Diligent
Diligent
Solutions
chevron_right
Products
chevron_right
Industries
chevron_right
Resources
chevron_right
0 min read

Corporate Governance

Businesses thrive or collapse based on the rules established to serve the needs of everyone involved, from shareholders and stakeholders to managers and customers. These policies and guidelines make up corporate governance. ‌ While corporate governance has evolved with new expectations and technologies, it remains the business’ driving force. It dictates how a company’s board of directors helps drive success in meeting short- and long-term goals. Board members with the right tools for communication and corporate monitoring have a profound impact on their organizations.

What is corporate governance?

Corporate governance encompasses the rules, practices and processes that guide a company’s operations and decisions.

A corporation, whether publicly traded or not, is a complex enterprise: It’s an interconnected web that weaves together the business itself, its executive leadership, the customers who buy its offerings, and the investors and financiers who provide the capital to make it all happen. Other key players include government bodies that impose guardrails and regulations, suppliers who provide the resources an organization needs to function, and communities affected by a company’s operations. Good corporate governance aims to balance all these interests in an effective, fair and transparent manner.

The details vary across companies, geographies and industries, but strong corporate governance can typically be defined by these traits: 

  • It’s responsive, participatory and consensus-oriented
  • It’s efficient and effective
  • It upholds the rule of law in applicable jurisdictions
  • It advances equity and inclusiveness, along with the company’s strategic vision — ensuring that the corporation “does good while doing well,” and vice versa
  • It prioritizes transparency and accountability

As Marc Hodak, Partner at Farient Advisors, said at Diligent's 2022 user conference, "Good governance is ultimately what is right for the long-term health of the company."

Ensuring stability and growth: What is the purpose of corporate governance in the United States?

The role of corporate governance in the United States is to maximize long-term shareholder value while ensuring transparency, accountability, and fairness for all stakeholders involved. This includes shareholders, employees, creditors, customers, and the broader community. By establishing a clear framework for decision-making and oversight, effective corporate governance fosters stability and growth for modern organizations, ultimately contributing to a healthy and sustainable business environment.

6 principles of corporate governance

The business landscape is always evolving, which means the principles of corporate governance are constantly changing as well. How can organizations maintain the core tenets of good governance while keeping up with the times?

In 2023, the G20 and the Organisation for Economic Co-operation and Development (OECD) issued six principles of corporate governance to help. These principles are intended to assist policymakers in evaluating and improving legal, regulatory and institutional frameworks. They also serve as a guide to help corporations innovate and adapt their practices to stay competitive in a changing world. So, what are these revised principles of corporate governance?

1. An effective corporate governance framework

Just like a house needs framing to determine its structure and “good bones” to remain standing over time, effective corporate governance requires a strong foundation.

According to the OECD, a corporate governance framework “should support transparent and fair markets and the efficient allocation of resources. It should be consistent with the rule of law and support effective supervision and enforcement.”

Each of these components is critical. Take, for example, consistency with the rule of law, which encompasses legislation in the jurisdictions where a company does business, rules for listing on various exchanges, and regulations that impact worker rights and the environment. Each of these guardrails exists to protect the rights of communities, customers, employees, shareholders and other parties. The first corporate governance principle helps ensure that a company is accountable and operates in a way that upholds these rights.

2. The rights and equitable treatment of shareholders and key ownership functions

As the owners of a publicly traded corporation, shareholders do more than reap the company’s profits. They also contribute to its governance in many ways, including:

  • Participating and voting in general meetings
  • Electing and removing members of the board, as well as an external auditor
  • Approving or participating in fundamental corporate decisions, like the authorization of additional shares or amendments to governing documents

The second principle behind good corporate governance helps these rights play out equally for all shareholders, regardless of class. Take a shareholder’s right to obtain relevant and material information about the corporation on a timely, regular basis, for example. Insider trading laws in the United States make it illegal to share information with one set of stockholders — like a prominent pension fund or majority investor — unless that information is available to the entire market at the same time.

3. Institutional investors, stock markets and other intermediaries

The immediate relationship between a company who issues shares and the investors who buy them is just one aspect of how capital markets work. Several intermediaries keep the gears turning. For example, stock exchanges and brokers connect buyers and sellers, while institutional investors buy, sell and manage stocks on behalf of other parties. Throughout, credit rating agencies, analysts and proxy advisors deliver guidance.

All these parties need oversight for fair and effective functioning. Enter corporate governance to maintain fairness, accountability and trust.

Imagine if a conflict of interest were allowed to go unchecked in any of these areas. Say a personal connection among top leadership leads to the favorable treatment of one company over others: Brokers might promote one company’s stock over others, and the clients of institutional investors might not get the best mix of companies in their own portfolios. Meanwhile, investors wouldn’t be able to trust the objectivity of an analyst report or credit rating.

4. Disclosure and transparency

If a decision affects the material health of a publicly traded company, investors must be made aware in a timely manner. The fourth principle of corporate governance requires clear and transparent communication to all shareholders and stakeholders.

Take the appointment of a new CEO, for example. A publicly traded company can’t just slip a new CEO into such an important and fiduciarily responsible leadership position without solid explanation, rationale and context.

When choosing new leadership, companies should follow a structured process for succession planning, conduct the appropriate due diligence, consider diversity and representation in the recruitment process, and choose leaders who fit the skills needs of the board, marketplace and corporate strategy — while providing visibility into the entire process.

Such thoughtfulness and transparency engender confidence, while showing shareholders that the company has nothing to hide. It also demonstrates the company’s commitment to protecting shareholder interests and a willingness to be held accountable.

5. The responsibilities of the board

The fifth principle ensures that leadership at the top is structured for effective oversight and accountability, so directors can exercise objective and independent judgement, oversee risk, and monitor managerial performance — in effect, perform their fiduciary duties.

This principle gets into the nitty gritty of board operations:

  • Are processes like meetings and minutes in place to keep directors fully informed?
  • What about conflict-of-interest measures and a balance of independent vs. executive directors, to ensure they’re acting in good faith?
  • Do committees and the full board regularly delve into important areas like audit and cybersecurity to exercise due diligence and care? And does this due diligence extend to their own ranks when choosing new directors?
  • Finally, do appropriate disclosure, engagement and accountability measures exist to ensure the board is operating in the best interests of the shareholders?

6. Sustainability and resilience

Making sure that a company can withstand the winds of change and thrive well into the future involves a great deal of decision-making and risk management. Corporate governance provides the frameworks, practices, policies and incentives for this work.

One example is climate change and the transition to net zero operations. What are the potential risks of moving from fossil-fueled operations to renewable energy sources? What are the risks of not doing so, like non-compliance with evolving regulations, or a poor reputation among environmentally-minded future workers? What are the potential opportunities, like cost savings and increased goodwill?

Within a company, good corporate governance enables sound management of these risks. Within the greater capital market ecosystem, disclosing material data in a consistent, comparable and reliable way ensures that investors, exchanges and advisors have the information they need for smart, timely decisions.

In essence, the six principles of corporate governance, recently outlined by the G20 and OECD, stand as indispensable guidelines for fostering resilience, transparency, and ethical practices in an ever-changing business landscape.

The consequences of bad corporate governance

Failing to follow the four principles of corporate governance adversely impacts any business. Time and again, corporations have shown just how damaging improper governance is. In a world of fast-paced news and instant information, any misstep or unethical practice can ruin a business in a heartbeat. Take these notorious examples:

The 2008 financial crisis

The 2008 financial crisis is an example of a complete failure of corporate governance. Greed permeated every level of multiple industries, creating an unnecessary and uncontrolled amount of risk, even as foreclosure data continued to raise alarms. Banks issued bad loans to numerous individuals and companies, despite the lessons of the past.

The result was a debt trap comparable to the credit crisis of the 1920s and one of the worst recessions in world history. Proper risk analysis and accountability were never implemented. Shareholders and companies fell to bad governance.

The Enron scandal

Some of the worst outcomes occur when there’s no governance at all. The Enron scandal represents a failure of corporate governance at nearly every level.

‌Cooking the books, suspending the code of ethics, deceptive business practices, and outright lying all brought down Enron, a corporation Fortune deemed “America’s Most Innovative Company” — not once, but six years in a row. It turns out that their profits were nothing more than a figment of the imagination.

Enron may have started as a legitimate venture. However, mixing the board of directors with bad actors and self-interested parties soon saw a disaster in the making. A lack of oversight allowed former CEO and COO Jeffrey Skilling and former chairman and CEO Kenneth Lay to take advantage of their positions in a highly unethical and illegal way.

The company eventually collapsed under the weight of its own deceit, leaving damage to the California power grid that continues to resonate to this day. Shares tumbled from $90.75 to a meager $0.26, and congress enacted the Sarbanes-Oxley Act to prevent similar fraudulent financial reporting and manipulation of financial laws.

Assessing corporate governance

Monitoring governance standards is a crucial task alongside environmental and social criteria. This is the essence of ESG, which stands for Environmental, Social and Governance.

These three factors play an essential role in the choices investors make. Many mutual funds and brokers use them to help their clients pick stocks. They also directly impact your bottom line. ESG criteria are interrelated. They all impact your company’s risk management and business strategies.

Social criteria relate directly to your business relationships. Critical choices in how the company treats surrounding communities and acts on social issues reflect its quality and revenue. Shown to increase the available talent pool by 25% and even raise sales by as much as 20%, social responsibility and transparency are now firmly entrenched in the corporate landscape.

ESG criteria should be reflected in every decision a company makes. They reveal just how open, accountable, and responsible your organization is.

How to ensure good corporate governance

It may not seem easy to implement good governance, but the right technologies can help. Modern platforms collect and analyze a large swath of information related to your business activities.

You can get a good idea of how well you perform on these criteria by analyzing investor sentiment, news articles, public opinion and your own policies.

Leverage data

The average organization generates a lot of data. Companies collect nearly 7.5 septillion gigabytes of data every day.

This data includes information on products, goals, customer sentiment and almost every other business activity. The right data management and visualization tools can transform these facts into useful information to monitor ESG criteria.

Diligent organizes data into powerful dashboards that filter and present essential information from a wide variety of sources. News, your own data and stakeholder surveys all combine in a single suite of tools to create a powerful feedback loop for monitoring every decision your company makes.

Keep up with news and public opinion

For every action, there’s a reaction. Each decision you make plays out over the long run. Irresponsible activities that eventually hurt shareholders and stakeholders usually start as a small ripple that turns into a tidal wave.

If your company decides to reduce costs by cutting quality, the grumbling of customers will eventually impact your bottom line — and those customers will find another place to go.

News and public opinion are terrific and underutilized sources of information. Many organizations fail to realize customer and stakeholder perceptions until it’s too late.

Know where your organization stands

All of this information helps you to understand your risk and where you stand within your industry. Are you a leader in the field, or is there room for improvement?

Your data helps you create gaps and SWOT analysis reports. These are the basis from which to generate risk and other corporate strategies.

Establish informed policies and strategies

With a complete understanding of your business environment, including how you meet ESG criteria to risks and opportunities, you can create a strategy to mitigate risk.

Data-driven decision-making is not just a trend, it’s a necessity. Companies that strategize based on accurate data and key performance indicators capitalize on their markets. Establish policies and guide your organization using the four principles of data governance.

Be transparent, accountable, fair and responsible

Planning and data are worthless without the drive to deploy them correctly. It’s up to you to act with the right data-based strategies in hand.

Present and own your decisions. Act on the insights you gain responsibly. Avoid the pitfalls of bad data governance.

Using technology to achieve strong corporate governance

Successful corporate governance often uses a data-driven approach to setting the rules and policies that guide an organization. The board of directors must act following the six principles of governance for the best interest of stakeholders, shareholders and the business as a whole.

Equipping your organization with the right tools, such as Diligent’s Board & Leadership Collaboration solution, enables you to implement strong governance practices for effective decision-making and a thriving company.

security

Your Data Matters

At our core, transparency is key. We prioritize your privacy by providing clear information about your rights and facilitating their exercise. You're in control, with the option to manage your preferences and the extent of information shared with us and our partners.

© 2024 Diligent Corporation. All rights reserved.