With the advent of the 21st Century, there was a drastic change in how organisations conducted their business. The maxim survival of the fittest became the yardstick which obligated organisations to constantly re-invent themselves. Governance continues to evolve even today to ensure an organisation’s financial viability. In recent times, the prime reason attributed to the failure of many organisations was the lack of corporate governance (The Guardian, 2023), making governance the stark difference between organisations flourishing or perishing. Alternatively, its flawed implementation eroded investors’ trust in renowned organisations (The New York Times, 2020), leading to resignations, underscoring the need for them to stay abreast and incorporate the latest developments in this domain to secure manifold benefits.
This forum presents an opportunity to talk in-depth about a sound corporate governance system, coupled with organisational steps and measures that will assist in attaining and realising an organisation’s corporate governance goals.
Corporate Governance
“Shareholder value gets lost when things are done illegally, when corporate governance is not adhered to, when cohesive action is not taken”.
– Cyrus Pallonji Mistry
Safeguarding the interests of its stakeholders is the utmost responsibility of an organisation. To accomplish this, the organisations mainly focus on a system by which companies get directed and controlled, known as corporate governance. Additionally, it refers to the checks and balances within an organisation, the guidelines, practices and procedures which provide a blueprint and roadmap to its board of directors to govern their companies transparently and efficiently. Herein, the shareholders play a crucial role as they assist in appointing the directors and the auditors, ensuring an appropriate governance structure is in order. An organisation’s corporate governance founds its course and business integrity, promotes monetary viability and builds trust with stakeholders and the community.
Its flawed implementation by organisations entails relentless scrutiny by the media and general public alike, often concluding in heavy financial (US Securities and Exchange Commission, 2023) and reputational costs borne by the organisation, necessitating its foolproof positioning in an organisation.
Role of the Employees
Employees play an immense and crucial role in upholding compliance with legal standards and keeping company leadership accountable. They are immensely affected by the decisions made and should back the emergence of more transparent and effective corporate governance. It may assist in making organisations more adaptable, improving employee commitment and their agreement with management’s goals. The following benefits may accrue to an organisation by involving employees in corporate governance.
- Improved employee engagement.
- Retaining talent.
- More effective change management (Hart David Carson, 2022).
Organisations where employee voices get heard assist in improving compliance with employment procedures and regulatory compliance throughout the organisation, enhancing sound corporate governance. Involved employees are also vocal about financial security, wellness, health and safety, and career development through incentive schemes. Alternatively, integrating these parameters under corporate governance will assist an organisation immensely in B Corp certification, as corporate governance is the key (Legal Futures, 2023).
Role of the Management
The four pillars of corporate governance, viz. accountability, transparency, fairness and responsibility, are the underpinning which assists an organisation in flourishing. They also impact the decisions the board members make. Fragmented and split views on what interests should be prioritised and pursued in corporate decision-making pose another challenge for management. One school of thought believes that maximising financial returns for shareholders is the purpose of an organisation’s operations, while another believes that shareholders merit more importance and support over profitability. Add to this the continuous insistence by sustainability-focused groups wanting further actions that benefit clients, personnel and societies, along with shareholders, and the management has its priorities set.
Gender diversity and equity are of priority for management. Management understands the accrued benefits because of giving fair representation to women on corporate boards and decision-making positions, including improving company performance (Post Courier, 2023). Equal compensation and flexibility for women and people of colour in the workforce create inclusive workplaces and increase diversity and inclusivity. Another area of utmost interest is compensation and oversight of CEOs and top managers as their selection, evaluation and reward process remains unregulated, leaving boards of directors solely accountable for this crucial element of an organisation’s corporate governance.
These latest developments in this domain allow management to revisit and assess their corporate governance practices and policies regularly because poor governance practices have stood at the core of some of the biggest corporate scandals. In the recent past, poor governance practices saw Volkswagen and Facebook (S&P Global, 2020) get caught up in this imbroglio and extricating themselves from it entailed immense financial and reputational costs. Management should consider incorporating the following points, which could assist it in ensuring the improvement, sustenance and permanence of governance practices and policies.
- Board accountability.
- Engaging the board.
- Greater emphasis on board diversity.
- Encouraging investor activism.
- Staying well-informed about the new guidelines and regulations (Forbes, 2023).
An organisation’s unwavering and relentless pursuit to uphold the principles of good corporate governance assists in improving it (Mint, 2023), thereby contributing to good governance and a better corporate governance structure and system. It ensures a robust, accountable and transparent organisation, thus contributing to its financial practicability.
Advantages of Integrating ESG
Corporate governance is paramount for management effectiveness, employee productivity and investor confidence. The first two points get accomplished when the G in ESG puts robust mechanisms in place to achieve compliance, pay ratios, the organisation’s ethos and transparency and accountability in leadership. Investor confidence gets reposed in an organisation when it keeps up with changing laws and regulations, with a commitment to equity and equality in the workplace. Investors get further assistance from rating agencies that include good corporate governance practices in their rating rationale (Mint, 2023). In addition, 82% of business leaders feel they have made substantial improvements in setting up the controls and risk management systems required to address material ESG risks (EY, 2022), further advancing the cause of good governance in ESG matters.
Good corporate governance ensures the proper functioning of an organisation. As competition grows, the milieu in which organisations function also changes, and in such a dynamic environment, corporate governance systems also need to advance.
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