It’s the biggest challenge, to keep a corporation running transparently, justly, towards the goals and on the correct path. Within this stormy-changing world we’re living today it’s hard to keep a corporation on the right path without hitting an iceberg. It’s mostly why the idea of Corporation Governance stood its ground especially after the pandemic, for giving stakeholders their rights fairly, on time and with no bias, whether the corporation is awarding massive profits or coming into a fall. In brief we can explore what is corporate governance, with some of the corporate governance framework examples.
What is Corporate Governance?
Corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders, such as shareholders, senior management executives, customers, employees, suppliers, financiers, the government, and the community.
What are the Corporate Governance principles?
1 Risk Management.
Generally, there’s no business without risks, furthermore, an economic theory proposed by professor and economist F.B. Hawley states that profit is a reward for risk taken in business.
But this is about treating the risks, and reducing the risks. An example, if you’re trying to open a new market for your products in a flaming area, you can plan for the alternatives that can help your business grow, whether by choosing another area that can be a better potential for your business and less risky, or by choosing the same area but with a specific business technique to avoid the loss. These are mostly the ways of how to risk manage:
- Treating the risk
- Avoid the risk
- Transfer the risk to a third party
- Reduce the risk
2. Fairness
Unfairness causes a feel of threat, which evolves the need for taking strong actions or verbal reactions. Whether it’s within the corporation or out, the fairness of the organization supports trust among customers, shareholders, employees and managing directors.
A fair action towards the outer parties like government and relative corporations leads to a state of stability, and opens the doors for better potentials.
3. Transparency
Which is not only about sharing information, the information should be objective and understandable for those you share it with.
When the stakeholders see the outputs clearly, it supports their efforts. Employees and directive managers get more responsible for those outputs. Shareholders trust the process of managing their capitals. Customers release they’re having a reference to come back to for counting, and they can trust the products and services they’re exposing to. Government can have a contact that talks the same language and understands the legal requirements. Everyone wins.
4. Accounting
Ensuring that an individual is evaluated on their performance against the criteria and aligned with business objectives.
It’s not about investigation, it’s more about measuring the team success and progress by getting feedback, and knowing what’s working and what’s not working; to ensure a better work atmosphere, fair raises and promotions, and better performance.
5. Responsibility.
The board is responsible for the oversight of corporate matters and management activities. It must be aware of and support the successful, ongoing performance of the company. Part of its responsibility is to recruit and hire a CEO. It must act in the best interests of a company and its investors.
These are the four fundamental principles of corporate governance.
Corporate governance framework examples
Volkswagen AG
Bad corporate governance can cast doubt on a company's reliability, integrity, or obligation to shareholders. All can have implications for the firm's financial health. Tolerance or support of illegal activities can create scandals like the one that rocked Volkswagen AG starting in September 2015.
The details of "Dieselgate" (as the affair came to be known) revealed that for years, the automaker had deliberately and systematically rigged engine emission equipment in its cars in order to manipulate pollution test results in America and Europe.
Volkswagen saw its stock shed nearly half of its value in the days following the start of the scandal. Its global sales in the first full month following the news fell 4.5%.
VW's board structure facilitated the emissions rigging and was a reason it wasn't caught earlier. In contrast to a one-tier board system that is common in most companies, VW has a two-tier board system, which consists of a management board and a supervisory board.
The supervisory board was meant to monitor management and approve corporate decisions. However, it lacked the independence and authority to carry out these roles appropriately.
The supervisory board included a large portion of shareholders. Ninety percent of shareholder voting rights were controlled by members of the board. There was no real independent supervisor. As a result, shareholders were in control and negated the purpose of the supervisory board, which was to oversee management and employees, and how they operated. This allowed the rigged emissions to occur.
Enron
Public and government concern about corporate governance tends to wax and wane. Often, however, highly publicized revelations of corporate malfeasance revive interest in the subject.
For example, corporate governance became a pressing issue in the United States at the turn of the 21st century, after fraudulent practices bankrupted high-profile companies such as Enron and WorldCom.
The problem with Enron was that its board of directors waived many rules related to conflicts of interest by allowing the chief financial officer (CFO), Andrew Fastow, to create independent, private partnerships to do business with Enron.
These private partnerships were used to hide Enron's debts and liabilities. If they'd been accounted for properly, they would have reduced the company's profits significantly.
Enron's lack of corporate governance allowed the creation of the entities that hid the losses. The company also employed dishonest people, from Fastow down to its traders, who made illegal moves in the markets.
The Enron scandal and others in the same time period resulted in the 2002 passage of the Sarbanes-Oxley Act. It imposed more stringent recordkeeping requirements on companies, along with stiff criminal penalties for violating them and other securities laws. The aim was to restore public confidence in public companies and how they operate.
Conclusion:
Corporate governance examples show us the corporate governance importance, and the growing demand for it in ambitious companies seeking long-term relationships with the market and everything associated with this goal.
Sources:
https://www.investopedia.com/terms/c/corporategovernance.asp http://pearlinitiative.org/corporate-fundamentals https://smallbusiness.chron.com/relationship-between-profit-risk-36050.html https://www.investopedia.com/terms/w/worldcom.asp https://www.investopedia.com/terms/e/enron.asp https://www.investopedia.com/terms/s/sarbanesoxleyact.asp