Summary of Corporate Governance

Corporate Governance

Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled. Among the principles of corporate governance are the rights and equitable treatment of shareholders and other stakeholders, specific roles and responsibilities of board members, integrity and ethical behavior in decision making processes, and disclosure and transparency which increases the level of accountability to stakeholders. Citing articles from the Financial Times (FT), "directors need training to improve their skills and knowledge about business strategies and products". Additionally, despite the chosen corporate governance model, it is recommended that "knowledge of the business, or at least experience in a related or similar business, should be given greater weight in the appointment of a new chairman". Knowledge and experience on the part of the board of directors enables organizations to understand the organization and business environment in order to set directives regarding ongoing operations, and identify those metrics that best accomplish its goals. For example, an FT article on corporate governance states that "the purpose of corporate governance is to reduce the cost of capital because investors face lower risks in well-governed companies". With this goal in mind, the board is challenged to develop measurement systems that find the best weighted average cost of capital for the organization that would increase shareholder value. Additionally, it involves using various benchmarks to determine which projects should be continued, and which ones should be considered as future opportunities for the business to pursue. Senior executives understand that their organization's measurement system strongly affects the behavior of managers and employees (Askar, Imam & Prabhaker, 2009). However directors are better able to develop effective measurement systems by involving managers and employees in the decision making process, including strategy formulation and determining key performance indicators.