Corporate governance plays a crucial role in shaping the success and sustainability of organizations. At its core, corporate governance refers to the system of rules, practices, and processes that direct and control a company.
Senior management, including the executive chairman and CEO, must ensure each department follows established processes and maintains high standards while performing corporate governance.
Whether you’re a business professional, investor, or simply curious about how companies operate, this article explains the principles of corporate governance, provides examples of effective corporate governance, and outlines how board management software helps boards streamline processes and work smarter.
What is Corporate Governance?
Corporate governance is the system of rules, practices, and processes by which a company operates. It encompasses the various mechanisms through which companies and their stakeholders (shareholders, management, customers, suppliers, and financiers) interact.
Corporate governance helps organizations make the right decisions while balancing the interests of their stakeholders. When implemented properly, corporate governance can accomplish the following goals:
- Protect company resources from corruption and mismanagement
- Improve the organization’s bottom line
- Ensure internal business frameworks align with legal requirements and environmental, social, and corporate governance (ESG) practices
Oversight and evaluation of a company’s corporate governance strategy is primarily handled by the corporate governance committee. The committee’s full list of responsibilities and its membership are determined by the organization’s governance committee charter.
Ensure effective, efficient meetings with our comprehensive Board Meeting Agenda Template.
Principles Of Corporate Governance
The most important aspect of corporate governance is shareholder primacy. This is the understanding that a company’s board and senior management should and will always work in the best interests of the shareholders. But these aren’t the only ideas that executives should keep in mind.
Other corporate governance principles include:
1. Fairness
Fairness is a fundamental principle of corporate governance. Every shareholder must be treated equally regardless of their level of investment or general status. All decisions from senior management should be made in the best interest of the organization, rather than any one specific stakeholder. Similarly, organizations should treat vendors, employees, and any other person they interact with impartially. To further promote fairness within your company, consider hiring an independent director or a corporate governance consultant.
2. Transparency
Every company must be willing and able to divulge important information to its shareholders, board of directors, and auditors. Examples of such information include:
- The financial position and overall status of the company
- Copies of board meeting minutes
- Any changes to normal operations
- The resignation or replacement of key managerial staff or board members
3. Risk Management
Knowing how to handle risks is a vital element of corporate governance. Every new product or service introduces some level of risk to your operation. It’s the job of the board of directors and senior management to implement systems and processes to identify and mitigate potential risks, in addition to creating policies or procedures to manage risk events. A common way for organizations to ensure proper risk oversight is to create an independent risk committee to assess risks and collaborate with other stakeholders.
4. Responsibility
Each individual in the organization is responsible for their own actions and their role in the company’s operations. Shareholders are responsible for electing board members. Board directors are tasked with managing the financial health of the business, while employees are obligated to follow company policies to conduct proper business. Senior managers are ultimately accountable to their shareholders and external stakeholders.
Company resources can never be used for personal use or benefit over the best interests of the company.
Examples of Effective Corporate Governance
1. Training Management Systems
Board training systems educate board members on the structure, bylaws, and resolutions that serve as the basis of their board duties. Learning these skills provides each person with the knowledge to make better decisions and perform their jobs at a higher level.
Sessions enable board members of varying experience levels and backgrounds to get to know each other and build personal relationships. This can lead to more established executives mentoring younger members to help them get more comfortable with their roles. The exchange of information can also help long-serving board members refresh their skills and avoid career stagnation.
2. Routine Vendor Audits
Vendor audits are used by organizations to evaluate the performance of third-party companies they work with. Conducting these audits verifies that vendors operate properly and on a consistent basis. The process of a vendor audit may include the following processes:
- Reviewing the third party’s financial records
- Data analysis of transactions
- Examining their cybersecurity plans
- Site visits
- Vendor questionnaires
- Policy reviews
- Comparing the costs of the service vs. the benefits
3. Policy Management Systems
A policy management system (PMS) is a software platform (traditionally hosted on a cloud computing service) that creates a centralized access point for administrative services. A PMS allows organizations to leverage modern technology to mitigate risk and assess ongoing policies.
How Corporate Boards Utilize OnBoard
Effective corporate governance can make the difference between a successful and upstanding organization and one mired in legal troubles and structural problems. Board portal software, such as OnBoard, helps the boards of corporations, nonprofits, banks, local governments, and schools get the most out of their meetings and protect themselves from governance-related risk.
Features such as an agenda builder, meeting analytics, board assessments, and a secure messaging system help board members deliver and acquire necessary information, hold each other accountable, and provide risk management to the entire organization.
Ready to learn more? Download our free Board Meeting Minutes Template to see how OnBoard streamlines board governance.
Efficiently track and document board decisions with our Meeting Minutes Template
Ready to upgrade your board’s effectiveness with OnBoard the board intelligence platform? Schedule a demo or request a free trial.
About The Author
- Adam Wire is a Content Marketing Manager at OnBoard who joined the company in 2021. A Ball State University graduate, Adam worked in various content marketing roles at Angi, USA Football, and Adult & Child Health following a 12-year career in newspapers. His favorite part of the job is problem-solving and helping teammates achieve their goals. He lives in Indianapolis with his wife and two dogs. He’s an avid sports fan and foodie who also enjoys lawn and yard work and running.
Latest entries
Board Management SoftwareSeptember 12, 2024How to Resolve Board Member Disputes
Board Management SoftwareSeptember 11, 2024What is a Board of Directors? (Overview, Roles, and Responsibilities)
Board Management SoftwareSeptember 10, 2024OnBoard Intelligent Assistant Simplifies Board Meeting Preparation
Board Management SoftwareSeptember 9, 2024Virtual Board Meeting Software: 6 Major Benefits
