Corporate Governance: What It Is and Why It Matters

Corporate governance is the foundation that guides how businesses operate and make decisions. As regulatory requirements increase and stakeholder expectations grow, understanding business governance principles has become a critical differentiator for mid-career professionals looking to climb the corporate ladder.

This guide explores the fundamental aspects of corporate governance. You’ll examine core principles, implementation strategies, and legal frameworks. You’ll also learn why corporate governance is important for business sustainability and how corporate governance law influences modern business practices.

What Is Corporate Governance?

Corporate governance refers to the rules and practices that regulate company processes. These rules also ensure accountability to key stakeholders, including:¹

• Employees
• Customers
• Shareholders
• The broader community

The core principles of corporate governance include:²

• Accountability
• Transparency
• Fairness
• Responsibility
• Communication

These principles create a framework where decision-makers can be held accountable to stakeholders. In addition, transparent reporting provides timely and accurate information about financial performance and governance practices.

Unlike day-to-day operational management, corporate governance focuses on high-level oversight and strategic decision-making. Corporate governance also gets to the heart of complex and often thorny ethical practices.

Why Is Corporate Governance Important?

Corporate governance matters because it creates substantial benefits for businesses by:³

• Promoting ethical behavior
• Managing risk effectively
• Enhancing organizational reputation

Strong corporate governance ensures that organizations meet high ethical standards. Corporate governance frameworks identify and mitigate risks to help protect the company’s future.³

Good corporate governance impacts stakeholders and society by building trust. This leads to higher valuations and helps to prevent costly scandals.⁴ Enhanced reputation through corporate governance practices helps businesses attract customers and top talent. By building stakeholder trust, businesses can enhance their long-term value creation through sustainable growth.

Best Practices in Corporate Governance

There are many best practices companies can follow to be successful in corporate governance. Here are a few general best practices that can be applied broadly across many companies:

Clearly Define Roles and Responsibilities of the Board 

Roles and responsibilities of the board of directors, executives, and management should be clearly defined, ensuring accountability and minimizing overlaps and conflicts of interest. It’s also important to recruit a diverse and independent board, with a mix of skills and expertise. This promotes objective decision-making and provides effective oversight.⁵

Establish a Code of Conduct to Promote Ethical Behavior

Promote a culture of integrity within the organization to maintain ethical behavior and minimize the risk of misconduct. An example of a policy that can go a long way to promote ethical behavior is one on conflicts of interest, which requires directors, officers, or employees to disclose any conflicts of interest during the course of their service with the organization and to refrain from participating in decision-making on any matters in which they have an interest or conflict.⁶

Promote Financial Reporting and Disclosure

Accurate and transparent financial reporting is vital for maintaining investor confidence. Implementing robust accounting practices, adhering to applicable accounting standards, and conducting regular outside audits enhance the reliability of financial information, ensuring transparency and accountability.⁷

Engage With Stakeholders 

Engaging with stakeholders and fostering open lines of communication is an essential part of corporate governance. Organizations should actively seek feedback, address concerns, and consider the interests of all stakeholders when making decisions. Transparent and regular communication helps build trust, strengthen relationships, and enhance the organization’s reputation.

Corporate Governance and Compliance

Corporate governance frameworks offer essential support to keep companies in compliance with applicable laws and regulations. To that end, successful corporate governance includes taking a systematic approach to risk management and accountability measures. Corporate governance and compliance work hand-in-hand to ensure organizations meet regulatory requirements while maintaining high ethical standards.

Internal Controls and Risk Management

It’s important to understand internal controls so you can help mitigate risks in your company. Operating with embedded checks and balances in day-to-day operations will help you ensure your company works within existing legal frameworks.³

For example, the Sarbanes-Oxley Act of 2002 is a core piece of corporate governance law passed in the wake of the Enron scandal. It protects investors by increasing financial transparency through greater independent auditing. That means public companies need to implement robust corporate compliance systems to ensure financial accuracy and transparency.

Risk management involves identifying and avoiding risks that could threaten the organization’s continued well-being.⁸

Transparency and Accountability Measures

Strong corporate governance requires meeting comprehensive reporting obligations and strict accountability measures. This helps to build stakeholder confidence and ensure regulatory compliance. Transparency involves clear and timely disclosure of all material matters involving the corporation. That includes:⁸

• Financial situation
• Performance
• Ownership
• Governance

Companies that successfully implement transparent measures can restore credibility after public setbacks. The failure to do so can cause significant damage to a company’s reputation. For example, the Enron scandal illustrated how poor corporate accountability and transparency damaged stakeholder trust, value, and led to the demise of the company.

How Corporate Governance Laws Shape Business Practices

Corporate governance law, such as the Sarbanes-Oxley Act of 2002, has transformed business practices by establishing greater accountability standards for public companies. The Sarbanes-Oxley Act came about in response to major corporate scandals and was intended to restore public confidence in financial markets.⁹

Key provisions of corporate governance law include executive certification requirements. These require CEOs and CFOs, as well as those who report to them, to personally certify financial statement accuracy. Significant penalties exist to punish fraudulent activities. The law also established the Public Company Accounting Oversight Board to oversee public accounting firms.¹⁰

These laws impact businesses by requiring companies to implement and maintain strong internal controls over financial reporting.⁷ This fundamentally changed how organizations approach crucial business functions such as risk management and financial reporting, while, at the same time, reducing the likelihood of fraud.¹¹

Building a Corporate Governance Strategy for Long-Term Success

Creating effective corporate governance strategies requires taking a systematic approach to policy development and process improvement. You must establish clear roles and responsibilities.

Successful governance policies should outline:

• Decision-making processes
• Risk management frameworks
• Ethical frameworks
• A clear pathway for reporting and resolving ethical or compliance issues

It’s important to focus on core areas such as internal controls and defining codes of conduct.³

Strong governance contributes to sustained growth over the long run by balancing short- and long-term objectives. Embracing strong corporate governance measures can help foster stakeholder trust and propel continuous improvement.

Position Yourself as a Leader in Compliance With Pitt Law

Successful organizations are built and supported by both strong corporate governance and thorough corporate compliance programs. By prioritizing corporate governance and compliance, organizations can position themselves for long-term success in an ever-evolving business landscape. To find this success, hiring professionals who understand the ins and outs of compliance is a must. Position yourself to lead in a compliance position with Pitt Law’s Online Master of Studies in Law (MSL) program with a Corporate Compliance specialization.

Pitt Law’s MSL program is here to help you learn what you need to get ahead without needing to earn a JD degree. This 30-credit graduate degree program pairs core courses that give you a foundation in a wide range of legal topics with a focus on corporate compliance. The Corporate Compliance specialization or the stand-alone Online Certificate in Corporate Compliance helps you set yourself apart as a leader in business with in-demand legal knowledge and skills. Small class sizes and individualized attention will set you up for success during your master’s program and after graduation.

As you consider Pitt Law’s Online Master of Studies in Law (MSL) program or one of the graduate certificate programs (also offered online), know that Pitt Law’s admissions outreach advisors are always on standby to answer your questions, clarify admissions requirements, and discuss what this degree can do for you. Schedule a call today.