From board selection and strategic decision making to day-to-day operations and legal compliance, corporate governance is a way for companies to create a framework for sound business practices, sustained growth, and risk management. At its core, corporate governance entails an internal control system for transparent decision-making that protects shareholders’ value. However, the significance of corporate governance goes far beyond this basic definition.
First, even though corporate governance has traditionally been associated with large publicly listed companies, it is also of crucial importance to other types of businesses, including family firms, state-owned enterprises, and even small businesses. Those companies also need good corporate governance for long-term sustainability and to become integrated into the global supply chains.
Second, corporate governance does not take place in a vacuum, and external factors are very important to making it work. From the availability of trained accountants and independent auditors to the presence of financial media and appropriate laws, regulations, and institutions, the environment in which companies operate determines how easy or challenging it is to follow good governance practices. The OECD Principles of Corporate Governance recognize that fact, with the first principle, Ensuring the Basis for an Effective Corporate Governance Framework, stating:
“The corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities.”
In a recent Feature Service article, CIPE Executive Director John D. Sullivan and I explore the importance of corporate governance and make a business case for it at both the company and country level.
Improving corporate governance allows companies to attract greater investment at lower cost, strengthens corporate strategy and its implementation, clarifies accountability, enhances shareholder protection, and helps to attract and retain quality employees. All companies must have a way of reconciling divergent interests, planning for strategy and succession, accessing capital, cultivating company image in the community, and ensuring legal compliance. Corporate governance is a key tool for achieving those business goals.
For countries as a whole, corporate governance minimizes the occurrence of corruption, reduces the risk of devastating systemic crises, improves productivity, and spurs economic growth. Improving the broader institutional environment in which companies operate is key for influencing business conduct and creating incentives for innovation and fair competition. At the same time, the institutional underpinnings of corporate governance make it an essential component of public governance that is better anchored in the core values of transparency, accountability, fairness, and responsibility.
Implementing good corporate governance is not a matter of simply ticking a box. It is a process through which these core values become integrated into a company’s strategic direction and daily operations, but also institutionalized in a broader sense. Efforts to reform corporate governance around the world must therefore focus on both the internal and external factors that drive corporate behavior.
Read the whole article here.
This article was originally published as a chapter in Essays on Governance: 36 Critical Essays to Drive Shareholder Value and Business Growth, by Andrew J. Sherman.
Anna Nadgrodkiewicz is Senior Program Officer for Global Programs at CIPE