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The importance of good corporate governance

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Last editedJul 20212 min read

Every entity requires governance and nowhere is that more true than in business. Because without a system of rules and practices in place there can be no way to properly run a company. Corporate governance exists to ensure that a business can run smoothly and that everyone knows where their place is. It’s also something that even many business leaders simply don’t understand.

Good corporate governance leads to ethical business practices and this doesn’t just make a company more financially viable but it makes it more favourable in the eyes of the general public and its stakeholders.

What is corporate governance?

In the same manner that a nation’s citizens are held to a framework of authority and accountability, so too are the employees and shareholders of a business. This system, by which everyone and everything within the business is directed and controlled, is, in essence, the corporate governance.

It defines not only who holds the power and accountability in a business but ensures that all the processes are in place that will allow for the interests of all shareholders, supplies, customers and employees to be met.

Corporate governance structure

A corporate governance structure is built up of both the internal and external factors that impact the interests of a business. The structure is usually created by a board of directors and includes everything from plans of action to conflict management.

Of course, the structure will vary from business to business but generally speaking, it will contain the following elements:

Shareholders need to be treated fairly and equally.
All pertinent information should be communicated to all stakeholders at all times.
Policies should be transparent.
A code of conduct needs to be defined for all board members.
The board of directors should ensure fairness, diversity and accountability within the business.
Checks and balances should be in place to minimise conflicts of interest and allow any conflicts that do arise to be solved in a non-biased way.

Why is corporate governance important?

Good corporate governance creates a stable infrastructure that allows for better, more ethical and balanced business decisions to be made and for businesses to set their own ground rules, if necessary. As long as the governance framework is well defined and properly enforced it should be working for the benefit of everyone, ensuring best practices are being followed across the board.

Examples of good and bad corporate governance

Perhaps the best way to underline why good corporate governance is so important is to outline two examples of governance done right and governance done wrong.

PepsiCo

The popular drink manufacturers has always been revered for its corporate governance and it’s an area it consistently focuses on and updates. Every year PepsiCo drafts a statement that outlines its governance practices, board composition, long-term strategies and more. This transparency has made PepsiCo a force to be reckoned with in the business world.

Volkswagen AG

The scandal that was dubbed “Dieselgate” shocked the car industry and beyond in 2015 when it was revealed that VW had been rigging its in-car pollution emission equipment for years to falsify test results. The disclosure caused share prices to plummet and faith in the VW brand to be almost irreversibly tainted. It’s arguable that the scandal was allowed to happen in the first place because of the company’s flawed two-tier board system.

We Can Help

If you’re interested in learning more about corporate governance and putting a system in place that’s transparent, fair, responsible and is able to hold all parties accountable, then get in touch with our financial experts today. Find out how GoCardless can help you with ad hoc payments or recurring payments.