• By: Adam Wire
  • January 6, 2022
Reading Time: 8 minutes
Why Does Corporate Governance Matter in a Company?

No organization can thrive without good corporate governance. We outline why it's important, different types of governance, and more.

Corporate governance is the bedrock of any business. It provides the fundamental structures and standards that align leadership with the organization’s goals, regulatory and ethical standards to help ensure accountability and transparency.

There is a lot at stake — good corporate governance can help assure that businesses thrive, while poor corporate governance can lead to brand ruin and financial failure.

This article serves as a comprehensive guide to sound corporate governance. We will outline the what, why, and how of corporate governance, including why it is important, different types of governance models and structures, how corporate governance works to resolve conflicts, how it is regulated, and the consequences of poor corporate governance.

What is Corporate Governance?

Corporate governance is the systematic structure by which a business is managed and regulated in the interest of all stakeholders. It encompasses the company’s leadership structure, and the processes, rules, and regulations under which it operates.

Depending on the business, stakeholders may include shareholders, executive leaders, managers, clients or customers, supply chain vendors, contractors, funding institutions, government regulators, and the broader community. The board of directors and board bylaws play a critical role in defining and overseeing corporate governance strategy to ensure a business follows best practices for transparency, accountability, and shrewd decision-making.

Why is Corporate Governance Important?

The importance of corporate governance is growing as businesses worldwide — and the boards that oversee them — find themselves increasingly under the microscope with mounting regulation, globalization, and rising societal expectations for what qualifies as good governance.

When done well, some examples of corporate governance benefits include:

  • Alignment between leadership and long-term strategic objectives
  • Adherence to accepted ethical standards
  • Compliance with government laws and regulations
  • Fortification against risks, both internal and external, known and unknown
  • Safeguards against mismanagement and corruption
  • Enhanced investor and community trust for a better brand reputation
  • Greater opportunities for business growth and success

Corporate Governance Models

A corporate governance model defines a business’ general ownership structure. It sets the stage for how the entity is organized and managed, including its leadership structure, how decisions are made, and how those decisions are enacted.

Businesses around the globe follow many different types of corporate governance models. For the purposes of this article, we will discuss the two primary models that exist in North America and Europe.

The Anglo-American Model of Corporate Governance

Also known as the shareholder model of corporate governance, the Anglo-American model is prominent in the United States, Canada, the United Kingdom, India, Australia, and some other commonwealth countries.

With this model, ownership of a company is broadly spread among different shareholders, including investors and financial institutions. While they often own relatively small percentages of a business, shareholders are provided certain rights. Perhaps most important among these is the right to elect the board of directors, which oversees management. Otherwise, shareholders generally do not take an active role in how the business is governed.

Under the Anglo-American model there is:

  • A clear distinction between shareholders (i.e., ownership) and management
  • Greater focus on individual or shareholder interests
  • Strict rules regarding transparency, including mandated disclosures
  • Government regulation to prohibit insider trading or creation of market monopolies
  • Protections for investors

With the shareholder model, businesses may be publicly traded with shares sold in capital markets. Furthermore, mutual funds and financial institutions buy or sell stocks as portfolio investors.

The Continental European Model of Corporate Governance

Also known as the stakeholder model of corporate governance, the Continental European model is prominent in Germany, France, Spain, Italy, and other European countries. With this model, shares of a business are rarely publicly traded.

Ownership is concentrated among a relatively small number of major shareholders, mostly private companies and financial institutions. Each stakeholder owns a sizable percentage of overall shares, meaning they have a much greater stake in the business’ success, and carry much greater risk.

Corporate Governance Principles

Just as there are different models of corporate governance, businesses operate under a broad range of company codes of conduct. There are, however, widely accepted principles for good corporate governance. Common principles for sound corporate governance include:

Accountability

As business leaders, executives and directors must be accountable for their decisions and their actions in service of shareholders, employees, and other company stakeholders. The corporate governance model should include systems of checks and balances that map clear lines of accountability for business decisions, performance, and outcomes.

Fairness

Equity has always been a key component of good governance, but it has received heightened attention in recent decades with efforts to target corporate corruption and abuse. This principle focuses on ensuring that all shareholders are aware of their rights and treated fairly in all matters pertaining to the business and its governance.

Integrity

All corporate leaders should conduct themselves honestly and have a high degree of integrity in managing the business. To set this expectation upfront, the board of directors should establish a code of conduct to be met by all company leaders and employees.

Responsibility

Being a corporate leader comes with inherent responsibilities to shareholders, customers, and the communities they serve. As such, those leaders are obligated to act in accordance with the principles of corporate governance, including complying with the various regulatory and legal requirements rooted in their positions.

Security

Security is another principle of corporate governance that is receiving heightened focus as it becomes increasingly complex in today’s digital environment. Board members and other corporate leaders ultimately are responsible for protecting proprietary business information, including the personal information of shareholders and customers.

Cyberattacks are all too frequent and if successful, can lead to costly data breaches that threaten a business’ brand and financial stability. Ensuring security requires broad engagement and the implementation of comprehensive and proactive measures organization-wide.

Transparency

While the specific requirements vary depending on the organization type and structure, all businesses are expected to provide an appropriate level of transparency to stakeholders. This includes adhering to all government-mandated reporting and disclosure requirements. Providing transparency in corporate governance engenders trust among stakeholders and can help strengthen brand reputation.

Conflict Management in Corporate Governance

Conflicts are a given in corporate governance. They may arise for any number of reasons. Board leaders might disagree with an executive on a business decision, initiative, or strategic direction. Shareholders may have differing opinions on the business’ future leadership direction. Executives may take some action in their personal or professional lives that conflicts with the interests of the organization, or an employee may accuse a business leader of inappropriate or unethical behaviors.

An important role of corporate governance is to be proactive in trying to prevent or minimize such conflicts through established checks and balances. When conflicts do arise, the board and executive leaders should have clear, equitable, and transparent procedures for addressing them.

Corporate Governance Regulation

Corporations are governed by a variety of local, state, and federal laws, rules, and regulations. The U.S. Securities and Exchange Commission, for example, governs publicly traded corporations with a goal of preventing manipulation of the capital markets, while the Federal Trade Commission is tasked with preventing corporate monopolies.

Corporate regulations touch everything from the formation of a business to its ownership structure, management, and operations. Such regulations have tightened significantly over the past two decades following a series of corporate financial scandals starting in the early 2000s —including the Enron, Tyco, and WorldCom scandals. The Sarbanes-Oxley Act mandates standards for financial record keeping and reporting, and is a prime example of a federal law enacted in response to such high-profile scandals.

Corporate Governance Structure

There is no one-size-fits-all structure for corporate governance. Rather, there are a wide variety of structures to choose from, depending on factors such as the organization’s needs, ownership model, and objectives. In many cases, creating a governance structure involves combining elements of two or more different models to mold one best suited to the unique needs of an organization.

With corporate boards, the focus typically is on maximizing profits for shareholders. The corporate governance structure should be one that helps business leaders succeed by making the organization as effective and efficient as possible in achieving its objectives. A few examples of corporate governance structures include:

Carver Board Model

With this model, the board establishes the policies and objectives of the company, and the CEO has broad authority to define how the organization operates and how it moves toward achieving those aims.

Competency Board Governance Model

This developmental model aims to build trust and communication among board members, and focuses on continuously improving the expertise, skills, and performance of the overall board through ongoing education. Progress is measured through regular board assessments.

Consensus Board Model

The consensus model puts all board members on a level playing field. Everyone is considered equal and therefore expected to make equal contributions, and hold equal liability and accountability for board decisions. This model is best suited for small businesses or companies that do not have major shareholders.

Traditional Model

This structure is the oldest model for corporate governance. It involves a series of committees that govern specific functional areas (e.g. finance and human resources), overseen by a board of directors. The board speaks with a unified voice on all matters and there is clear division between governance and operations.

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Consequences of Poor Corporate Governance

The consequences of poor or unethical corporate governance can be dire. The repercussions can affect all stakeholders, including board members, executives, management teams, employees, communities, and even entire industries. As mentioned earlier, the corporate financial scandals at Enron, Tyco, and WorldCom had broad effects and forever changed corporate governance regulatory standards.

Due to the accounting fraud by executives at energy giant Enron, shareholders lost an estimated $74 billion, and employees lost billions in hard-earned pension benefits. As the seventh-largest company in the U.S. at the time, Enron’s collapse had ripple effects for markets around the globe.

More recently, health technology company Theranos made news after an investigative journalist with The Wall Street Journal raised alarms about the validity of its blood testing technology claims. The company’s former president and its founder and CEO now face federal fraud charges for lying to investors, who reportedly lost more than $600 million.

These cases reflect the importance of good corporate governance in establishing a framework for responsible, ethical, and accountable governance. The absence of solid corporate governance principles can open the door to faulty, negligent, or even criminal behaviors that can disrupt businesses and the many lives, markets, and communities they touch.

How OnBoard Can Help Improve Your Corporate Governance

Having a sound corporate governance strategy is essential in today’s turbulent market environment. By aligning a business’ leadership with its goals and corporate governance best practices, companies can build a foundation for strong governance centered on the principles of accountability, fairness, integrity, responsibility, security, and transparency.

Board management solutions such as OnBoard can help corporate boards govern more effectively by providing a variety of capabilities within a centralized portal. They can help unify fragmented communication, streamline time-consuming processes, and ensure transparency.

Some of OnBoard’s solutions to help foster good corporate governance include:

  • Governance, Risk, and Compliance: Provides a secure system for board meeting content, communication, and data with customizable access and security controls
  • Intelligent Meetings: OnBoard offers an advanced board intelligence tool that uses artificial intelligence and machine learning to provide unparalleled insights that can help boards clarify priorities, and increase engagement and collaboration.