The Importance of Effective Corporate Governance

The success of a company is contingent on policies that satisfy the needs and expectations of stakeholders, investors, and managers. Corporate governance sets the stage to determine how companies will set and implement these policies. Effective governance is more essential today than ever before in a world of ever-changing demands and expectations.

Effective corporate governance requires a thorough understanding of the company’s culture, values and mission. It is also necessary to have systems in place that enable a company to recognize and limit risk before they happen. This includes establishing an ethical code, establishing effective reporting channels, and regulating conflict of interests.

The board of directors must ensure transparency, openness, and accountability to all internal and external stakeholders. The board’s responsibility is to ensure that the company’s resources are used in a manner which will yield long-term value for shareholders. This is achieved through an assessment of risks as well as establishing and implementing risk management strategies and monitoring performance against goals.

Boards should consider appointing an independent lead director (also called the presiding Director) to ensure that they are leading their boards on their own. This is especially important when the company’s chair and CEO are merged. Boards should also include nonmanagement members in CEO evaluations where appropriate, and evaluate the overall performance of the senior management.

The board should engage regularly with shareholders and other stakeholders on issues that impact the long-term value of the company even if they’re not necessarily in a position to directly influence the corporate strategy or decision-making process. It should encourage shareholders that would like to influence corporate decision-making to reveal their identity and ownership to the public, if federal securities law permits it.


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