investment as shareholders — in essence, a pluralist culture that combines
democratic and market logics.

Each of these different corporate governance typologies impacts a firm’s human resource
choices and the implementation of those choices in different ways.

Shareholder value firms have control and calculative HR policies intended to ensure

employee compliance and employee efficiency (e.g., through close supervision and no
hesitancy to fire). A few high value employees receive a disproportionate level of
compensation, otherwise there is very little investment in human capital and social capital
(relationships).

In contrast, communitarian stakeholder firms feature a commitment to people exemplified

through training to increase skills and job security, and a collaborative culture
exemplified through an effort to give employees a voice in the firm. Communitarian
stakeholder firms trade the low-trust board-employee mentality of shareholder value firms
for a dynamic high trust approach.

The hybrid models offer a mix of these two HR approaches. Enlightened shareholder
value firms temper the control/calculative practices of shareholder value firms with
commitment/collaborative practices. While a few “star” employees are highly paid, the
firm tries to engage less value-adding and less scarce employees.

The employee-ownership hybrid tempers the high commitment/collaborative practices of

the communitarian stakeholder model with some control/calculative practices. Thus, the
firm pushes training and development but contracts will include transactional features
such as incentive-based pay for performance.

BUSINESS APPLICATION

Each of the four models has important challenges to overcome. The transactional human
resource relationships of the shareholder value model promote short-termism and low
trust. The communitarian model can be unrealistic — can all stakeholder interests be truly
satisfactorily addressed? The enlightened shareholder value and employee-ownership
hybrid models have their own drawbacks. The inclusive HR rhetoric of the enlightened
shareholder value is refuted by practices such as rewarding a few high-value employees at
the expense of job insecurity for the majority of employees. Meanwhile, employee-
ownership firms promote employee involvement, but as shareholders, employee owners
support transactional HR practices to protect their investment.

One way to overcome these inconsistencies and challenges is through a corporate

sustainability frame, which mandates a set of corporate values and a culture that ensures
the long-term survival and prosperity of the firm. Through independent boards, corporate
sustainability not only helps resolve the challenges described above, but also reinforces
the legitimacy of the firm — that is, the general perception that a firm is not violating
societal norms, values and beliefs.)
 The research team describes the elements that a corporate sustainable approach to human
resources might entail. A sample of these elements include:

 Creating a high trust dynamic across all levels of employment.

 Implementing employee share ownership linked to a long-term commitment to
firm and market value.
 Reinforcing the legitimacy of the firm through sustainability, ethics and diversity.
 Training employees on environmental, ethical and diversity issues.
 Enabling employee involvement in sustainability initiatives and decisions.
 Linking performance appraisal and rewards to sustainability, ethics and diversity.

While not a separate archetype, the objectives and culture of sustainability-driven firm
provide a potential frame for resolving the tensions highlighted in different models above.

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Authors
 Martin, Graeme
 Farndale, Elaine
 Paauwe, Jaap
 Stiles, Philip G.

Institutions
 University of Dundee
 Pennsylvania State University
  Tilburg University
 University of Cambridge Judge Business School

Source
 European Management Journal

Idea conceived
 February 2016

Idea posted
 April 2016

DOI number
10.13007/595

Subject
 Sustainability
 Boards, Roles and Responsibilities
 Governance
 HR Management
 Values

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What Is Corporate Governance?

Corporate governance is the system of rules, practices, and processes by which
a firm is directed and controlled. Corporate governance essentially involves
balancing the interests of a company's many stakeholders, such as shareholders,
senior management executives, customers, suppliers, financiers, the
government, and the community. Since corporate governance also provides the
framework for attaining a company's objectives, it encompasses practically every
sphere of management, from action plans and internal controls to performance
measurement and corporate disclosure.

KEY TAKEAWAYS

 Corporate governance is the structure of rules, practices, and processes

used to direct and manage a company.
 A company's board of directors is the primary force influencing corporate
governance.
 Bad corporate governance can cast doubt on a company's reliability,
integrity, and transparency, which can impact its financial health.
Understanding Corporate Governance
Governance refers specifically to the set of rules, controls, policies, and
resolutions put in place to dictate corporate behavior. Proxy advisors and
shareholders are important stakeholders who indirectly affect governance, but
these are not examples of governance itself. The board of directors is pivotal in
governance, and it can have major ramifications for equity valuation.

A company’s corporate governance is important to investors since it shows a

company's direction and business integrity. Good corporate governance helps
companies build trust with investors and the community. As a result, corporate
governance helps promote financial viability by creating a long-term investment
opportunity for market participants.
Communicating a firm's corporate governance is a key component of community
and investor relations. On Apple Inc.'s investor relations site, for example, the
firm outlines its corporate leadership—its executive team, its board of directors—
and its corporate governance, including its committee charters and governance
documents, such as bylaws, stock ownership guidelines and articles of
incorporation.

Most companies strive to have a high level of corporate governance. For many
shareholders, it is not enough for a company to merely be profitable; it also
needs to demonstrate good corporate citizenship through environmental
awareness, ethical behavior, and sound corporate governance practices. Good
corporate governance creates a transparent set of rules and controls in which
shareholders, directors, and officers have aligned incentives.

Corporate Governance and the Board of Directors

The board of directors is the primary direct stakeholder influencing corporate
governance. Directors are elected by shareholders or appointed by other board
members, and they represent shareholders of the company. The board is tasked
with making important decisions, such as corporate officer appointments,
executive compensation, and dividend policy. In some instances, board
obligations stretch beyond financial optimization, as when shareholder
resolutions call for certain social or environmental concerns to be prioritized.

Boards are often made up of inside and independent members. Insiders are
major shareholders, founders, and executives. Independent directors do not
share the ties of the insiders, but they are chosen because of their experience
managing or directing other large companies. Independents are considered
helpful for governance because they dilute the concentration of power and help
align shareholder interest with those of the insiders.

The board of directors must ensure that the company's corporate governance
policies incorporate the corporate strategy, risk management, accountability,
transparency, and ethical business practices.

Bad Corporate Governance

Bad corporate governance can cast doubt on a company's reliability, integrity, or
obligation to shareholders—all of which can have implications on the firm's
financial health. Tolerance or support of illegal activities can create scandals like
the one that rocked Volkswagen AG starting in September 2015. The
development of the details of "Dieselgate" (as the affair came to be known)
revealed that for years, the automaker had deliberately and systematically rigged
engine emission equipment in its cars in order to manipulate pollution test
results, in America and Europe. Volkswagen saw its stock shed nearly half its
value in the days following the start of the scandal, and its global sales in the first
full month following the news fell 4.5%.

Public and government concern about corporate governance tends to wax and
wane. Often, however, highly publicized revelations of corporate malfeasance
revive interest in the subject. For example, corporate governance became a
pressing issue in the United States at the turn of the 21st century, after fraudulent
practices bankrupted high-profile companies such as Enron and WorldCom. It
resulted in the 2002 passage of the Sarbanes-Oxley Act, which imposed more
stringent recordkeeping requirements on companies, along with stiff criminal
penalties for violating them and other securities laws. The aim was to restore
public confidence in public companies and how they operate.

Other types of bad governance practices include:

 Companies do not cooperate sufficiently with auditors or do not select

auditors with the appropriate scale, resulting in the publication of spurious
or noncompliant financial documents.
 Bad executive compensation packages fail to create an optimal incentive
for corporate officers.
 Poorly structured boards make it too difficult for shareholders to oust
ineffective incumbents.