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Posts Tagged ‘The basic factors in good corporate governance’

Good corporate governance is a highly relative concept, made even more slippery by the post-war global business environment. Well-known corporate scandals throughout the first decade of the 2000s, such as the accounting fraud at Enron, have brought corporate governance to new prominence, and governments, in response, have engaged in tightening corporate accounting standards.

Features

The basic factors in good corporate governance are the board of directors, shareholders en masse, and management. How these three power centers work together can make all the difference for a company.

The basic structure is to keep management accountable for its actions, maintain good cash flow, and satisfy the shareholders as a group.

Function

These factors, working together, are meant to keep a firm not only profitable but reputable. Investors want to be a part of a firm that is well-run, ethical, and still profitable. For these reasons, the makeup of the board of directors is extremely important.

How often they meet and the specific areas of expertise of its members are important to keep not only a watch on management and corporate activities, but also to do so in an environment of competence.

Significance

Few will deny that both investors and governments have become more cynical since the corporate scandals typified by Enron and Tyco. More than ever, the state has become a major factor in corporate governance.

This means that governments have clamped down on anything that smells of a conflict of interest and, importantly, the lack of independence of any independent accounting firm. A strict “separation of powers” among the factors of corporate governance has been necessitated by the desirability of independent auditing. Read the rest of this entry »