Corporate governance is the system by which corporations are directed and controlled in the completion of their typical activities. The structure of corporate governance specifically refers to the hierarchy by which responsibilities are assigned and allocated amongst the participants in the corporation. Participants in the corporation include:
- Board of Directors
- Other important stakeholders
It is through the allocation of these responsibilities by hierarchy that corporate governance completes its goal of allowing the corporation to pursue their profit seeking objectives (in compliance with market and economic environments). In addition, corporate governance determines the regulations and procedures for making decisions that relate to the company.
The principles of corporate governance are loosely defined by several documents: The Cadbury Report (1992), the Principles of Corporate Governance and the Sarbanes-Oxley Act. They include:
- Equitable treatment of shareholders and protecting their rights (allows effective communication between the shareholders and the decision makers of the company)
- Interests of other stakeholders should be considered, including employees, creditors, suppliers and customers
- The roles and responsibilities of the board of directors (they must have the sufficient skills and commitment to provide appropriate service to the company)
- Integrity and ethical behaviour (ensuring that all of the directors and other decision makers choose responsible decision making , as well as applying a code of conduct)
- Disclosure and transparency (allow the public to see the roles and responsibilities allocated to management and the board)
The ethical side of corporate governance refers to the direction and completion of a company's typical activities in an integrous manner. Ethical governance ensures that good decisions are being made at the executive and board level, in order to protect the interests of the stakeholders. In addition, ethical decision making prevents the company from having issues with governing bodies that regulate, supervise and audit the company. Essentially, making ethical decisions at their inception can help the organization in the long run.