Corporate governance has been a subject of interest for a long time now and it has a considerable importance in the economy. By definition corporate governance is a system by which companies are directed and controlled (Cadbury, 1992). The core objective of corporate governance is to ensure that the board of directors is overseeing the organization’s activities. The board of directors is intended to keep track of the activities of the company and to ensure that the company is following the right strategies and operating with the right principles.
The purpose of corporate governance is to provide a reporting system that is transparent and enables accountability to stakeholders with the expectation that entities will be well managed and finances will be properly used (Organization for Economic Co-operation and Development, 2015). The organizations that are well managed, with effective monitoring and governance systems in place, are more likely to be successful in the market.
The components of corporate governance encompass legal, regulatory, institutional and ethical dimensions. According to the World Bank, corporate governance can be divided into 3 parts, namely the board of directors (consisting of non-executive and executive directors responsible for strategic decisions and oversight), senior management (employed professionals responsible for daily operations and management of the firm) and the shareholders (the owners of the firm and who provide capital for the firm).
On the legal basis, the Companies Act of any country, will provide the framework for setting up and running of organizations. The act, in turn, will prescribe the responsibilities of the directors and their powers, the type of information that is to be disclosed periodically, the rights of shareholders and their responsibilities, the disclosure of financial information, the process of making major changes internal to the organization and calling of board and shareholder meetings.
On the regulatory front, regulatory bodies have the power to provide guidance and shape laws and regulations to ensure proper management and implementation of effective organization’s practices. They help companies to minimize risks, thereby increasing the value of the investment of all stakeholders.
Furthermore, on the institutional perspective, there are a number of established organizations and standards that are available for companies to observe and implement. Accounting standards, corporate governance codes and codes of best practice provide guidance for corporations on how to successfully manage the affairs of their organization (Gray, Owen and Adams, 1996).
Finally, the ethical element of corporate governance includes values, beliefs and norms which a company adopts and considers important to ensure the best interests of all stakeholders. The role of a board of directors and senior management should be to provide leadership in this area and create a culture in which ethical standards and norms are respected, monitored and maintained.
In conclusion, it is important for companies to understand and observe the principles of corporate governance to maximize performance and protect the interests of all stakeholders. Companies should put in place proper control mechanisms and implement effective strategies to ensure healthy and sustainable corporate governance. The board of directors, senior management and shareholders should work together in a collaborative manner to ensure that the organization achieves its goals. The role of the board of directors, regulatory bodies and institutional standards is also very important in providing frameworks and guidance. Finally, ethical considerations must also be taken into consideration.
