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Need For Corporate Governance

Corporate Governance is a philosophy which requires companies to conduct their affairs in a manner that takes into account the interest of all stakeholders. Towards this end, it is necessary to put in place a set of rules, policies and procedures which help business to be conducted in a straight forward manner. The Board of Directors form an integral part of a company’s governance system, and it is responsible for co-creating the company’s strategy, and making major decisions that impact on the future of the company.

Good Corporate Governance practices are given a lot of importance by well managed and well governed companies. Some of the reasons for this are –

  • Helps put right policies and practices in place – The essence of good Corporate Governance is that it helps the company to put in place robust policies and practices, that help promote a proper structure for the company to be run well.
  • Makes management accountable for their actions – The Board, which is at the apex of every company, holds the management responsible for its action. The Board, which is appointed by the shareholders on its behalf, ensures that the management runs a company in a transparent manner, and in a manner which promotes the interests of all stakeholders.
  • Helps prevent/catch frauds – With better policies and practices being put in place, the possibility of catching any irregularities, sometimes even before they take shape, becomes easier.
  • Helps mitigate risks – Each company faces numerous risks, some foreseeable and some not so. With the Board and a committee of the Board (Risk Management Committee) dedicated to looking at risk, it becomes easier for them, along with the management, to find ways by which such risks can be anticipated and mitigated.
  • Promotes the interest of all stakeholders – Each company is expected to promote the interest of all its stakeholders, and not only of the shareholders. With good Corporate Governance practices, there is an increased emphasis on this.
  • Helps in building brand value – Companies that are known to follow good practices, and are transparent, have a better brand value.
  • Helps create a governance premium – It has long been believed that companies with sound governance practice, enjoy a premium on their share price.

A company should not focus only on profit maximization. It takes a lot of effort to build the image of the company. Corporate Governance practices play an important part in such an exercise. Lack of good Corporate Governance practices has the potential of resulting in losses, which could tarnish the reputation of the company. Corporate Governance is crucial to avoid mis-management, and to enable a company to operate more efficiently, while promoting the interests of all its stakeholders.