Corporate Governance

March 30, 2011

Corporate Governance

April 1, 2011

By Erica Brown

Have you ever wonder who is keeping large companies and organizations in check. Who is "Big Brother" to the entities that govern your life? The answer is Corporate Governance. In recent years, corporate governance has received increased attention because of high-profile scandals involving abuse of corporate power and, in some cases, alleged criminal activity by corporate officers. Well this will lead you to ask “What is corporate governance?” Corporate governance is a term that refers broadly to the rules, processes, or laws by which businesses are operated, regulated, and controlled. The term can refer to internal factors defined by the officers, stockholders or constitution of a corporation, as well as to external forces such as consumer groups, clients, and government regulations. (1)

Parties to corporate governance

The most influential parties involved in corporate governance include government agencies and authorities, stock exchanges, management(including the board of directors and its chair, the Chief Executive Officer or the equivalent, other executives and line management, shareholders and auditors). Other influential stakeholders may include lenders, suppliers, employees, creditors, customers and the community at large. (2)

Styles corporate governance

There is no one specific style of corporate governance that fits every company. According to TE Research, however, there are four broad corporate governance styles. These four different styles of governance are suited to companies in various stages of their development, from the early stage of a new business to the final stage of a mature cash cow. (3)

The Controlled Board

  • A controlled board is a board of directors that is under the control of the company’s management. This can be achieved either directly, by having the management serve on the board, or indirectly, by placing management allies on the board of directors. The controlled board is best suited to upstart companies in the early stages of development because the environment for a new company is highly dynamic. In order to quickly change to market demands, a company needs to have management that can make strategic decisions on the fly.

The Trusted Board

  • The trusted board is a style of corporate governance that puts mechanisms in place to increase shareholders’ trust of the board. These mechanisms can include annual elections to the board of directors or restrictions on the ability of the board to use a poison pill to ward off takeover bids. This style of corporate governance is best suited to companies in the financing stage of their development. This is due to the simple fact that investors are more willing to commit capital to companies whose boards they can trust to make decisions in shareholders’ best interests.

The Sovereign Board

  • The sovereign board is a style of corporate governance in which the board is free from the influence of either the management or shareholders. An independent board of directors is able to make decisions in the long-term best interest of the company. Companies with independent boards of directors have, on average, a higher return on equity and profit margin. This increase in profitability makes this style of governance best suited to companies in the production phase of development, where they will begin to turn profits.

The Influenced Board

  • The influenced board is a moderate style of governance in which the board of directors is influenced (but not controlled) by management but in which there is little influence from shareholders. Companies with an influenced board yield the highest dividends to shareholders because shareholders, while well-intentioned, do not always have the long-term interest of the firm in mind. The influenced board is the style of corporate governance most important aspect of the business is continuing to yield high dividends for as long as possible.

Conclusion

Corporate Governance is rules, processes, or laws by which businesses are operated, regulated, and controlled. This is in place to safeguard the stockholders and stakeholders within companies. The key players involved in creating the corporate governance include government agencies and authorities, stock exchanges, management, lenders, suppliers, employees, creditors, customers and the community at large. There is not one style that fits all companies. A company can decide on their style by
the setup of their corporation. I’m personally glad corporate governances are in place to cover the companies that impact my life.

References

(1) Tech Target- Corporate Compliance -Definition http://searchfinancialsecurity.techtarget.com/definition/corporate-governance

(2) Wikipedia- Parties to Corporate Compliance

http://en.wikipedia.org/wiki/Corporate_governance

(3) Ehow- Styles of Corporate Governance

http://www.ehow.com/list_6719787_styles-corporate-governance.html

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One Response to “Corporate Governance”

  1. During my research, I found corporate governance to be a vital factor for companies planning to adopt cloud computing. Proper governance is necessary for both the service providers and the customers to ensure a successful. Great work.

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