- In a corporate business structure, management (i.e. the company’s executive leadership) and ownership (i.e. stockholders) are separated.
- It is not uncommon for a corporation to face decisions where the interests of management may be different from that of owners and other stakeholders (employees, business partners, and creditors).
- Corporate governance is the policy structure applied by the firm’s stakeholders to reduce the risks associated with inborn conflicts of interest.
- Corporate governance seeks to minimize the conflicts of interest between a company’s managers and its shareholders and facilitate the optimal use of corporate assets to maximize investor and stakeholder value.
Traits of an Effective Corporate Governance Structure
At a base level, an effective corporate governance structure will:
- Unambiguously outline the responsibilities of the board of directors and company managers for maintaining stakeholder relationships;
- Define the accountability for these responsibilities;
- State the rights of stockowners and stakeholders;
- Ensure fair treatment for interactions between the board of directors, the company’s management, and stockowners.
- Ensure accuracy and transparency for the company’s public financial reporting and business operations.