What Is the Role of Corporate Governance in Business?

Corporate governance is the convergence of economics and relationships that determine a company's direction and performance. Its purpose is to optimize resources to promote accountability and efficiency within the corporate structure. Most companies' corporate governance is set by their boards of directors, which establish and promote policies for the management and employees of the corporation. The board of directors is responsible to shareholders and customers for the corporation's outcomes.

Board of Directors

The board of directors is a corporation's primary rule-making body. Its members are generally high-level professionals with strong management backgrounds and/or an understanding of common financial and business practices. Members by and large have a common stake in the corporation's success.

Policies and Actions

Using complicated economic modeling of various hypothetical scenarios to predict return on investment, the board develops a set of policies and actions for corporate managers and employees to carry out. Policies and actions are commonly profit-driven. In other words, the main objective of a policy or action is to produce a positive return on investment for the corporation as well as its shareholders and customers to which it's accountable.

Corporate Governance Structure

For a board to be effective, it must also have a way to guarantee accountability. This is an important feature of whether or not the corporate governance structure is successful. For example, if a policy or action isn't properly carried out and/or the results that were expected either didn't occur or fell short of the goal, there must be a system in place to make adjustments. The board also determines these correctional steps for management to administer to avoid future mistakes.

Shareholder Accountability

Corporate governance ultimately determines the success or failure of a corporation. It's therefore important that shareholder and customer input are appropriately factored into all decisions made by the board. After all, it's the financial investment of these groups that enables a corporation to operate. To ensure this occurs, the board holds regular shareholder meetings to report on earnings and to discuss the direction of the corporation. The shareholders are able to inform and guide the discussion to ensure a favorable outcome.

Customer Accountability

Customer feedback is collected in a less direct way than shareholder input, but is just as important to a corporation's bottom line. Customer feedback is based on consumer trends and the extent to which goods are bought and sold, which are reflected by the corporation's quarterly profits. If a corporation does well, it's said to have exceeded or met its earnings goals for the quarter. If a corporation performs poorly, it's said to have underperformed its anticipated earnings goals for the quarter.

References

• Corporate Governance: Corporate Governance Defined
• Corporate Governance