Corporate Governance is a set of rules, practices, and processes followed by the management of the company to direct and controls all the operations and segments undertaken by an organization. The governance must be design to balance out the interests of all related parties or stakeholders such as shareholders, customers, employees, suppliers, government, community, and management. Thus, it provides a framework for the whole organization to achieve its aims and goals. Every organization needs some set of rules and norms to be followed to direct the efforts to its goals through high control measures.
Corporate Governance and Board of Directors
The board of directors is the most significant stakeholder of the company that directly affects its operations. Shareholders of the company appoint a board of directors to represent them. The Board is responsible for making decisions, whether it may be related to corporate officer appointments, executive compensation and dividend policy of the company. Board could be appointed from inside members of the company or from independent members.
• Insider members include shareholders, executives of the company and founders.
• Independent directors have the experience of directing large companies, though appointed to guide perfectly.
The relationship between governance structure and firm performance
The organizational agents or members focus on the role of CEO (Chief Executive Officer) and the Board of directors. Though, CEO's follow dysfunctional governance structure and other members follow functional structure. Thus, these inappropriate governance structures will result in decreased performance of the firm. The relationship between governance structure and performance of the firm is U shaped. In starting there is need to follow the proper structure and norms of the company to derive maximum results and high performance. After some time of execution, a firm should provide some flexibility and chance of innovation to the company, which will lower down the performance of the company for a limited time span but the innovation and improvements will be made in this phase. After the implementation and acquisition of innovative model, the norms and governance will be strict again to achieve a higher level of performance again.
The performance of the firm is valued by calculating the return on capital invested and operating income before depreciation to evaluate the returns on the capital invested. The management of the company has to design the evaluation criteria to determine whether the outcome is appropriate according to the efforts indulged.
The corporate governance must have following features:
• The performance of the company must integrate the performance of the board of directors.
• The relationship between the board and executive management must be integrated.
• The performance of the board of director is also required to be evaluated for overall success.
• The company must include risk management in the corporate governance policy of the company. The policies and norms must be communicated to all members of the company so that they can implement such plans appropriately.
• The norms of corporate governance must also state the measures to evaluate it.
• The results of corporate governance must be communicated to shareholders.
• The financial reporting of the company will depict the true position of the company and the impact of corporate governance on the performance of the company.
• Importance of corporate governance is as follows:
• Corporate governance encourages positive traits in the company.
• All the members become accountable to the management of the company.
• The measures followed by the company will build the trust of customers on the company.
• The norms and rules in corporate governance show the culture of the company.
• It provides major consideration on the security of the company, transparency, accountability, and trust is significant but security requires special attention.