What Is Corporate Governance? (+Why It's Vital to Your Business)

Lauren Pope
Lauren Pope  |  June 11, 2019

Businesses have their own internal governance system – and I’m going to explain how it works.

But don’t worry, this is going to be much easier to understand than your 11th grade government class. We’ve put together an easy to follow guide that outlines what corporate governance is, who is involved with it, and why it matters on a grand scale.

If you’re looking for a specific topic regarding corporate governance, you can use the links below to jump ahead:

What is corporate governance?

While corporate governance might seem straightforward, it’s actually more complicated than you might think. There are several moving parts within a corporate governance framework that are all required to work together as part of a larger GRC program.

In broad terms, corporate governance refers to how a company makes its decisions. The direction, administration, and decision-making of any company is decided with the help of corporate governance.

There’s a lot that goes into corporate governance. Corporate governance can cover a variety of businesses decisions and topics, but nearly all their functions can be placed in one of the following five categories.

Functions of corporate governance
 

A person's involvement in the roles listed above is linked to what role they hold in the corporate governance structure. There are three main groups involved in corporate governance that we’ll dive into in the next section.

Who is involved in corporate governance?

Much like our own government, a corporate governance structure is designed with a system of checks and balances in mind. In order to ensure no one person has too much power, the responsibilities of corporate governance are spread among three major players.

  • Shareholders– who provide start-up capital and are charged with approving all major financial decisions and transactions
  • Board of Directors – who are elected by the shareholders to oversee the strategic management of the company
  • Senior leadership – who are responsible for the day-to-day operations of the company

Each of these groups are important and serve a unique role within the corporate governance framework. They keep each other accountable and report to one another to prevent one group from gaining too much control over the company.

When these shareholders work well together, they become a well-oiled machine. These groups of shareholders all work together to ensure the company stays on track to hit annual goals, maintain legal compliance, and guide the company toward success.

Why is corporate governance important?

The primary function of corporate governance is creating a system of checks and balances in order to ensure the success and growth of the company. The corporate governance structure is designed to prevent the derailment of a company. This is done in a couple ways:

1. Corporate governance promotes ethical behavior

Unlike legal standards that companies are required to follow, business ethics are a bit more nebulous. Ethical standards do not have any grounding in legal obligation. These are not laws that businesses are required to follow: they are based on what we as a society deem right and wrong.

All that said, it’s often in a company’s best interest to practice business ethics. Corporate governance is the executive body that decides on things like a business’ code of conduct or ethical standards to which employees of the company will be held. They also have a say in what part of the company’s budget will be dedicated to things like social corporate initiatives and philanthropy.

2. Corporate governance aids in risk management

Enterprise risk management is a business strategy designed to identify, assess, and prepare for any dangers, hazards, and other potentials for disaster that may affect an organization's operations and objectives.

The shareholders involved with a company’s corporate governance are vital to creating a successful and well-intentioned risk management program. They have the final say in safety procedures and protocols that affect all of the employees working for their company.

3. Corporate governance unites a company vision

Ultimately, the shareholders involved with corporate governance are working together to guide the company toward success. From financial decisions that will catapult to unicorn status, to making decisions that will enhance corporate culture.

4. Corporate governance ensures compliance

The primary focus of corporate governance is ensuring compliance. Regulatory compliance refers to the ways in which a company ensures they are following all the laws and regulations that apply to their business or industry.

In practice, stakeholders use the structure of corporate governance to ensure everything is on the up and up through methods like adhering to legal expectations and preventing conflicts of interest. It can also mean making decisions on when to hire a third-party business to conduct an audit on your business.

It’s about more than law and order

Corporate governance is about maintaining the integrity of a business and eliminating conflicts of interest. It’s just one part of a larger compliance strategy that ensures a company follows the law and keeps itself out of trouble.

Looking for an easy way to stay compliant? Identify your company's compliance and security risks using G2 Track.

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Lauren Pope
Author

Lauren Pope

Lauren is a Senior Content Specialist at G2 with five years of content marketing experience. You can find her work featured on CNBC, Yahoo Finance, and on the G2 Learning Hub. In her free time, Lauren enjoys listening to podcasts, watching true crime shows, and spending time in the Chicago karaoke scene. (she/her/hers)