Corporate governance facilitates prudent, effective management to deliver long-term success. It is a system by which companies are controlled and directed.
A company’s board of directors is responsible for governing it. The shareholders’ role is to appoint directors and auditors and satisfy themselves that the company has an appropriate governance structure.
The board of directors is responsible for setting strategic aims and providing the leadership necessary to turn those ambitions into accomplishments. The board also supervises the management of the business, as well as periodically reporting to the shareholders on the company’s performance.
In essence, corporate governance is about what the board does and how it sets the values of the company. Corporate governance is distinct from the day-to-day operational management of a business.
Good governance has wider implications than simply adhering to regulations. It improves transparency and accountability within systems. It helps businesses run more efficiently.
With the power of institutional investors steadily increasing, the issue of corporate governance has become a topic of public interest. Ideas about how companies should be governed vary widely, with individuals frequently clashing on fundamental matters such as the purpose of the company, the role of its board, the rights of shareholders, and methods of effectively measuring corporate performance.
The issue of subjective interests in decision making is particularly contentious, with some authorities giving precedence to shareholders’ interests in maximizing financial returns, and others rallying for executive compensation and environmental policies.
Corporations are some of society’s most important institutions. They drive business and fuel economies. Some corporations wield significant power, rivaling that of entire countries. Yet the purpose and nature of corporations have long been a matter of debate.
Two dominant schools of thought have persisted over the last century, one contending that corporations are ‘legal fiction’, designed to facilitate private agreements between shareholders, and the other holding that a corporation is a ‘real entity’ enabled to serve the needs of society by law. The former places emphasis on the interests and rights of the shareholders, while the latter underlines the need to balance the interests of shareholders with the interests of society at large.
As the founder of FDH Bank, one of the Malawian financial sector’s most prominent organizations, Dr. Thomson Mpinganjira operates robust corporate social responsibility policies through all of his companies. With large concentrations of capital, corporations can extend considerable power and influence over society. Many corporations realize that their responsibilities are not simply to shareholders in achieving fast, easy gains. Corporations also have obligations to customers, employees, and society as a whole.
In the UK, the Purposeful Company Taskforce urges corporations to state explicitly how their purpose ‘contributes to human betterment’ as well as creating long-term value for stakeholders. The UK’s Corporate Governance Code charges boards with establishing their corporation’s purpose, strategy, and values. In the US, leading institutional investors have lobbied for several years for transparency in corporate boards, clarifying the organization’s purpose and its contribution to society.
In January 2020, Forbes predicted a period of increased market volatility. The outbreak of COVID-19 has caused unprecedented economic and social disruption. Forbes predicts that boards will re-examine their corporation’s purpose, addressing social responsibility issues, tackling gender equality, and placing greater emphasis on human capital – in short, investing in the company’s long-term future, rather than simply seeking the highest, fastest return for investors.