Corporate Governance

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The ultimate objective of a corporate governance assignment is to achieve the highest degree of harmony within the organization. A high level of governance will ensure that the firm performs efficiently in a well-controlled environment, independent of individuals.

The main elements related to Governance are:

  • Existence of a well-defined strategic positioning
  • Structure of the Board of Directors
  • Efficiency of the organizational structure
  • Definition of lines of responsibility and authorities
  • Oversight by management
  • Effectiveness of internal and external controls
  • Ethical values and transparency

Enhancing Corporate Governance throughout the organization
The concept of corporate governance in general evokes the set of relationships that exist between a company’s management, its board of directors, its owners and the other stakeholders. It provides the framework in which to establish the strategic objectives of the company and the means to attain and monitor those objectives. To start with, a corporate governance framework should protect owners’ rights. It ends with the availability of transparent and relevant information concerning the corporation on a timely and regular basis.

Since governance is the process of decision-making and the process by which decisions are implemented, an analysis of governance focuses on the formal and informal actors involved in decision-making and implementing the decisions made and the formal and informal structures that have been set in place to arrive at and implement the decisions.

Adequate corporate governance is essentially ensured by effectively adhering to the board of directors’ fiduciary responsibilities towards the shareholders of the corporation. Nevertheless, this statutory power, driven by the separation between control and ownership, should not eclipse the importance of the "business judgment" rule.

The Business Judgment Rule
According to the business judgment rule, the directors, when making a business decision, act under the underlying assumption of maximizing the interest of the entity, or at least in such a honest belief. They are therefore meant to conduct the activities on an informed basis and in good faith (bona fide – in absence of violation of the duty of care and duty of loyalty). The way in which a board functions can greatly affect its ability to serve not only the ultimate owners of the company - the shareholders - but also the entirety of entity stakeholders.

Benefits
One of the main benefits of effective corporate governance is the mitigation of endogenous/idiosyncratic risk factors –and among them ”agency frictions”–, while being best prepared to affront random and/or exogenous ones. Preserving and protecting property rights encourages innovation and long-term investment in human and physical capital, foreign direct investment, as well as the creation of intellectual property.
Good corporate governance stimulates performance (generating higher returns and company profitability) leads to higher total factor productivity growth, a major source of economic growth, and, as a result, better operating performance and market valuation. Similarly, limiting the abuse of corporate insiders enhances leadership, demonstrates transparency and social accountability and creates an efficient mechanism for transferring wealth between generations.