Key Elements of Corporate Governance

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Corporate governance is important in both small companies and large corporations.
Corporate governance is important in both small companies and large corporations. (Image: Corporate Building image by Bobby4237 from Fotolia.com)

Corporate governance is an economic discipline that focuses on the strategic management of corporations with the aim of improving financial performance. In recent years, since the 2001 fall of corporate giant Enron, the study of corporate governance has widened its focus to include balancing the need to improve financial performance with the need to act in a socially responsible manner. Several key elements of corporate governance must be taken into consideration to meet these needs.

Independence and Separation of Duties

One of the main concerns of successful corporate governance is the implementation of policies and procedures designed to eliminate bias and conflicts of interest. In an organization that is directed by such individuals as the founder or owners and friends and family members who are engaged in the day-to-day management of the business, biases and conflicts of interest may hinder the ability of the board of directors to make independent decisions. In these cases, it is important that the board include independent directors who are capable of making decisions that keep the best interests of the company in mind rather than making decisions that benefit them individually. The roles of strategic planner and operator must also maintain a separation of duties so the planner can focus on long-term planning while the operator maintains control of day-to-day business activities.

Reliability of Systems and Procedures

It is important for a corporation’s systems and procedures to be both reliable and easily manageable. A lack of reliable systems and procedures can have a negative effect on the bottom line, which affects stakeholders at every level. The organization must also be able to remain in operation in a variety of contingencies, such as the illness or other unavailability of the business owner. Efficient corporate governance also includes an exit strategy for the owners of the company so the organization may continue to run smoothly in the event the owners decide to sell. Extensive documentation of all systems and procedures must be in place for the smooth transition from one owner to another or from party to party.

Key Performance Indicators

The use of key performance indicators (KPIs) involves the determination and measurement of the key factors that drive the business. KPIs may include a variety of indicators, such as financial measurements and operational goals. It is important to identify the appropriate KPIs to measure and manage to maintain optimal performance. KPIs are an integral part of the corporate governance of an organization in that they may be used to measure and analyze the performance of the company at every level.

Transparency

Transparency in all aspects of corporate governance provides greater protections for investors. For example, transparency in compensation of both employees and directors, sales incentives and other human resource practices reduces the opportunity for mismanagement and unethical practices, which may damage the organization. Effective corporate governance also helps attracts and retain high-quality employees.

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