Importance Of Corporate Governance

Jan 7, 2021

Importance of Corporate Governance

Yes, this applies to you even if you are not a corporation and all the other owners are your relatives.

Corporate governance is the structure that allows an organization or company to achieve its goals while ensuring compliance of laws and regulations as well as controlling risks. Solid and healthy corporate governance ensures that the relationship between management, the board of directors and all stakeholders are clearly defined and established. These rules ultimately influence the direction of the company and how well it will succeed. 

Understanding Corporate Governance

Ultimately, the most basic fundamental goal of corporate governance is to ensure that the business goals and strategy of the company are handled correctly by the executives and decision makers of the company. The state of Louisiana has laws that address the formation of a company; however, corporate governance affects not only the executive operational aspects of a business, but also addresses the social aspects of a business as well. Ultimately, corporate governance is the system by which the business or organization is managed and directed and provides the objective framework to evaluate and document how the objectives of the business are being achieved overall. 

The top management and Board of Directors of a business should have an established set of rules that describes exactly how the company will act and make key decisions and that the best interest of all the shareholders and stakeholders will be paramount at all times. Some of the areas that encompass corporate governance can result in systems that relate to the following: 

  • Systems to ensure full transparency and disclosure to all stakeholders and shareholders regarding any financial or important issues impacting the company
  • Rules for the company to accomplish the financial, business, social, legal, contractual, and policy goals of the company 
  • Guidelines for the behavior (ethical and integrity) of all management and decision makers for the company to ensure the best interests of the company at all times

Benefits of Strong Corporate Governance 

When a company has a strong and clear corporate governance framework established, the following benefits often occur: 

  • Transparency of decision making by and for all stakeholders
  • A written record of key decisions made for the company in order to reduce or eliminate uncertainty and confusion
  • Identification of errors and challenges so that they may be quickly addressed
  • Establishment of a company culture that promotes consistency, transparency and professionalism

When Companies Ignore Corporate Governance 

Many companies (especially those that are closely-held and family-owned businesses) tend to stray from the established boundaries and rules established by the original corporate governance documents either because they feel they do not have the time to follow those rules or the rules no longer fit the business and its current composition. When companies ignore their own documents and policies regarding corporate governance, it can impact a business in several ways including the following: 

  • Creates an environment of secrecy and distrust that can lead to disagreements among stakeholders that can jeopardize the company’s brand and financial position
  • Leaves voids in the records and written “memory” of the company creating uncertainty and risk
  • Eliminates the appearance of a professional, strong, and well-managed organization
  • Removes a strong culture of professionalism

Steps Towards Strong Corporate Governance

Understanding the importance of corporate governance is important, however, the next step is implementing strong corporate governance into your business. In many cases, a Board of Directors (Board) is important to accomplish your business and corporate goals. Therefore, consider the following when implementing corporate governance in your company: 

  • Take the time to review the Board applicants carefully and create a diverse group of directors to provide unique perspectives
  • Make sure there are enough directors to guide the company in the event that certain directors have conflicts of interest or there is a tie vote
  • Provide written expectations and guidelines to Board members so that they fully understand their roles and responsibilities
  • Prepare written records of all Board decisions and votes
  • Disclose all significant transactions or other business interests that impact the shareholders, stakeholders, Board, or other impacted parties
  • Review the Board regularly as part of your corporate governance procedures
  • Make sure that the connections between management and the Board are regularly monitored and evaluated according to established criteria
  • Consider internal and external audits to ensure that your corporate governance truly benefits your company and adheres to your financial and ethical business goals
  • Ensure that the Board provides thorough information to all stakeholders at all times in order to establish quality communication and trust

If you are unsure if your business has established or is following appropriate systems of corporate governance, consider visiting with our legal team to ensure your corporate documents reflect and protect the business goals of your company.

Why Corporate Governance Should Be a Priority for All Businesses 

If you own a business of any kind, either small or large, you should consider establishing clear rules and policies of corporate governance. Without these processes in place, any communication regarding the most essential aspects of your business including finances, job descriptions, roles within the company, fiduciary duties, business interests, prioritizations, and more, can become confusing or inconsistent. The truth is that every company, no matter how small, needs to have the ability to measure whether or not they are reaching their goals – both financial and otherwise- and the institutional memory to meaningfully evaluate its decisions. Take the time to consider whether or not your business has actually established any foundational corporate governance structures and policies, and if you have whether they still apply today. 

Learn How an Experienced Attorney Can Assist You With Your Corporate Governance 

You may have never addressed corporate governance formally before in your business, or perhaps you realize that your corporate governance system does not adequately address the current needs of your business. Building a solid foundation of corporate governance can ensure that your company’s legal, financial, and ethical goals are clear to anyone involved with your business and help protect your business from disputes and litigation. Send us an email or call us at (504) 584-7336 today to learn more about your legal options to ensure the success of your business.