Corporate Governance: What is it?

Corporate governance provides the framework through which a company is directed.

How does corporate governance work?

Whether publicly traded or privately owned, it is good business practice to monitor the effectiveness of policies concerning corporate responsibility, executive compensation, sustainability, human rights, diversity and inclusion, and social impact. Corporate governance is a set of rules that can guide corporate practices and align them with these goals.

Many companies strive to make their corporate governance policies as visible as possible to enhance their commitment to the aforementioned issues. For instance, Nike, like many large companies today, has a page on its website dedicated to explaining its corporate governance policies. It lists board members and explains how they are appointed and compensated, providing details on Nike’s corporate governance guidelines. It also includes a letter explaining the company’s code of conduct from Nike’s CEO John Donahoe.

Like many companies, Nike also provides regular reports on corporate governance in its communications with investors. Mark G. Parker, Chairman of Nike, stated in the agency’s 2019 report: “In fiscal year 2019, we also evaluated and enhanced our committee charters.” “Specifically, we updated the charter of the Corporate Responsibility, Sustainability and Governance Committee to more clearly highlight the ongoing oversight of the committee on our unified efforts focused on sustainability, social and community impact, and diversity and inclusion.”

Who ensures corporate governance?

The primary goal of corporate governance is to align the interests of various parties and ensure that all parties are working towards common goals for the company. There are different corporate structures designed to enforce corporate governance directives. Companies, whether public or private, may have any or all of these entities to monitor compliance with those directives.

Executive Management Team: Typically consists of the CEO and may also include the COO, CFO, CTO, and CMO.

Board of Directors: A group of elected or appointed directors whose purpose is to provide advice and oversight of the company’s executive management team on behalf of the shareholders, as the board represents the interests of shareholders and stakeholders. The board often has a chair. Board members may be a mix of internal individuals (company employees) and external individuals.

Shareholders: Most publicly traded companies hold an annual general meeting where shareholders are invited to attend and ask questions of the board or executive management team. In some cases, shareholders have the right to vote on corporate matters such as executive compensation. Expressions of dissatisfaction by shareholders on any aspect of the company’s corporate governance – known as shareholder activism – can also be effective in enforcing change.

What does this mean for individual investors?

Investors want to ensure that the companies in which they hold shares have strong corporate governance directives. Surprises regarding ethical failures by publicly traded companies can significantly impact shareholder value. In addition to carefully reviewing financial statements in the company’s 10-K, 10-Q, or other disclosed documents, savvy investors should conduct a thorough review of the company’s corporate governance policies. Significant attention should be paid to how the company has dealt with past conflicts between corporate actions and its operational guidelines, or how it has responded to shareholder complaints. Investors should try to determine whether the board has the capacity to hold executive management teams accountable.

Now more than ever, most investors want to own shares in companies that will perform well as an investment while also adhering to policies that make them good corporate citizens. A careful review of a company’s corporate governance policies can help reassure a potential investor that this is the case.

Conclusions

Main:

• Corporate governance is any set of rules or corporate charter or formal regulations that guide and govern the company.
• The leadership team of the company is expected to adhere to the applicable corporate governance.
• The board of directors is responsible for enforcing the corporate governance guidelines.
• Investors are becoming more cautious to ensure that the companies they invest in have strong corporate governance guidelines that lead to ethical and sustainable business practices.
• Principles of corporate governance typically relate to the company’s practices regarding accountability, executive compensation, sustainability, human rights, diversity and inclusion, and social impact.

Source: https://www.thebalancemoney.com/what-is-corporate-governance-5196682