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The Importance of Corporate Governance

The Importance of Corporate Governance

Investopedia defines Corporate Governance as “the system of rules, practices, and processes by which a firm is directed and controlled”.  Getting a little further into the weeds, the Harvard Business Review identifies two long-standing descriptions of what a corporation is, that define how it should be run.

In the first definition, a corporation is a “legal fiction”, a notional entity which exists to facilitate the interests of stakeholders.  More recently, the idea of companies being “real entities” has been promulgated.  In this version, corporations have a responsibility to various people and entities, both within and outside of the corporation.

The former definition allows unfettered capitalism to rule the roost since shareholder interests rest largely on the profit margin.  The second formulation attempts to balance the conflicting interests of parties as varied as the C-suite, employees, consumers, lobbyists, unions, environmentalists, and, yes, shareholders.

Since the start of the twentieth century, various curbs have been placed on the power of corporations, including antitrust and securities laws, financial reporting requirements, and adherence to various pieces of legislation related to workers’ rights, health and safety, environmental impact, and more.  All such mandatory controls strengthen the “real entity” definition of a corporation and make corporate governance an obligation, rather than a luxury.

For this reason, it is in the interests of a company of any size to draw up Corporate Governance documents to define what the company’s purpose is, who will oversee its operation, what its priorities are, and where accountability lies (where the buck stops).

Moves to Modernize and Standardize Corporate Governance

Various high-profile moves have been made by socially aware corporations to standardize an approach to corporate governance, one which recognizes the responsible role modern companies can play within larger society.  One such attempt, for instance, is the Commonsense Governance Principles declaration signed by notable industry leaders including Berkshire Hathaway’s Warren Buffett, Jamie Dimon of JP Morgan Chase, and Brian Moynihan of the Bank of America.

Written in 2016 in the form of an open letter and revised in 2018, this document states “Because well-managed and well-governed businesses are the engine of our economy, good corporate governance must be more than just a catchphrase or fad. It’s an imperative – especially when it comes to our publicly owned companies”.

It then set out various recommendations for the composition and operation of a company’s board of directors, shareholder rights, management compensation, and asset management.  The focus is primarily on the economic impact of corporations, no doubt in part influenced by the role of such entities in the global financial collapse of 2008.

Corporate Governance for Social Justice and the Environment

In recent years, as Forbes magazine relates, startups have devoted considerable energy to devising corporate governance principles, but for quite different reasons.  Societal pressure and real-world evidence, particularly relating to social justice and the environment, have led firms to work towards playing a more positive role in society, inculcating corporate governance principles that reflect those concerns.

The COVID-19 pandemic has shown that large pharmaceutical companies and PPE manufacturers can be encouraged to put shareholder returns to one side to deliver vaccines and surgical masks at cost to vulnerable populations.  It isn’t always about the bottom line. Corporations can purchase significant and lasting goodwill from the public when they set aside the profit motive for the greater good.

As CEO and entrepreneur, Betsy Atkins wrote in Forbes put it in April 2021 “strong corporate governance practices foster a company culture built on high standards of integrity, accountability, transparency, fairness, and responsibility.”

In 2021, a company needs to set out the principles by which it operates, to minimize risk, achieve good standing and maintain a competitive edge.  Corporate governance is the best mechanism by which this tripartite aim can be achieved.

Corporations of all sizes should sit up and take note of the changing tides in both law and consumer awareness and the impact both of them have on your company.  The development of robust and comprehensive corporate governance documents has become a necessity. 

If your company needs any assistance with the review or drafting of your corporate governance documents or to determine what documents and policies you need in place please do not hesitate to call us. Our firm offers in-person and virtual consults, if you have any questions or concerns about the topic of this blog or any corporate, commercial, employment, family law issue, please feel free to call our office at 305-460-0145 or to schedule a consult here.

accountability, Corporate Governance, corporateresponsibility, fairness, integrity, socialcorporations, socialresponsibility, transparency

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