The Complete Guide to Corporate Governance
Corporate governance is more often than not defined in the public imagination when it doesn’t work.
News stories are rife with examples of corporate governance gone awry where a company’s stakeholders, including shareholders, management, customers, financiers, suppliers, government agencies, and the general public are at each other's throats.
Notable examples of corporate governance failures include the astonishing bribery and corruption scandal endured by Siemens in the mid-2000s and the catastrophic implosion of Enron.
Siemens, for example, underwent the biggest corruption scandal in the history of the German Federal Republic. As a result of poor corporate governance where corruption became institutionalized, the company was forced to pay a fine of $1.6 billion US dollars, the largest fine for bribery ever imposed at the time. The total costs including attorney fees were $2.8 billion US dollars.
The outlook was so dim for the company that many experts didn’t expect the company to survive. But it did. So today, Siemens has become a two-fold story of failure and redemption.
The company’s recent history has been one of the poor corporate governance examples that nearly drove it into the ground and the right corporate governance model that has rehabilitated and redeemed the company in the eyes of consumers, shareholders, government regulators, and those within the company itself.
Bad corporate governance nearly killed Siemens.
Good corporate governance saved Siemens from the fate of an Enron or a WorldCom.
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What Is Corporate Governance?
Like our government, corporations are directed and controlled by a system of internal rules and regulations, and practices and processes.
Corporate governance also balances the sometimes conflicting interests of a variety of relevant stakeholders including consumers, shareholders, management, suppliers, partners, financiers, governments, and the communities in which they operate. When one or more of these stakeholders are ignored or overruled, scandals or bitter conflicts can emerge.
When there is balance, and corporate governance is working as intended, a company can benefit and prosper from the long term stability.
Because corporate governance touches on nearly all aspects of a company’s existence, from it’s day-to-day activities to its long term vision and strategy, it can be difficult to ascertain what corporate governance is.
In essence, corporate governance can be seen as the set of rules, controls, policies, and resolutions that are put in place as an edict to a company’s expected behavior and direction.
Poor corporate governance, exemplified in the case of Siemens in the mid-2000s by the criminally lax attitude towards corruption, led the company as a whole to behave corruptly.
Likewise, the strict supervision and corporate ethical controls, rules, and regulations established by both angry shareholders and government regulators helped the company to correct its harmful behavior and begin a journey towards a financial (and public relations) recovery.
Examples of Corporate Governance
Leadership or executive team directives or committee charters
Board of directors committee charters
Inside and independent board member requirements
Articles of incorporation
Governance documents (e.g., code of conduct or compliance policies)
Stock ownership guidelines
Internal corporate controls procedures
Corporate balance of power rules
4 Key Components of Corporate Governance
The leaders and executives of a corporation are responsible for determining a corporation’s comprehensive vision, mission, and business direction. Making strategic decisions and addressing current and future concerns are essential ways for a company to execute on their vision. A strong vision and mission not only gives the corporate body motivation and a strong sense of purpose to move in a unified direction, but it also displays the company’s intention to the general public and the world at large.
Corporate governance must satisfy and hold in balance the many stakeholders involved in a corporation. These stakeholders include consumers, regulators, executives, management, shareholders, financiers, suppliers, and the public at large.
The most prominent stakeholder to which corporations are beholden are often the shareholders who own the company. Shareholder relations form an essential aspect of corporate governance with many companies providing their shareholders with important documents and information about decisions and company considerations.
Although often neglected in favor of shareholder relations, corporate citizenship in the wider community cannot be discounted. Consumers, communities, and the general public engage with corporations on a daily basis, and thus it falls on the corporation to be governed, or behave, in a way that reflects the corporation's broader message to the world and in a way that respects the public and the environment. When this aspect of corporate governance is neglected, public relations usually suffer, and regulatory actions often follow.
Strong corporate oversight and accountability, built on a foundation of balancing powers, is crucial for the long term survival and the success of the company. This has everything to do with a company’s corporate governance.
Siemens, for example, had weak internal ethical oversight and a culture of corruption that was institutionalized and never questioned. Ultimately, this unacceptable behavior and poor corporate governance were driven by executive greed to enrich themselves at the expense of the other stakeholders, and as a result, the company itself.
The goal of corporate governance when it comes to oversight and accountability is to ensure that leaders and employees work in the interest of the company and of the company’s shareholders and other stakeholders.
What Every Board Member Needs To Know
To accept membership on a Board of Directors is to take on an enormous responsibility, and potential liability. The board is the guiding force of any for-profit or non-profit organization. They are ultimately accountable for decisions that can impact hundreds of staff, thousands of shareholders or millions of customers.
To meet these responsibilities and to protect the company, board members must know the most vital functions of their prestigious roles.
How to Respect Fiduciary Duties
Board members are considered fiduciaries, and they are legally obligated to act on behalf of their organization. The nature of these obligations may differ slightly from state to state, but the following duties are recognized in part or whole throughout the country.
Duty of Care
The duty of care (also known as the duty of good faith) is an obligation to give each decision its due consideration. Every decision that is made and handed down should be explored, refined and submitted to criticism in proportion to the impact it will have on the organization and shareholders.
Duty of Loyalty
The duty of loyalty is an obligation to hold the best interest of organization and shareholders as the highest priority. Board members are obligated to avoid conflicts of interest, self-dealing and other situations where their self-interest is placed in direct conflict with their duty.
Duty of Obedience
The duty of obedience is an obligation to respect all laws and governing documents of the organization. The violation of external laws is itself a risk to the organization. The violation of internal laws defrauds the shareholders who have ratified those laws to ensure excellent governance.
How to Advance the Mission of the Organization
The Board of Directors are the leaders most responsible for the direction of an organization, and the ones most accountable to the shareholders. For that reason, it is imperative that every member of the Board fully understand the core idea of the organization and the broad strokes of the mission that will make that idea possible.
Board members should not only understand the mission but be able to articulate it to the officers who will be expected to carry it out and the employees who will action it at every level. Each Board member is responsible for fostering the unity that creates clarity of purpose throughout an entire organization.
How to Assess, Appoint and Compensate Officers
Board members are expected to provide top-level leadership in an organization, steering it toward the most ambitious and profitable goals. However, the decisions that steer the organization must be executed on the ground level by the Chief Executive Officer and other high-level officers.
One of the ways that Board members exercise their duties is by choosing officers who are well-qualified for their duties and compensated well to avoid instability. They must be able to define what is expected of the role, carefully assess the candidates and make an appointment based on the best available information.
How to Identify and Resolve the Deficiencies of the Organization
Board members must be active in solving the problems that keep the organization from reach its full potential. Understanding problems is a result of active attendance and participation in each meeting throughout the year, along with the review of any materials produced by the officers and the practice of privately engaging the shareholders.
One of the most effective ways that Board members can resolve problems is by participating on Board committees and task forces. Most Boards form regular committees to allow for special attention on particular ad-hoc issues or to ensure close collaboration between the Board and key subject matter experts in the organization.
How to Protect the Unity of the Board
Every Board member shares the responsibility of ensuring that the Board remains free of the dysfunction that results from apathy, factionalism, and disrespect. The Board must remain a unified force to set an example for the rest of the organization.
Board members should know how to resolve a conflict on the Board by encouraging mediation, finding common ground and setting firm boundaries. When necessary, they should know when to give up on an idea whose time has not yet come instead of creating a rift.
The Board member who understands these duties will be a credit to their organization. They will be able to build an organization and a legacy that will inspire pride for years to come.