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What is the purpose of corporate governance?

Corporate governance is an important aspect of business in the modern world; with greater communications and media coverage of international business, having a reputation for good corporate governance can increase the good reputation of a company. Amongst the benefits companies see when they are known for their strong corporate governance are higher levels of investment and in many cases a high level of brand loyalty amongst investors and customers.

Corporate governance

Corporate governance is a difficult term to define, as it can be used in different ways by different companies. In general, the term is used by companies listed in the stock exchange as private companies. Therefore, the term refers to the way a company is run within the laws of the country it is operating in; the aim of corporate governance is to operate a transparent company working within the values demanded by the shareholders and customers of the organisation. Within the UK, corporate governance must be defined by each listed private company as part of the legal requirements of the UK Corporate Governance Code, ICAEW reports.

Purpose

Corporate governance is a process of defining how a company operates within society and ensures its processes remain within the confines of law. By determining how a company will be governed, the shareholders and directors attempt to ensure the organisation is operated in a way that fits in with the values of society. A company setting out a strong statement of corporate governance will be run in a more effective and successful way. Strong corporate governance ensures that customers and investors are confident in the way the company is run; transparency in business dealings is an important aspect of corporate governance as it builds investor confidence and can lead to a company attracting more investment.

Aims

Strong corporate governance begins with the shareholders of a company appointing independent directors to the board. The decision of who is appointed to the board should reflect the values of the shareholders and how they wish to operate the business; appointing a group of independent directors can build confidence that the management of the company will be strong in staff members, shareholders, existing and potential investors. The main aim of corporate governance is to build a framework on which the long term success of the company is guaranteed, according to Powys Council. When a strong code of corporate governance is established, a company can determine where it fails its customers and which areas of investment are not strong; under the guidance of the board of directors these areas of weakness are identified and actions are taken to resolve the problems.

Benefits

The main benefit of corporate governance is to make sure a company reaches its potential for success and builds on this success for many years into the future. In terms of investor confidence companies seen as having string corporate governance are shown to have higher levels of investment, according to ICAEW. Alongside achieving confidence in the business sector, customer confidence is also built, as is respect and trust amongst local and national government officials. With a strong set of ethical values on which a company operates, good levels of corporate governance can also lead to greater loyalty amongst employees as the company builds a strong reputation for fairness and success.

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About the Author

Paul Cartmell began his career working in film and TV production before moving into print and online journalism with a number of media outlets, including Yahoo! Sports, "Greenwood Today" and "The Grimsby Telegraph." His areas of interest include sports, politics, the arts and home improvement.