What Is Good Corporate Governance?

The financial meltdowns of Enron, Tyco and AIG have increased attention and concerns about corporate governance, which is a system of regulations and policies designed to hold corporate leaders accountable and protect company stakeholders. While compliance with federal regulation such as the Sarbanes Oxley Act, SOX, is one way of defining corporate governance, good corporate governance is a mixture of meeting both the letter and spirit of the law.

A sound whistle blowing system is a critical component of good corporate governance. While public companies are required to meet SOX whiste blowing standards, private organizations, as well as small businesses, have also followed suit. Features of a firm whistle blowing system include clear methods for reporting claims, confidentiality assurance and protection against retaliation. In addition to being good corporate governance, whistle blowing is in an organization's financial interest. Tips from employees and vendors catch 34 percent of fraudulent activity and 48 percent of owner or executive fraud, according to a 2006 report from the Association of Certified Fraud Examiners.

Good corporate governance is anchored in organizational culture, not compliance. Good corporate governance cultures are marked by consistency, responsibility, accountability, fairness, transparency and effectiveness, according to Dr. Yilmaz Arguden, chairman of Arge Consulting. Board members should be chosen not only for qualifications but for their judgment, ethics and experience in making the tough decisions. In addition, corporate leadership should focus on both performance and how that performance was achieved, according to Arguden.

A code of ethics, which clarifies and stipulates adherence to some of more abstract ideals of trust and accountability, is another indicator of good corporate governance. Effective codes of ethics spell out who must adhere to the rules, division of power between company leadership and its board of directors and guidance on other gray areas such as political contributions, conduct and compensation. While the SOX requires public companies to have a code of ethics, creation and adoption of an ethics code is a best practice for those organizations not covered under the legislation.

Splitting the roles of Chief Executive Officer and Chairman of the Board of Directors is a popular but controversial recommendation toward good corporate governance. Those who support separating the roles, such as Tom Wajnert, the former CEO of AT&T Capital Foundation, argue that splitting the roles prevents conflicts of interests and ensures that board members remain vigilant and involved. On the other hand, those who disagree, such as Wharton professor Andrew Metrick, claim that there is no evidence that splitting the roles improve performance or guarantees good corporate governance.