Corporate Governance

Governance is the setting of expectations, the grant of power and monitoring performance against the set expectations. These expectations, either in governments or businesses are goals set by the managers therein. For a government, it comes from the manifesto that they float during their election campaigns and as for the businesses, it comes as a strategic business plan; both are broken down into various categories and almost each category having a distinct goal for itself. In many well defined documents, how the government or the management of the business intends to accomplish these goals is clearly set. How effectively do these managers achieve these goals and while achieving these goals what exactly was the modus operandi - how did they behave as an individual and as an entity - or simply put, Corporate Governance.

The most influential parties involved in corporate governance include governmental bodies, stock exchanges, the management itself (including the board of directors and its chair, the CEO or equivalent, other executives and line managers, shareholders and auditors). Other influential stakeholders may include lenders, suppliers, employees, creditors, customers and the community at large. 

Corporate governance is the set of policies and procedures, rules and regulations even as much as a code of conduct that manages the processes in the organization which effectively control the direction of the company and reflect its management style while highlighting the attention it sets on CSR, the environment, obligation to customers and its commitment to product quality. 

Corporate governance spills over all areas of the business and its management. To wrap it all up the UN Intergovernmental Group of Experts on Good Practices in Corporate Governance Disclosure. This document captures good corporate governance in the following 5 broad categories:

1. Auditing
2. Board and management structure and process
3. Corporate responsibility and compliance
4. Financial transparency and information disclosure
5. Ownership structure and exercise of control rights

The Organization Structure

Corporate governance is hugely affected by ownership structures and the dominance of individuals within.

A family owned business structure is going to be well weaved and be dominated by the eldest member, usually, sitting at the top as against the public company being run by a bureaucrat. This alone allows the family owned business to react faster than the public company which no matter has realized the urgency would still have to go through a lot of red tape before it can plunge into the opportunity.

Similarly, a top performing individual would have to wait till his year end review/appraisal or a very important task that he pulls off saving the company its image and dollars (both or whichever comes first) to an individual in the family owned business who could attract attention, responsibility, power and rewards fairly easily. 

In a recent study by Credit Suisse found that companies in which "founding members retain a stake of more than 10% of the company's capital enjoyed a superior performance over their respective sectorial peers."

Each business structure has to be managed in a way where the costs, benefits, processes and the time taken to get the job done bring about optimal performance.

Popular principles of corporate governance

• Rights and equitable treatment of shareholders
• Interests of other/minor shareholders
• Roles and responsibilities of the Board
• Integrity and ethical behavior
• Disclosure and transparency

Corporate Governance Through Built-in Internal Controls

Corporate governance internal controls monitor activities and then take relevant and necessary corrective (or to some extent 'reactive') action to accomplish organizational goals. Examples include:

Monitoring by the Board of Directors

• The Board of Directors, with its legal authority to hire, fire and compensate top management
• Regular Board meetings allow potential problems to be identified, discussed and avoided
• Whilst non-executive Directors are thought to be more independent, they may bring in experience in overall performance of the organization but then they may not always result in more effective corporate governance

Internal control procedures and internal auditors

•  Internal control policies and procedures are implemented by the Board, the audit committee, management and other personnel to provide reasonable assurance of the entity achieving its objectives related to the financial reporting, operating efficiency and compliance with laws and regulations.

Balance of power

• The simplest balance to power is very common; require that the President be a different person from a Treasurer
• There should be clear distinction as to who is doing what and what does the job description say in the first place?
• In case where there are for any reasons overlaps in the job descriptions, how will things be rearranged to get the most out of employees' efforts?

Remuneration

• Performance based remuneration is designed to relate some proportion of salary to individual performance. It may be in the form of cash and non-cash payments such as shares and shares options, end of service benefits or other benefits
• Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behavior and any intolerable behavior 

A continual process

As a process, governance can operate in an organization of any size; from a single human being to a corporation spanning continents whether it does or does not work for profits. A reasonable or rational purpose of governance might aim to assure, that an organization produces worthwhile pattern of good results while avoiding an undesirable pattern of bad.