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The importance of good corporate governance

Why is it important for companies to have a good system of corporate governance in place?

Corporate governance is the corner stone of any good business. It encompasses the processes, practices and policies that a company relies on to make formal decisions and to manage the company. The Oxford University Press Business English Dictionary defines corporate governance as the “way in which directors and managers control a company and make decisions, especially decisions that have an important effect on the shareholders.” The concept of corporate governance is becoming increasingly important in companies.

At a quick glance, good corporate governance will ensure that the board of directors meet regularly, retain control over the business and are clear in the division of their responsibilities, as well as maintaining a system of risk management. The company secretary will be responsible for duties such as ensuring that board procedures are followed and that all pertinent rules and regulations are abided by. They must also ensure the company keeps Companies House up to date with any necessary filings. Corporate governance can encompass many more duties, although the system of governance will often vary from company to company.

Employing good corporate governance helps the company to regulate risk and reduce the opportunity for corruption. Often, scandals and fraud within a company become more likely where directors and senior management do not have to comply with a formal governance code. The board should meet regularly, retain control over the business and monitor those in management, to enable it to see how the company is functioning. Furthermore, a good corporate governance scheme will make clear to every officer of the company, his or her duties and will encourage them to keep these duties in mind when making decisions.

Implementing an excellent corporate governance system will also ensure that the company protects its members, officers and management. By ensuring that the company retains its records in the company books and maintains its statutory registers, they will be protected. Maintaining these records also means that officers of the company can be held accountable through documentation for their actions if necessary. It also means that a shareholder cannot unnecessarily contest the actions of the officers. They can be shown the company books, approved resolutions and board minutes if necessary and rest assured that the officers are acting within their authorities.

Whilst thoughts of restructuring or even selling the company may be in the far distance, good corporate governance is something to always bear in mind. In an attempt to refinance or even sell the company, investors and buyers will look for a well-organised business model. A company without up to date books and registers is unlikely to attract the finest buyers. Additionally, companies are becoming increasingly aware of their public image and the need to behave ethically. By employing good corporate governance, holding board meetings and making decisions as a board, these goals can be kept in mind. Where a company practices good corporate governance, with full disclosure, the public will feel that the company and brand can be trusted, ultimately helping the company reputation to grow.

Corporate governance has earned its place as an essential tool in the management and growth of companies, and will continue to grow in importance as time goes on. It is advisable that all companies take steps to increase the quality of their corporate governance systems in order to improve the functioning of the business.

Further reading

  • The UK Corporate Governance Code: Directors’ Duties
    What steps should you take to ensure compliance with The Code?
  • Corporate Governance and your business: Sense and Sensibility?
    How do you go about making important business decisions?

 

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