What is Corporate Governance? (Overview, Definition, and Examples)

Effective corporate governance abides by several principles. Perhaps the most important is the principle of shareholder primacy, which holds that a corporation’s board of directors and management should always act in the best interests of the shareholders. Other important principles include:

1. Fairness

One important principle of corporate governance is fairness. This means all shareholders should be treated equally and management should not make decisions that favor one group of shareholders over another. In addition, organizations must treat vendors, employees, and communities fairly. Bringing in independent directors helps promote fairness.

2. Transparency

A company should disclose all the necessary information to its shareholders, board directors, auditors, and the general public. Such information may include the financial position and status of the company, minutes and outcomes of board meetings, changes to normal operations, and resignations and replacement of key managerial staff and board members. 

3. Risk Management

The board and senior management should have systems and processes in place to identify and manage risks. They should also have policies and procedures to prevent and respond to risk events.

4. Responsibility

Responsibility means everyone in the company is responsible for their actions. Directors are responsible for the company’s financial health, employees are accountable for following the company’s policies, and shareholders are responsible for electing directors.

5. Accountability

This principle ensures the governing body (usually the board of directors) is accountable to shareholders and external stakeholders.

As one of the major pillars of good governance, accountability aims to ensure that no one in the company, including the managers, can use the company’s resources for personal gain or to their own benefit, but instead, for the benefit of the company and its stakeholders.