Wednesday March 05th, 2025 Dayani Dhanapala Blog25
What is Corporate Governance?
Corporate Governance is a system which includes rules, practices and processes that enables to manage and control organizations. In other words, it is a strategy which crafted to manage and control organizations for the best interest of the stakeholders by complying with rules and regulations relevant to the jurisdiction of which the organization operates. Governance is no one size fits all, so it gets tailored to each company.
History of Corporate Governance
Corporate Governance (CG) evolving over the period, and British East India Company and Dutch East India Company were among the first companies which introduced governance structures that balance interest of investors, management and the state. Financial accountability and board oversight were introduced in the era of industrial revolution as new developments to CG. At present, CG continue to evolve integrating ethical considerations, sustainability and digital transformation.
Significant Characteristics of Corporate Governance
1) Fairness – This means to treat every stakeholder justly and equally. Here the stakeholders include shareholders, employees, customers, suppliers and the entire community. In this view ‘Code of Ethics’ for both employees and suppliers will specify the behaviors expect by the organization from them.
2) Transparency - Open reporting enables to enhance and strengthen the trust of stakeholders and this reduce the information gap between the company and its stakeholders. Timely and clear disclosure of activities of the company and financials, governance and sustainability practices ensure transparency of the organization.
3) Responsibility – Responsibility in Governance involve in sound decision making, risk management and response to ESG (Environment, Social and Governance) issues. It is the Board’s duty to act in best interest of the company and its stakeholders.
4) Accountability – This helps to mitigate risk and establish responsible behaviors within the organization. To achieve Accountability in governance, a company should achieve its objectives and financial performances and should comply with rules and regulations of law and ethics. Clear targets should set to achieve the said aspect by making the Board and the Management accountable for their actions towards the company.
5) Risk Management – Effective risk management strategies ensure long-term sustainability of the company. In governance perspective, Board should involve in overseeing and evaluating the risk management strategies of the organization. Identifying, assessing and mitigating potential risks to the organization and its stakeholders are essential components in effective risk management strategies.
What is Corporate Governance Framework?
Governance framework and governance structure are almost same and interchangeable. Governance framework is a set of rules and procedures that direct the Board and the Management of the company to fulfill their duties in the organization to achieve its goals. Governance framework supports entity management and compliance. There is no unique corporate governance framework as governance frameworks vary across countries and regions due to the variances in legal structures, ownership structure of the organization, market dynamics and cultural norms.
Through effective Corporate Governance Framework organizations could:
Stakeholders expect firms to operate with integrity and accountability. Effective corporate governance framework enables organizations to achieve stakeholder expectations successfully in present progressive and aggressive business environment.
Roles Involved in Corporate Governance Framework
To ensure organization’s governance framework is robust and effective, it should have clear division of organizational responsibilities. This ensures smooth running of the organization. Accordingly, below are the key roles in corporate governance framework.
1) Board of Directors – Set strategic direction of the company and oversee its implementation by ensuring that the company’s performances are align with such strategies. It is responsibility of the Board to appoint senior management to successfully implement the set strategies.
2) Independent Directors - Provide objective oversight for the organization.
3) Audit Committee – Oversee financial reporting, ensure financial transparency and monitor internal control of the organization.
4) Senior Management – Day-to-day operation of the organization and the decision making for such operation is responsibility of Senior Management. The operation and decision making should align with the strategies set by the Board.
“Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society. The incentives to corporations and those who own and manage them to adopt internationally accepted governance standards is that these standards will assist them to achieve their aims and to attract investment. The incentive for their adoption by states is that these standards will strengthen their economies and encourage business probity.” (Sir Adrian Cadbury, Forward to Corporate Governance and Development, Global Corporate Governance Forum, Focus 1, 2003)