Good corporate governance is all about integrity and accountability. First, a brief understanding of corporate governance: Corporate governance may be described in simple terms as the system of governing, controlling and directing a corporate entity. Processes, practices and rules are used to do this.
The efficiency of corporate governance rests on how well the varied and sometimes clashing interests of the stakeholders of the company are managed. The company’s stakeholders consist of a vast and diverse set of entities such as management, investors, financiers, customers, shareholders, suppliers, financiers, government and sometimes even the general public or the community. It is through corporate governance that any company accomplishes its objectives. This means that corporate governance embraces just about every activity and area of management.
The heightened role of good corporate governance
The role of good corporate governance has assumed greater importance and significance in corporate America since the Sarbanes-Oxley Act was passed in the U.S. The SOX legislation came into being following the turmoil the outbreak of scandals such as Enron and WorldCom caused to the markets.
Since the passage of this Act; stakeholders look at not just corporate governance, but good corporate governance. Companies are expected to show this through actions that reflect their rectitude, such as conducting business in an ethical manner, implementing proper governance and adhering to principles regarding the environment, respecting minorities and diverse opinions, etc.
Principles of good corporate governance
Good corporate governance is about instilling ethics through the prism of five important traits, namely leadership, accountability, capability, integrity and sustainability.
Leadership: Leadership is a prerequisite for good corporate governance. A company should have the kind of leadership that guides it through good and bad times. It should have the foresight and ability to manage risk.
Accountability: Accountability is another important trait of good corporate governance. The management is responsible and accountable to its shareholders and stakeholders, and it is to them that the company has to demonstrate a level of accountability and transparency in its dealings.
Capability: Ethics have to combine with ability to produce good results. A company that is ethical, but doesn’t have much knowledge and vision about its business does not qualify as a practitioner of good corporate governance.
Integrity: Integrity, it goes without saying, stands at the foundation of good corporate governance. A leadership that practices, fosters and inspires integrity should first have this quality itself. Proper and timely disclosure of every issue of importance to the stakeholders shows the integrity a company’s management has, and is a constituent of good corporate governance.
Sustainability: Sustainability as one of the core principles of good corporate governance assumes importance for the long term financial health of the company. A company which demonstrates good corporate governance recognizes the long term interests of the organization and its stakeholders and rewards them fairly and justly.