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Necessity of Corporate Governance in Business

Md. Manjur Hossain/Photo: Arif Mahmud Riad

Collection of mechanisms, processes and relations by which corporations are controlled and operated is literary corporate governance. It is, in an elaborative way, a set of rules through which an organization is directed and controlled that incorporates to define the relationship between stakeholders, management and the board of directors of a company and influence company’s operation.

Corporate governance consists of the procedures through which organizations’ objectives are set and pursued in the context of the social, regulatory and market environment.

Principles of Good Corporate Governance

When a firm has its structured rules to mitigate risk, assure compliance, have smoother running operations, definitely that firm possesses better governance and maintains the basic principles of it. Since governance refers specifically to the set of rules, controls, policies, and resolutions put in place to dictate corporate behavior, ‘shareholder recognition’ is the key fact as one of the basic principles for maintaining a company’s stock price. Furthermore, small shareholders with little impact on the stock price are swept aside to pave the way for the interests of majority shareholders and the executive board. Good corporate governance seeks to ensure that a shareholder gets a voice at general meetings and are allowed to participate.

Secondly, interests of stakeholder are crucial requisition for maintaining corporate governance. Particularly, taking times to address non-shareholder stakeholders can help a company establish a positive relationship with the community and the press. Besides, board responsibilities must be clearly outlined to majority shareholders. All board members ought to be on the same folio and share a similar vision for the future of the company.

Thirdly, ‘ethical behavior’ or ‘integrity’ is the foremost figure for this very issue. Violations for the sake of higher profits can cause vast civil and legal problems down the road. Underpaying and abusing outsourced employees or skirting around negligent environmental regulations can come back and bite the company hard if ignored. So it is a code of conduct regarding ethical decisions that need to be established for all members of the board. The code focuses on the application of the Principles and reporting on outcomes achieved. For the Code’s Provisions, companies should disclose how they have complied with these or provide an explanation appropriate to their individual circumstances. Carefully considered corporate governance policies and practices along with high levels of transparency can lead to improved levels of trust.

In fine, good corporate governance is completed when ‘business transparency’ is perfectly included there because this promotes shareholder trust. Financial proceedings or earning reports and forward guidance should all be clearly stated without overstatement or creative accounting. Fake records can take the company away from being a successful corporate leader.

Benefit of Corporate Governance  

Bad things happen when corporate governance is ignored and it can throw a disbelief or suspicion on a company’s reliability, integrity or obligation to shareholders which have implications on the firm’s financial health. So a healthy corporate culture needs to be created in the firm for casting a positive impact on the business. If a good culture, perfect clarity, upholding reputation and economic sustainability are there in the company, a good output will come through the company.

  • Culture: Good governance over and over again like an input in every sphere of levels creates as an output a culture of excellence. Those that ‘swim against the tide’ stand out against the ‘blueprint’ or ‘DNA’ of the organization. Behavior of leadership defines the behavior of the workforce, and it gets far easier in such circumstances to fit in with the defined culture.
  • Clarity: Every organization has issues, problems and non-conformities and so an organization with good governance can isolate these, reducing the impact on the market and very often containing the risk internally.
  • Reputation: Good governance delivers good products, which, in turn, lead to good business performance. The reputation of a company can make or break it in the market.
  • Financial sustainability: Better governance trims down the threat of safety, legal, performance and warranty concerns that can severely impact an organization and its stakeholders or interested parties. These interested parties may be customers, directors, staff, suppliers, shareholders and even whole communities.

A company can have different models of governance or different strategies but principles are the same. It is actually a law and sound approaches for the business. It is of dominant value to a company and is almost as imperative as its chief business plan. It can prevent, when executed effectively, scandalous corporate issues, fraud and the civil and criminal liability of the company. It also develops a company’s image in the public eye as a self-policing company that is accountable and worthy of shareholder and debt holder capital. A corporation without a system of corporate governance is often regarded as a body without a soul or conscience. So keeping a company honest and trouble free, there is no alternative of having good corporate governance.

The writer, Md. Manjur Hossain, is the Company Secretary of NRB Global Bank Limited.  

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