A board of directors in corporate governance holds great power within an organization. They set the broader goals for the organization, hire senior-level management, and manage mergers. Every decision that the board of directors makes can be felt from the top to the bottom of the corporate hierarchy. Therefore, the way in which a board of directors chooses to govern its organization plays a critical role in how well the organization reaches its objectives.
So, what is the importance of corporate governance? The benefits of good corporate governance are plentiful. It inspires good behavior via positive reinforcement. Strong corporate governance allows for those at the top to make quick decisions to better improve the company. It also breeds good rapport, which can manifest itself in greater business opportunities that would not otherwise be available to a company with poor corporate governance.
An organization that suffers from corporate governance issues may find it more difficult to secure investment capital, or can only do so with higher premiums and interest rates. In the same manner that a bank reviews an individual’s financial history and responsibility to see if they are a suitable candidate for a mortgage loan, an organization will signal to potential investors if they are a reliable company that can meet its own goals effectively and efficiently.
Latest Corporate Governance Issues
Corporate governance issues and challenges are bound to arise. Within any organization, within any group of people, heads will clash on what is thought to be best for the goals they are trying to meet. This existed before the pandemic, and in some ways, the pandemic has shed light on the latest corporate governance issues.
One of the biggest governance issues examples is how the board of directors’ member salaries are perceived. According to a study at Harvard Business School, if a CEO’s salary is perceived as being overinflated by the employees, the overall performance of the organization will take a hit. This is not a stretch to imagine. If any employee feels his contribution is ignored, they are not going to be the mental space to perform at their optimal level.
Another big challenge is accountability issues in corporate governance. Beyond an organization’s direct financial objectives, organizations are expected to use their mass profit to better serve their employees and their communities. However, this does not always take place. Sometimes, decisions made by the board of directors have a negative impact on the employees, without impacting the board of directions. While conversation rises about social inequality, and equity, along with discussions of the great resignation, it is important for corporate directors to take part in their employee’s conversations to better serve them.
Accountability can also manifest itself in how an organization is perceived as engaging with social issues and environmental sustainability. Stakeholders will often be interested in whether or not an organization has a commitment to current events and movements today. Such as, If the organization has the potential to have an adversarial effect on the environment, stakeholders may also want to see how these risks are mitigated and how else the organization is committed to a greener world.
Role Of Board Of Directors In Corporate Governance Instructions:
What is the role of the board of directors in corporate governance? What is the role of the board of directors in strategic management? What is expected of them? The role and responsibilities of the board of directors can vary from organization to organization, whether the institution is for-profit or nonprofit, but there are a few primary duties that most board of directors are responsible for.
There are three major duties of directors in corporate governance:
- Duty of Care
Duty of care means showing up for the meetings and truly being present as a board member. They should be in consistent contact with the executive director and other relevant personnel. They should also be passionate about the mission, and thus follow through with any assignments delegated to them.
- Duty of Loyalty
This duty refers to the expectation that a board member is acting on behalf of the organization. This means the board member is setting aside their personal and professional self-interest, and acting solely in the best interest of the organization.
- Duty of Obedience
The duty of obedience refers to the commitment that each board member makes to follow the rules and guidelines of the organization that they govern. While a board of directors should strive to meet company goals, they should not cut corners or consider themselves above the organization’s policies as they work to achieve their aims.
There are plenty of lists online showcasing the 5 or 10 basic responsibilities of board members, but these are a few of the most important.
- Achieve the organization’s mission
- Manage legal and financial responsibilities
- Attend board meetings
- Hire and establish the salary for the CEO or Executive director
Good Corporate Governance
So, what is good corporate governance? There are many ways to learn how to achieve good corporate governance. The last section touched upon some good corporate governance principles, but the three “duties” refer more to the ethos and moral code of the board members rather than specific examples. How does one recognize good corporate governance practices? Here are some good corporate governance examples to bear in mind. These examples are especially applicable to nonprofit governance.
- Check-in with board members on what they need
It is important to keep touching base with your board of directors. The best way to help them achieve the most for the organization is to equip them with what they need. However, you may not be certain what they need, and board members may be too shy or too busy to ask directly. Therefore, always keep asking the board what is wanted and needed.
- Ensure that all job descriptions are updated regularly
There are many benefits to keeping your job descriptions up to date. In any role, it always serves the individual to understand exactly what is expected of them in their capacity as a board member. Organizations evolve, different board members bring different strengths, and as such job descriptions will inevitably change to suit the needs of the organization at any given time. So job descriptions need to reflect those changes.
- Have a clear, strong succession plan
While having a strong and successful board member on your team is extremely helpful and important, it is also important to not lean too heavily on one board member. If the stellar board member’s term comes to an end, it may be difficult to keep everything running smoothly. It’s important to ensure good governance practices continue no matter the specific members of the board. This is why many organizations use succession committees to ensure that there are no major disruptions.
- Have a board assessment plan
Just as it is important to ask the board of directors what they want and need, it is also considered a best practice to assess the overall functionality of a board, identify where the board’s strengths lie and which areas could benefit from some improvement.
Corporate Governance Principles
The overall success of corporate governance is crucial to corporations, A strong corporate governance framework is reliant on best practices and strategic planning. Some corporate governance principles were covered in the previous section, but here are some more stellar corporate governance examples. Below is a list of the 8 principles of corporate governance, according to the National Committee on Corporate Governance.
- Governance Structure
- The Structure of the Board
- Director’s Appointment Procedures
- Director’s Duties
- Risk Governance and Internal Control
- Reporting with Integrity
- Relations with Shareholders
These principles cover a variety of aspects within a board of directors that fosters stronger and better corporate governance. It is important to have clear order and direction so that everyone knows what to do, and how to do it. As an organization gets bigger the capital they handle grows larger and, the legal and financial consequences of an organization will be far more severe. Therefore, investing in strong corporate governance and good corporate governance principles is essential. From good corporate governance, things should only be smooth sailing as the benevolent governance trickers down the organization’s hierarchy.
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