Three types of corporate governance mechanisms
Corporate governance is the policies and procedures a company implements to control and protect the interests of internal and external business stakeholders. It often represents the framework of policies and guidelines for each individual in the business.
Larger organisations often use corporate governance mechanisms to manage their businesses because of their size and complexity. Publicly held corporations are also primary users of corporate governance mechanisms.
Board of Directors
A board of directors is a corporate governance mechanism that protects the interests of a company’s shareholders. The shareholders use the board to bridge the gap between them and company owners, directors and managers. The board is often responsible for reviewing company management and removing individuals who don't improve the company’s overall financial performance. Shareholders often elect individual board members at the corporation’s annual shareholder meeting or conference. Large private organisations may use a board of directors, but their influence in the absence of shareholders may diminish.
Audits are an independent review of a company’s business and financial operations. These corporate governance mechanisms ensure that businesses or organisations follow national accounting standards, regulations or other external guidelines. Shareholders, investors, banks and the general public rely on this information to provide an objective assessment of an organisation. Audits can also improve an organisation’s standing in the business environment. Other companies may be more willing to work with a company that has a strong track record of operations.
Balance of Power
Balancing power in an organisation ensures that no one individual has the ability to overextend resources. Segregating duties between board members, directors, managers and other individuals ensures that each individual’s responsibility is well within reason for the organisation. Corporate governance can also separate the number of functions that one division or department completes within an organisation. Creating well-defined roles also keep the organisation flexible, ensuring that operational changes or new hires can be made without interrupting current operations.
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