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Corporate Governance: What It Is and Why It Matters

Corporate Governance: What It Is and Why It Matters

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At its core, corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled.1 It encompasses the relationships among various stakeholders, such as shareholders, management, employees, customers, suppliers, and the community at large. The goal of corporate governance is to manage the business to maximize long-term value while safeguarding the interests of all stakeholders.

In this blog post, we will demystify the concept of corporate governance, delve into its basic components, explore best practices, and highlight how corporate governance and corporate compliance intersect.

Importance of Corporate Governance

Corporate governance is vital to a healthy company for a myriad of reasons, including:2

  • Providing a framework for effective decision-making and strategic planning
  • Establishing accountability and transparency
  • Fostering trust amongst employees and stakeholders
  • Allowing organizations to adapt to changing market conditions
  • Enhancing a company’s reputation
  • Mitigating financial and reputational risks
  • Promoting ethical behavior to ensure compliance with laws and regulations

Benefits aside, corporate governance is especially important for what it prevents. Companies with bad corporate governance in place are subject to losing support of stakeholders and the public, financial loss, and ultimately, collapse.3

Let’s delve a bit deeper into a few of the key benefits of corporate governance.

The Benefits of a Strong Corporate Governance Framework

Improved Decision-Making
A strong corporate governance framework facilitates informed decision-making by providing a structured process, incorporating diverse perspectives, and focusing on long-term value creation. This leads to more effective strategies and better outcomes for the organization.

Increased Shareholder Trust and Confidence
Transparent governance practices and adherence to ethical standards foster trust by shareholders. When investors have confidence in the organization's governance, they are more likely to invest, leading to increased access to capital and potential growth opportunities. We’ll touch on the importance of transparency and communication later in this post.

Reduced Legal and Reputational Risk
Robust corporate governance practices help minimize legal and reputational risks by ensuring compliance, ethical behavior, and accountability. Being proactive to address potential issues means companies can avoid costly legal battles, safeguard reputation, and maintain stakeholder confidence.

Corporate Governance and the Board of Directors

The board of directors is the key to good corporate governance. This body is responsible for overseeing the company’s activities, setting strategic objectives, appointing and monitoring senior management, and representing the interests of shareholders.4 A well-structured and independent board is crucial for effective corporate governance. The ideal structure of a board of directors for corporate governance will vary depending on the company’s size, industry, ownership structure, and jurisdiction.

Directors have a duty to act in the best interests of the company and its shareholders. Their fiduciary responsibilities include making informed decisions, exercising due care and diligence, and avoiding conflicts of interest. By fulfilling their duties, directors contribute to the overall governance and success of the organization.4

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 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 to declare any conflicts of interest during the course of their service on the board and to refrain from voting 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 relevant accounting standards, and conducting regular 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.3

Corporate Governance and Corporate Compliance

Corporate compliance complements corporate governance. A corporate compliance program is a set of policies, procedures, and practices that ensure a company and its employees and agents comply with applicable laws, regulations, and industry standards.8 While governance is focused on management, compliance is focused on ensuring proper conduct and adherence to applicable laws, rules, and regulations, as well as the policies set forth by the board.

When governance and compliance are appropriately aligned, companies function more effectively.9 Effective compliance programs enhance the positive outcomes of corporate governance, including mitigating legal and reputational risks and upholding the principles of transparency and accountability.

Compliance professionals, while not directly responsible for corporate governance, do play a critical role in assisting the board of directors. These professionals develop and implement compliance frameworks, monitor regulatory changes, provide guidance to management and employees, conduct training programs, and establish mechanisms for reporting and addressing compliance concerns. With the interplay of governance and compliance, these actions go a long way in keeping a company compliant and well-managed.

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.