WHAT IS CORPORATE GOVERNANCE?
Corporate governance is the collection of processes, steps, mechanisms, and relationships of the working of an organization. These methods control and operate the organization. Every company functions according to an appropriate structure. So, without corporate governance, it can be hard to manage a company.
An organization consists of different participants at different levels. For instance, the board of directors, managers, creditors, shareholders, auditors, regulators, and stakeholders all are the members of a company. Corporate governance explains the distribution of rights and responsibilities to these members of an organization. Hence, the work becomes clear to everyone. Also, it increases efficiency and productivity.
Moreover, corporate governance is also necessary to avoid conflicts of interest. In a company, conflicts of interest happen between shareholders and upper management or among the shareholders. Since corporate governance consists of the rules and procedures, it helps to resolve the issue. Also, the decision-making process becomes effective.
STEPS TO IMPROVE CORPORATE GOVERNANCE
The importance of corporate governance is increasing day by day. Also, there are many perks. Therefore, companies must take appropriate steps to improve corporate governance.
Every company indeed has its way of working. So, there is no compulsion for a company to follow the steps of another company.
Here are a few steps to improve corporate governance that every company can adopt:
- Increase diversity
Diversity in a workplace is a smart step to improve corporate governance. Many studies show workplace diversity uplifts work performance.
However, many companies lack diversity. In 2018, the board of Fortune 100 companies included about seventy-one percent white men and twenty-nine percent of minorities and women. Among the Fortune 500 companies, the composition of women in the board of directors is only 16 percent.
A recent study by Credit-Suisse showed that greater gender diversity improves financial performance. Also, the study concluded that companies with one or more women in BOD were four times better in net income than the companies with no women.
Hence, increasing diversity is an effective way to improve corporate governance.
- Clarify the board’s roles
The board of members plays a significant role in making the organization’s strategies. Therefore, each member should analyze their tasks properly. They should determine what is appropriate. Also, the board should clarify the roles of the management. It builds understanding and avoids conflicts in the future.
- Ensure timely information
Senior managers should be able to flow the information at the correct time. The manager should ensure that the directors have the information they need. Also, the manager should separate the necessary information and irrelevant information before providing it to the boards.
Timely information is crucial for proper decision-making. Managers should know that it is BOD who selects a CEO. Therefore, for better decisions, the directors should have enough information.
- Prioritize risk management
Risks in an organization are inevitable. Risk is a broad term. It is not limited to compliance risks. For instance, a company goes through different kinds of dangers like financial risks, cybersecurity, global warming, and many more.
Therefore, the board should make an effective system for risk management. The risk oversight and management helps in effective decision-making. Also, it results in accurate cost management.
- Monitor organizational performance
Organizational performance evaluation is an essential step to improve corporate governance. It ensures that the performance can meet the owner’s expectations. Also, it makes sure that the decision-making is consistent with the strategies.
Monitoring organizational performance can be done by following ways:
- Identifying the organization’s key performance drivers
- Establishing appropriate measures
- Ensuring legal compliance
- Evaluate board performance
Evaluation of the performance of the boards improves corporate governance. They can conduct a self-evaluation process. The assessment should include the performance of individual directors as well.
The evaluation process helps to identify the strengths and weaknesses of the board. It can also give an idea of the necessary reforms. The evaluation should be broad and fair. Also, it should include all members and their issues. Similarly, there should be interactions between senior management and board members.
- Pursue opportunities for improvement
After evaluation, boards can be aware of their strengths and weaknesses. They can find out the sectors where they need to improve. It can be board processes, director skills, motivation, competencies, and relationships.