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Corporate Governance: What It Means and Why It Matters

Corporate governance refers to the policies and practices that keep businesses operating in a transparent, honest, and responsible manner. In the United States, corporate governance laws and regulations fall under the purview of the Securities and Exchange Commission (SEC). The Sarbanes-Oxley Act of 2002 (SOX) is one of the most well-known pieces of legislation intended to promote good corporate governance through increased transparency in accounting methods and personnel accountability. Corporate accountability refers to the board’s responsibility for providing explanations for a company’s conduct as well as consequences when policy or law has been violated.

Can you trust Corporate America?

Corporate America is currently under scrutiny as a result of continued poor financial results. Although many points to poor consumer confidence, poor worker morale and uncertainty surrounding oil prices as possible causes for a company’s performance, more often than not, it comes down to corporate governance. Corporate governance refers to a board’s responsibility for providing explanations for a company’s conduct. Poor corporate governance usually surfaces in cases of accounting irregularities, insider trading or scandals involving top executives; these things lead investors to lose trust in senior leadership teams. However, corporate accountability has also been spreading throughout corporations like wildfire as firms look to regain investor confidence by holding their executives accountable for mistakes they make that result in significant losses or negatively impact shareholders.

Corporate Governance Defined

Corporate governance refers to a company’s structure, management, policies, and decision-making processes. Corporate governance touches on everything from executive compensation to corporate social responsibility (CSR). The Federal Sentencing Guidelines for Organizations define corporate governance as the organizational structure of a company, including its formal rules, processes and procedures. Governance also includes internal controls that ensure adherence to relevant laws and regulations.

The Impact of Corporate Accountability

When thinking about corporate accountability, most of us think about scandals—and for a good reason. Some major corporations have become notorious for corrupt practices like price-fixing, tax evasion, or giving funds to terrorist organizations. But these bad examples don’t represent all that much money or impact compared to what would happen if more companies were actually held accountable in a positive way. If your company was legally required to do good things for society rather than focusing solely on profit, you might choose to provide affordable healthcare coverage instead of one-size-fits-all premiums; you might choose to promote women into leadership roles at higher rates than you currently do, and you might treat your employees well enough that they stick around longer and create stronger relationships with customers.

Get Involved in Your Company’s Governance

The more involved you are in corporate governance, generally speaking, as a board member or executive officer, or even a company’s founder, the more accountable you become. That’s because public companies have many obligations that require disclosure of material information to shareholders, including annual meeting minutes and proxy statements (e.g., materials circulated by investors around voting issues), not to mention SEC filings like 10-Ks or 8-Ks. Corporate governance can sound pretty dry—and for some, it is—but it’s also an area where you can use your knowledge and experience to ensure that your company is being proactive about its accountability obligations. Your company may already be incorporating corporate governance into its annual planning process; if not, recommend it does so.

How Do I Become Part of a Board?

If you’re thinking about joining a board, that’s great! Your presence on a board can be hugely beneficial to your organization and to other companies in your sector. But it takes time to become part of a board, whether you’re being nominated by another member or voted onto an open position.

Conclusion

Accountability has been defined as responding to responsibility. When we are accountable, we are being responsive, whether or not that is what others may want or expect. To be an accountable person means to hold oneself responsible for one’s own words and actions—including the consequences of those words and actions. As a concept, accountability is fundamental to both management and leadership; in fact, you could define a manager as someone who holds people accountable for doing their jobs effectively.

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