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An appropriate structure or framework will help a company run smoothly without any confusions. “Corporate Governance” is a proper structure of the rules and the work practices that are to be followed in an organization.

This structure delegates all responsibilities and assigns every employee specific tasks. With the help of corporate governance, all employees are aware of their responsibilities and duties and perform them accordingly avoiding any sort of confusion.

A board of directors controls this framework and ensures the accountability and fairness of the system. Moreover, the board also ensures that the company has a transparent relationship with its stakeholders. The stakeholders of a company include customers, suppliers, employees, management, financier, the government and the society.

Corporate Governance comprises of two fundamental elements.

• A long term relationship – This part of the structure involves checks and balances that are necessary in a business, incentives or motivation for managers and proper and smooth communication between investors and company managers.
• A transactional relationship – This area of the structure involves managing aspects of authority and disclosure.

The framework of corporate governance includes:

• Contract, whether implicit or explicit between the firm and its stakeholders to responsibilities, rights and incentives or rewards.
• Procedures to reconcile the stakeholders’ interests according to their duties, roles and privileges.
• Procedures to allow proper control and supervision and a smooth flow of information to allow for regular checks and balances.

A detailed and all-embracing corporate governance structure that is enforced effectively by the company will benefit the entire business and its stakeholders by ensuring that the firm is aligned with and adheres to the established ethical standards and a set of best practices and formal laws. This is extremely essential for all organization, big or small, whether they are set up at national, regional or global level.

A well established structure of corporate governance promotes a trustworthy, moral and ethical corporate environment. It harmonizes the entire company and helps every individual to collectively focus on aligning their individual goals with the corporate goals.

Today, corporate governance has become vital due to the changing trends in business. As globalization is having an impact on the business world, firms need to be even more efficient and rule-compliant to fight and rise above the competition. Furthermore, they need to be ethically correct in their practices and strive to better their current system to win over more customers. This will, in turn, help them grow their revenues and profits.

The importance of corporate governance has increased in the past few years due to many firms being involved in high profile corporate scandals that involve corporate power abuse, corruption and alleged criminal acts undertaken by corporate officers.

Finally, corporate governance has an overall impact on the economy. It not only benefits the company or its stakeholders, but the economy as well. By reflecting a positive image, the company can attract foreign investors and benefit the economy of the country.

Further reading: Corporate Governance | Audit | Performance Improvement