Page 1 of 46Governance is the ethical and effective management of an organisation by its executives and its governing board of directors or trustees. The corporate governance framework consists of rules, practices and processes to ensure accountability, fairness and transparency in an organisation’s relationship with all of its stakeholders (including financiers, customers, management, employees, government and the community).
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The StageGood governance is important for all organisations – from start-ups to large corporations – and most strive for excellence in their corporate governance structures. For instance, for smaller organisations, an external perspective from a trusted advisor can be invaluable to sustaining growth. Larger organisations sometimes find that merely running a profit is not enough for their shareholders; they also need to showcase good corporate citizenship by demonstrating environmental awareness, ethical behaviour and sound corporate governance practices.
As organisations grow, the governance role becomes more formal, and a board or an advisory committee may be established. The board, which is made up of directors, is the primary influencer of corporate governance. Directors are usually elected by shareholders or appointed by existing board members. They consist of insiders – major shareholders, founders or executives – or independent external members, who have good experience of managing other organisations. It is important to get a good balance of insiders and independent members to align power and shareholder interest.
Good governance has a profound impact on an organisation’s vision. It gives the organisation a ‘big picture’ overview of itself, which is distinct from its operations; this ensures strong accountability and operational oversight. In addition, good governance improves overall performance; identities and mitigates risks; and, finds a balance between short-term gain and long-term wealth.
Bad governance, on the other hand, casts the organisation in a bad light and can damage its reputation: reliability, integrity and obligations to shareholders have major implications on the financial health and long-term sustainability of an organisation. Negligence or complacency can lead to illegal activities. Scandals such as Enron and WorldCom are a stark reminder of what can go wrong when good governance is ignored or deliberately circumvented. These scandals not only bankrupted high-profile corporations, they also shook investor and public confidence at a global level.
To support good governance, many countries and regions are improving regulatory standards and accountability in organisations. It is critical for an organisation to choose its board and senior management wisely and to constantly evaluate their performance.
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