Corporate governance keeps businesses accountable.
When you see company scandal, corruption, and fraud splashed across the headlines, you can be pretty sure that the term ‘corporate governance' will follow.
It's a phrase we've been familiar with since the high-profile collapse of energy company Enron and communications giant WorldCom in 2001 and 2002, which exposed the inner workings of these companies to public scrutiny.
Their downfalls also shone the spotlight on how other companies are governed – and how managers are kept accountable.
Companies are typically governed according to a set of rules and regulations – rules that have been subject to tighter control since the Enron scandal. These rules are expected to protect the assets and resources of the company – and hold top managers and executives accountable for their decisions and actions.
In this article, we look at how corporate governance began, what its implications are in today's world, and the people and processes that support it.
When companies first started forming during the industrial age, greed and a lack of ethics were common. Company executives often got rich – while customers were taken advantage of, workers remained poor, and investors lost money. It became clear that laws were needed to protect the interests of stakeholders.
With the rise of public corporations, corporate governance was born. People at the highest levels of organizations were made accountable to a group of elected representatives: the board of directors. The board became the head of the organization – responsible for hiring professional managers to run the company, overseeing the corporate systems, and protecting investors' interests.
This system of representation is the basis of corporate governance – the system by which organizations are directed and controlled today.
In the modern world, corporate governance protects more than investors' interests. It also represents the public interest, through environmental and social standards and practices. Post-Enron, the United States government passed the Sarbanes-Oxley Act (SOX) in 2002, to help prevent similar corporate catastrophes in future. And recent financial crises in the US and United Kingdom have created an even stricter regulatory environment.
Now, more than ever, there's an increasing emphasis on improving corporate processes, accountabilities, and controls – all in an effort to decrease abuses of power, and increase the integrity of decision making within corporations. This is part of a more general trend toward more openness and accountability for all organizations in the public and private sector.
Corporate governance is a major factor in overall organizational health and sustainability because it does the following:
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