Corporate Governance: Principles, Advantages, and Disadvantages

In a basic sense, corporate governance refers to the way in which a business operates. The rules, regulations, policies and practices adopted by a business entity, the way in which it’s internal working functions, all form part of corporate governance.

It is of utmost importance that the governance of an entity is one that ensures the following of appropriate and relatively transparent policies and practices, ones that protect the interests of all involved. In a world where transnational companies are a dime a dozen, in a situation where all goes south, the impact of that disaster will affect multiple countries, some in a much more adverse manner than others.

What is Corporate Governance?

Corporate governance is a system by which corporates are directed and controlled. The Board of Directors have a fiduciary duty to the shareholders, and thereby are responsible for overseeing the operations and activities of the company. Corporate governance also provides the framework for the attainment of a company’s objectives. The main focus is to make the business function in a highly effective manner so as to achieve positive results and thereby maximise the returns of the stakeholders.

Principles of Corporate Governance

Transparency

The more informed you are, the more certain you are. This is the mantra that the stakeholders firmly believe in. Transparency, in the business world, also pays dividends. Companies that are upfront about the goings-on in the operations and with regard to their financials earn the public trust, something that is immeasurable.

Transparency is an essential component at all levels of operation in a business entity; especially at the top management level, where major decisions are made and where major plans are formulated. Keeping the investors and other stakeholders informed helps build a relationship of trust and solidarity that results in the rewards of a higher valuation and easy access to funding.

Accountability

Accountability, in essence, means a willingness or an obligation to accept responsibility for one’s actions. Accountability is generally looked at from a negative viewpoint and misconstrued by many who think it is associated with the traditional “Blame Game”. In reality, accountability answers more questions than just the one regarding who the responsible person is. It has to be looked at from a positive standpoint as well because it recognises accomplishments too.

Accountability gives the shareholders confidence in the business that, in any case, that leads to an unfavourable situation in the company, the ones responsible are dealt with in an appropriate manner. Accountability establishes a system in place where everyone is held accountable for their respective work and associated duties. Accountability holds two main things firmly in place:-

• Ensures that the management is accountable to the Board.
• Ensures that the Board is accountable to the shareholders.

Independence

The ability to make decisions while being free from any sort of constraint or without any influence is what independence is. And this is something that has proven to be crucial to the smooth operation of businesses as well. Independence is –

• The ability to stand firm in the face of inappropriate influences.
• The ability to make unadulterated, firm decisions on any given issue
• The ability to adhere to professionalism and do right by the company

It allows the person to act with integrity and make decisions and form judgments bearing in mind the best interests of the stakeholders. This is the reason companies appoint independent directors, so as to ensure that there is no force of hand being used or that the director does not have any personal interests with the company thereby hampering his ability to make decisions freely.

Advantages of Corporate Governance

Good corporate governance can turn a good company into a great one. The leaders in any industry are at the helm of their respective industries, mainly because of outstanding corporate governance practices.

• Compliance with laws: With corporate governance in place, compliance with various laws is taken care of easily, as corporate governance includes the rules, regulations and policies that enable a business to stay compliant throughout and function without any hassle or legal inconveniences whatsoever.
• Lesser fines and penalties: Since the legal compliance aspect is taken care of credit to the corporate governance practices, companies are able to save a fortune on unnecessary fines and compliances and possibly redirect those funds towards business objectives to achieve greater heights.
• Better management: Since there is a structure in place with regard to how the entity operates, its day-to-day functioning, managing the activities and achieving targets becomes a whole lot easier. The work atmosphere also takes care of itself under good principles of corporate governance fostering teamwork, unity, efficiency and a drive for success.
• Reputation and relationships: Companies with good corporate governance are able to attract investors and external financiers with relative ease, going by their sterling reputation and brand image. One of the pillars of corporate governance is transparency, which is the practice of sharing key internal information with the stakeholders. This improves the relationship of the entity with its stakeholders and sows the seeds of trust between the company and society at large.
• Lesser conflicts and frauds: The rules instilled in the workplace encourage the employees to be morally conscious in every situation that they encounter, thus eliminating the possibility of fraud and conflict between employees.

Disadvantages of Corporate Governance

When it comes to the matter of smaller corporations, there might be a bit of hassle where the shareholders may serve as the directors and managers, having no segregation as such. Bearing this in mind, it gives rise to :-

1. The burden of staying legally compliant: Corporates generally have loads of compliance that have to be followed, attracting different laws based on their industry. Corporate governance ensures legal compliance, but it does come at a very hefty price.
2. Increased costs: Administrative costs for companies with corporate governance are pretty exorbitant, considering all the requirements to be met. Here are a few documents to be maintained:-
   – Stock sales and purchases. – Legal compliance records. – Annual registration.
3. Maintenance of segregation: Irrespective of the size of the corporation, the adherence to all formalities and requirements must be met without any exceptions. Failure to comply with these rules leaves the company with huge exposure such as “piercing of the corporate veil”, where the separate legal entity status of the corporation is ignored in order to understand the goings-on behind the closed doors.
4. The conflict between the principal and the agent: Large corporations have made it a common practice to appoint a well-known manager, one with a good track record to manage the day to day operations of the business. Unfortunately, this gives rises to a conflict between the shareholders and the managers as they both may have very different objectives and perspectives. This often leads to a clash between the two, thus affecting the overall ability of the business to run its operations in a smooth and efficient manner.

Disclaimer: The materials provided herein are solely for information purposes. No attorney-client relationship is created when you access or use the site or the materials. The information presented on this site does not constitute legal or professional advice and should not be relied upon for such purposes or used as a substitute for legal advice from an attorney licensed in your state.

Get an expert at affordable price

For ITR, GST returns, Company Registration, Trademark Registration, GST Registration

Get an Expert