07/07/2023

What is Corporate Governance?

Business advisory Europe

TGS Romania

Corporate governance is a set of principles that govern the management and control system within the company, the report between the management, shareholders and other interested persons. In detail, corporate governance refers to the way in which the rights and responsibilities are divided between the categories of participants to the company activity, such as administrators, directors, shareholders and other interest groups, specifying also how decisions regarding the company activity are made, how strategic objectives are defined, which are the means of reaching those and how economic performance are monitored.

Impact and purpose of corporate governance

Good governance of an organization has a direct impact on its existence and lays the foundation for fulfilling the organization’s purpose in an ethical, effective and accountable manner in line with stakeholder expectations. Translated into internal regulatory documents, corporate governance principles determine the efficiency and effectiveness of the control mechanisms adopted to protect and harmonize the interests of all stakeholders – shareholders, directors, executives, managers of the various company structures, employees and their representative organizations, customers and business partners, suppliers, central and local authorities, regulators and capital market operators, e.g.

Good governance includes actions on the part of the governance body (e.g., through the development of governance policies) to guide organizations to provide transparent, clear and concise reporting and access to information to stakeholders. This enables authorities and society, through their duly appointed representatives, to assess the positive and negative impact of the organization on the natural, social and economic environment. Furthermore, good governance enables stakeholders to hold organizations to account, benchmark their performance, highlight poor practices and monitor the impact of the organization on society, the economy and the natural environment.

Benefits of corporate governance

Organisations with strong corporate governance may be more successful than those without it. Effective corporate governance offers many benefits to organisations. It plays a significant role in ensuring that any corporation has strong internal controls, which increases the consistency of the decisions that key figures within that organisation make and improve the company’s external brand. Corporate governance offers important benefits, including increased transparency, accountability and strategic planning, which are essential for most organisations operating in competitive markets.

Governance bodies should ensure that sustainable development and sustainability are fundamental considerations when carrying out their governance work and applying governance principles.

The absence of rules can lead a company to chaos and any investment can represent a game of chance and where predictability no longer exists.
The list of benefits can be long indeed, nevertheless the following are considered, by most organisations, as the most important worth mentioning:

Risk mitigation
By identifying and reducing risks, corporate governance helps to mitigate risk by implementing policies and procedures that ensure that key people within the organisation identify and evaluate risks as soon as they arise.

Improvement of decision-making
Good corporate governance improves the decision-making process by defining clear responsibilities, improving access to information and enabling clear communication between stakeholders at all levels.

Enabler for better strategic planning
Strong corporate governance enables organisations to carry out effective strategic planning by faster access to information, clearly defined roles and responsibilities and good communication between team members.

Booster for compliance and corporate reputation
Strong corporate governance requires companies to comply with relevant laws and regulations, which positively affects the company’s risk management profile.

Enabler of capital flow
Strong corporate governance also impacts capital flow as increasing confidence in the company from investors, banks and other lenders makes it easy to access capital when the organisation needs it.

Is corporate governance a necessity?

In the current context, the answer is affirmative. Accelerating globalization has led to the need for more and more organizations to adopt corporate governance principles.

New governance standards increasingly emphasize the responsibility of leaders to adopt solid governance practices. On 5 January 2023 the EU Corporate Sustainability Reporting Directive (CSRD) entered into force. The new rules will ensure that investors and other stakeholders have access to the information they need to assess investment risks arising from climate change and other sustainability issues. They will also create a culture of transparency about the impact of companies on people and the environment. The connection with the financial and non-financial statements is obvious and can represent a real progress in the transparency of the companies’ activity.

The purpose of governance and the duty of the governing body is to create the conditions and support the organization to operate over time in such a way that it fulfils its organizational purpose and generates value as it has set out to do. It can be said that an organization contribute to sustainable development and is sustainable itself when it generates value in a way that meets the needs of the present and future. By aligning an organization’s governance with sustainable development, governance bodies support the creation of conditions for the organization’s future success.

In conclusion, governance bodies should ensure that sustainable development and sustainability are fundamental considerations when carrying out their governance work and applying governance principles.