Corporate Governance

Business Directory defines Corporate Governance as "The framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company's relationship with all its stakeholders (financiers, customers, management, employees, government, and the community)."[1]

Corporate governance is most often viewed as both the structure and the relationships which determine corporate direction and performance. The board of directors is typically central to corporate governance. Its relationship to the other primary participants, typically shareholders and management, is critical. Additional participants include employees, customers, suppliers, and creditors. The corporate governance framework also depends on the legal, regulatory, institutional and ethical environment of the community. Whereas the 20th century might be viewed as the age of management, the early 21st century is predicted to be more focused on governance. Both terms address control of corporations but governance has always required an examination of underlying purpose and legitimacy. – – James McRitchie, Corporate Governance Publisher 8/1999[2]

Principles of Corporate Governance[3]
Contemporary discussions of corporate governance tend to refer to principles raised in three documents released since 1990: The Cadbury Report (UK, 1992), the Principles of Corporate Governance (OECD, 1999, 2004 and 2015), the Sarbanes-Oxley Act of 2002 (US, 2002). The Cadbury and Organisation for Economic Co-operation and Development (OECD) reports present general principles around which businesses are expected to operate to assure proper governance. The Sarbanes-Oxley Act, informally referred to as Sarbox or Sox, is an attempt by the federal government in the United States to legislate several of the principles recommended in the Cadbury and OECD reports.

  • Rights and equitable treatment of shareholders: Organizations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by openly and effectively communicating information and by encouraging shareholders to participate in general meetings.
  • Interests of other stakeholders: Organizations should recognize that they have legal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers.
  • Role and responsibilities of the board: The board needs sufficient relevant skills and understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment.
  • Integrity and ethical behavior: Integrity should be a fundamental requirement in choosing corporate officers and board members. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making.
  • Disclosure and transparency: Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.

Benefits of Corporate Governance[4]

  • Good corporate governance ensures corporate success and economic growth.
  • Strong corporate governance maintains investors’ confidence, as a result of which, company can raise capital efficiently and effectively.
  • It lowers the capital cost.
  • There is a positive impact on the share price.
  • It provides proper inducement to the owners as well as managers to achieve objectives that are in interests of the shareholders and the organization.
  • Good corporate governance also minimizes wastages, corruption, risks and mismanagement.
  • It helps in brand formation and development.
  • It ensures organization in managed in a manner that fits the best interests of all.

Corporate Governance plays a pivotal role in shaping an organization's strategic direction. The governance principles within the AFI Strategy Framework can help ensure that strategic decisions align with stakeholders' interests and the organization's long-term vision.

See Also

Corporate governance refers to the rules, practices, and processes by which a company is directed and controlled. It essentially involves balancing the interests of a company's many stakeholders, such as shareholders, management, customers, suppliers, financiers, government, and the community. Effective corporate governance provides a framework for attaining a company's objectives; it encompasses practically every management sphere, from action plans and internal controls to performance measurement and corporate disclosure.

  • Board of Directors: A group of individuals elected by shareholders to oversee a company's activities and direction. The board makes significant policy, strategy, governance practices, and performance evaluation decisions.
  • Shareholders: The owners of a company holding its shares. Shareholders invest capital in the business and, in return, expect governance practices that protect their interests and provide a return on investment.
  • Stakeholders: Any group or individual who can affect or is affected by achieving a company's objectives. Beyond shareholders, stakeholders include employees, customers, suppliers, and the wider community.
  • Fiduciary Responsibility: Legal obligations of one party to act in the best interest of another. The board of directors has fiduciary duties to the shareholders, including duties of care, loyalty, and good faith.
  • Transparency and Disclosure: Key principles of corporate governance that involve providing timely and accurate information about the company's operations and financial status to stakeholders.
  • Internal Controls: Processes and procedures implemented to ensure the integrity of financial and accounting information, promote accountability, and prevent fraud.
  • Business Ethics and Compliance: Corporate governance also encompasses the company's ethical conduct and compliance with legal and regulatory requirements.
  • Risk Management involves identifying, assessing, and controlling threats to an organization's capital and earnings. Effective governance includes establishing frameworks for managing risk.
  • Corporate Social Responsibility (CSR): A self-regulating business model that helps a company be socially accountable—to itself, its stakeholders, and the public. CSR practices are often integrated into corporate governance to address the company's impact on the environment and social welfare.
  • Audit Committee: A key committee of the board of directors, typically composed of independent directors, responsible for overseeing financial reporting and disclosure, ensuring the integrity of financial statements, and overseeing the company's internal controls and audit processes.

Effective corporate governance ensures a company's accountability and transparency to its stakeholders, helps safeguard against mismanagement, and can enhance a company's performance and shareholder value. It is a broad and multifaceted concept that requires commitment from the top down to implement and maintain practices that align with the company's mission and the expectations of its stakeholders.


  1. Definition of Corporate Governance Business Dictionary
  2. Corporate Governance Defined CorpGov.Net
  3. Principles of Corporate Governance Wikipedia
  4. What are the Benefits of Corporate Governance? Management Study Guide