3. Understanding the Organizational hierarchy
The corporate governance function encompasses an organization's capacity to operate ethically.
A fairly typical organizational structure often appears as follows:
The C-suite is the key body within the organization that makes operational decisions with the CEO as the senior most member. The CEO reports to the Board of Directors (BOD). The BOD is in charge of directing and carrying out the corporate governance function under the guidance of the Board Chair.
The company's shareholders must vote on every appointee to the Board. This makes the BOD dependent on shareholders in numerous ways. The majority of BODs have traditionally worked along these lines.
This concept is called shareholder primacy, which refers to the tacit recognition that every choice taken within a company must take the best interests of its shareholders into consideration.
Board of Governance
The BoD is a governing body to oversee the management and set policies for the company. BoD is nominated by the nomination committee and also by outsiders (independent directors) seeking change.
Roles of Board of Directors
- Financial (Fiduciary) decisions of the company
- Selecting CEO of the company
- Hiring / Firing Top Management and their compensation
- Mergers & Acquisitions
- Dividends and Major Investments to see short-term and long-term returns
- Understanding risks in the company’s business activities and oversee risk management process
- Approving strategies of the company and monitoring its implementation
Principles of Board of Directors
Following principles guide firms in developing a corporate governance framework:
- Leadership: The board of directors and the CEO should be competent in decision-making.
- Risk Management: A robust risk management mechanism to handle uncertainties and externalities in business.
- Transparency: In disclosing the financial information of the company.
- Responsibility: in running the business on behalf of the shareholders.
- Accountability: The board of directors and the CEO are accountable to the shareholders for their actions and their style of governance. At the same time, the management is answerable to the BOD.
- Unbiased: All the stakeholders should be treated equally.
- Effectiveness and Efficiency: The policies and procedures should be clear and uniform. Moreover, it should be well-communicated.
- Liberty: The shareholders should be free to vote, and the auditors should be given access to financial data and freedom to prepare transparent audit reports.
- Responsiveness: In addition to shareholders, crucial information should also be communicated to vendors, customers, financers, and employees.