Every company may have policies, rules, or principles which dictate how it functions. These policies differ for each company. However, there are some areas within companies that operate similarly. Furthermore, some areas within a company are critical and need proper attention.
Some companies may view corporate governance as an unnecessary and costly process. However, a proper corporate governance system has many advantages. While corporate governance can benefit companies, its importance relies on how companies use it. As mentioned, corporate governance defines the rules, principles, and regulations that companies can use for control and direction. But for these to be effective, companies must use them properly.
#1. Minimize Agency Problems
Agency is when one entity acts as another entity’s agent. In companies, the management acts on behalf of the shareholders, which is a type of agency relationship. In some instances, the board of directors may not act in the shareholders’ best interests. Corporate governance tackles that problem by ensuring the objectives of both the shareholders and the management are in line.
#2. Protect Stakeholders
Apart from minimizing agency problems, corporate governance protects a company’s other stakeholders as well. These may include both internal and external stakeholders. Corporate governance defines the relationship that companies must have with their stakeholders. By doing so, it ascertains that each stakeholder’s rights are clear for companies to fulfill.
#3. Attract Investors
Corporate governance provides companies with a system for best practices. Through this, it ensures a company’s operations are efficient. As mentioned, it also protects shareholders’ and other stakeholders’ rights. When investors look for companies to invest in, they will always prefer companies with good corporate governance. This way, corporate governance can attract new investors.
#4. Promotes Accountability
A good corporate governance system ensures that companies follow a sound, transparent, and credible financial reporting system. This way, corporate governance helps promote accountability in a company. This accountability can also help in the above aspects, helping attract more investors or protect stakeholders.
#5. Mitigate Risks
Corporate governance also focuses on risk mitigation for companies. One of the areas that help with this is the audit committee or risk committee. These committees are responsible for managing and mitigating a company’s risks from various sources. By defining such committees, corporate governance ensures that the risks that companies face are minimal.
#6. Ensure Compliance
Companies are complex business structures. Therefore, they must comply with various rules and regulations. Corporate governance also applies to this area as it ensures companies meet these obligations. Compliance with rules and regulations is also a part of a company’s risk management process. By complying with rules and regulations, companies can avoid any unnecessary issues.
#7. Improve Efficiency
Corporate governance also helps companies maximize operational and organizational efficiency. Many companies have ineffective governance, which also translates into below-average performance. Corporate governance lays the foundation for how a company handles its operations, uses its resources, applies innovation, and implements corporate strategies. Through these, it also improves a company’s efficiency.
#8. Ensure Corporate Social Responsibility
One area that corporate governance introduces is corporate social responsibility. It usually applies to how companies interact with the environment in which they operate. Corporate social responsibility enables companies to consider the impact their operations have on the environment. Similarly, it promotes sustainability and social responsibility.