A number of times my learners ask what is the corporate governance and why it is important? I then thought of writing about it.
Lets start from understanding the word ‘Corporate’ first. Generally Corporate means a company or organisation for making profit as it is all about profit making business. However, the term corporate means a large company or organisation which has a separate legal entity. The key elements of a corporate organisation is that it has limited liability which means that there is no individual held liable in case of any debt in company. In addition, corporate organisations do not have any individual ownership. Shareholders enjoy the ownership of a corporate organisation and participate in profits through dividends.
As it is mentioned above that corporate organisation have a different legal entity, the tax systems are also different from sole traders/practitioners, partnerships and limited partnerships. The process of becoming a corporate organisation is different and it is called ‘Incorporated’ and in abbreviation ‘Inc.’ You might have come across this abbreviation after a big company’s name.
Generally, a Director is a most important person in any company; however, Directors play a crucial role in a corporate organisation. Directors are accountable for shareholders and play bridging role between a company and the shareholders. In the United Kingdom Companies Act 2006, directors have statutory duties to run a company according to the Company’s constitution, Article of Association, Shareholders Agreement, Contracts and Company’s Act and Case Law.
Governance: a process
Governance is a process of governing an organisation whether it is a small or large, formal or informal, family or social. In any governing process, a few key elements are talked about, and they are leadership, management, decision making, participation and accountability. Leadership style can vary; however, a visionary and democratic leader can lead a company into progressive direction. Management of resources is one of the key elements of governance. Awareness of internal and external existing resources is important aspect of an efficient manager, and of course the skills of managing the available resources.
Transparent and participative decision making are crucial to governance of any company. Biased decision in personal favour can lead any organisation to a wrong direction. It is important to understand that who a leader or manager of a company is accountable to? This determines the decision making process. For example, the directors of a company are accountable to its shareholders, the decision making process will consider the benefits of a company first rather than benefits of the directors themselves.
As mentioned above, directors have statutory duties in the UK Companies Act 2006; Directors or Board of Directors need to fulfil the statutory duties in addition to comply with the legal documents of a company including the Companies Act 2006.
Corporate Governance is not defined by legislation or court; however, it is recommended by a number of committees based on the malpractices in various corporate organisations globally in the history. The Cadbury Committee (1992) says that the Corporate Governance is the system by which companies are directed and controlled. Corporate governance promotes effective control, business efficacy and accountability of the management of public listed companies for the benefits of stakeholders.