Why is corporate governance important for organizations? How and what measurements do organizations need to take to apply best governance practices? The board’s responsibility is providing guidance and coaching to top management and oversight and monitoring of the performances of top management in order to ensure that the organization creates value on a sustainable basis in line with its purpose and mission, while protecting the interests of key stakeholders. Value creation requires measured risk-taking, the kin of profit. Providing a context that emphasizes good governance principles and deployment of a good corporate governance culture is a key to long-term value creation.
Corporate governance is looking at the governance framework in the company, the rights of shareholders, equitable shareholders rights, role of stakeholders, transparency and disclosure, and the responsibilities of the board. When improving board effectiveness, companies should (1) clearly define the board’s role and directors’ duties, (2) prepare a proper structure for the board and guarantee a diverse composition; and (3) enable boards to function optimally where directors find a subtle working balance with top management between collegiality and supervision.
Moreover, best corporate governance practices created an unintended emphasis on procedure over substance. Boards should acknowledge this tension between form and substance. “Best” solutions for governance challenges can only be resolved by well informed boards who have a deep and honest understanding governance practices and their limitations and who transparently communicate with their corporate shareholders and stakeholders.
Successful organizations need to demonstrate a willingness to engage critical stakeholders in some of the decision-making, to embrace a culture of openness, accountability and transparency, to be fair and consistent in relations with those key stakeholders, and to have an organizational infrastructure that safeguard and ensure corporate trust and reputation. Although best corporate governance practices at firm level may not consistently guarantee superior return on investments it can provide a safety net not to violate obvious rules and norms and to prescribe certain behavior within the organizational culture to adhere to high standards of transparency, fairness, proper equity rights, accountability and responsibility.
In this increasingly digitized global world, boards and top management cannot ignore the notions of transparency, accountability and responsibility anymore.
Any potential gossip, true or not, on the social media can affect the reputation of the company.
In addition, companies need to take reputation risk seriously and should prepare themselves for potential negative events to take place; companies need to prepare themselves for potential crises.
Moreover, it is the board’s responsibility to monitor and set the risk standards, how much risk appetite companies are willing to absorb.
Figure: an integrated reputation & corporate governance framework
When boards take decisions to invest particular resources into a project or decide to acquire another company, specific criteria are used to guarantee a decent return on the investment for the company’s shareholders. Stock prices do not always reflect the true value of companies, so an investor should study a company thoroughly and really understand the business, capital, board, and management when deciding whether it had sufficient underlying value to make an investment for the long term worthwhile. Successful investors value wise leadership at companies and how they steer organizations to create consistent value over a longer period.
Moreover, companies and their boards will need to take critical and relevant stakeholders’ concerns into account when taking these financial decisions. In other words, boards need to have the foresight to sense the new trends or create an eco-system in which new services and products can be successfully launched. Investments increasingly focus on sustainability requirements from relevant stakeholders and the community at large.
Hence why environmental, social and governance (ESG) concerns and requirements increasingly become additional criteria in making investment decisions. In an increasingly interdependent global world, and with more transparency and responsibility expected from companies, investors, owners, and stakeholders demand organizations to take be accountable for the organizational impact on environment and social-ethical realities