Corporate governance is defined as a set of policies and procedures affecting the way a corporation is administered. These policies and procedures are mechanisms required to ensure accountability of certain individuals who have great impact on the organization’s direction and goals.
The next question will be “Who are these individuals?” they are none other than the directors of the company. The role of the director is to design, develop and implement strategic plans for their organization in a cost-effective, time-efficient manner. Further to strategic plans, the director is also responsible for day-to-day operations of the organization. He/She will need to report the status and progress of the strategic plans to the Board of Directors of the company in a periodic basis.
“If directors are the controlling party of the organization, then why must there be corporate governance?”
Corporate governance comes into play when there are different stakeholders involved within and around the organization. Stakeholders are parties who have certain interest in the company, directly and indirectly, which means that a certain strategic decision by the organization may affect the position of some other parties. Examples of stakeholders are the shareholders, management, employees, customers, creditors, banker and regulators.
In essence, every organization need good corporate governance to ensure the interests and welfare of all stakeholders are protected. Some famous events of how bad corporate governance affected numerous stakeholders can be seen from the high profile collapse of some large US companies like Enron and WorldCom. More recent cases of bad corporate governance issues came about when the large US automakers seeking for government bailouts and the collapse of a 150-year old multinational company called Lehman Brothers.