The term corporate governance (CG) is used to refer to systems that ensure proper direction and control of a company. While stock market companies are known to have a corporate governance structure in place, small entities are expected to have a set of CG codes in place voluntarily. This article explains what corporate governance is and what it's not. Let's begin.
Corporate Governance Defined
Corporate governance is a system through which companies' operations are directed and controlled. It includes procedures, policies, and rules that a company follows to ensure long-term benefits to stakeholders. Shareholders are referred to as the owners of companies. In small businesses, these shareholders might engage in the direction and control of the entity. However, for large businesses, especially stock market companies, there is usually a separation of ownership and control.
The shareholders are owners, and the board of directors has the responsibility for the direction and control of the organisation. Directors are expected to direct the company to achieve long-term profitability for the shareholders. To achieve these, executive directors and senior management are provided with remuneration packages that are tied to the organization's long-term goals and objectives.
The “is and not” of Corporate Governance
The board of directors direct the company by providing policies, procedures, and structures that help senior management carry out business operations in a way that benefits the company. However, they are not part of managing the business.
Directors monitor and control the decisions of the company's management. But without direct involvement with the business operations. They ensure the organization is run properly. Board members committees are formed to ensure that each strategic area of the business is monitored and controlled.
More so, directors do not formulate a company's strategies; this is the responsibility of the executive and senior management. However, they approve the strategy based on laid down policies and monitor the progress. Therefore, you may wonder, what are the responsibilities of the directors. Of course, some duties are “reserved for the board”, such as internal control and risk management policies.
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