Corporate governance is a system of structures and processes that sets out how companies are governed and guides their direction and control. It is a framework of principles, rules, and practices by which a board of directors ensures accountability, fairness, and transparency in a corporation’s relationship with its stakeholders. Recently, the scope of stakeholders has expanded past the executives and shareholders, and includes any person affected by the corporation: employees, customers, government, and the community.
Corporate governance principles are often used as categories to evaluate the practice of companies. These principles include:
- Integrity and fairness
- Transparency in transactions and business
- Disclosing important decisions and information
- Compliance with the law
- Accountability and responsibility to stakeholders
- Commitment to ethical and sustainable business practices
The benefits of following these principles lead to sustainable economic development, enhance the performance of corporations, and increase access to outside capital. The assessment of corporate governance practices is essential to provide advice to improve corporate practice, build capacity, and support reform while providing stakeholders with valuable information pertaining to their interests.
Good corporate governance practices instill confidence in the market and in investors. An active group of independent directors on the board ensures that the corporation will operate with its stakeholders in mind, rather than simply benefiting the top executives of the company. It positively influences share price and makes it easier to source capital.
There are several codes and guidelines issued nationally and internationally. They have been developed and issued for stock exchanges, corporations, investors, and institutes to encourage good corporate governance practices and to help explore ways for improvement depending on the economic situation in which a corporation finds itself. While these practices are only recommended and not mandated by law, taking steps towards sound auditing, board and executive management, corporate responsibility, financial and informational transparency, and corporate control go a long way in helping corporations improve their status in the market.
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