The general principles of governance (also referred to as corporate governance) is the system of rules, practices, and processes by which a company is directed and controlled. It is concerned with balancing the interests of a company’s many stakeholders, such as shareholders, management, customers, suppliers, financiers, government, and the community. The goal of corporate governance is to provide a framework for attaining a company’s objectives and to safeguard the interests of all stakeholders.
Company ownership and control
Company ownership and control refers to the way in which a company is owned and controlled. There are two main types of ownership and control structures: shareholder-controlled companies and stakeholder-controlled companies. In shareholder-controlled companies, the shareholders own and control the company. In stakeholder-controlled companies, multiple stakeholders, such as employees and customers, have a say in the company’s decision-making.
Coverage of governance
Coverage of governance refers to the various stakeholders that governance practices are intended to serve. In addition to shareholders, governance practices may also be intended to serve the interests of other stakeholders, such as employees, customers, suppliers, financiers, and the community. The consideration of other stakeholders (other than shareholders) are becoming increasingly important to consider when it comes to the general principles of governance.
Key concepts of governance
In regards to the general principles of governance, there are 11 key concepts that are commonly used to describe and analyse governance practices: accountability, transparency, responsibility, fairness, integrity, commitment, respect, trust, leadership, stewardship, and shareholder value. These concepts are interrelated and are all important for ensuring that a company is well-governed.
Purpose and scope of governance
The purpose and scope of governance are to provide a framework for attaining a company’s objectives and to safeguard the interests of all stakeholders. The scope of governance includes the activities of the board of directors and management, as well as the relationships between the board, management, and other stakeholders.
Agency theory is a branch of economics that explains the relationship between principals (e.g. shareholders) and agents (e.g. management). According to agency theory, the principal hires the agent to act on their behalf, but there may be conflicts of interest between the two parties. This is known as the principal-agent problem. To address this problem, various mechanisms, such as performance-based compensation, can be put in place to align the interests of the principal and the agent.
The principal-agent relationship is the relationship between the principal and the agent. In order for this relationship to be effective, it is important for there to be clear communication and mutual trust between the principal and the agent. The principal should provide the agent with clear expectations and performance criteria, and the agent should provide regular updates on their progress and any potential issues.
Stakeholder theory is a perspective on corporate governance that emphasises the interests of all stakeholders, rather than just shareholders. According to stakeholder theory, organisations have a responsibility to consider the needs and interests of all stakeholders, not just shareholders, when making decisions. This means that the organisation should take into account the impact of its decisions on all stakeholders, including employees, customers, suppliers, and the community.
Stakeholder claim refers to the rights and expectations that stakeholders have with respect to an organisation’s decision-making and behaviour. Different stakeholders may have different claims on the organisation, depending on their relationship with the organisation and the impact of the organisation’s actions on them. For example, employees may have claims on the organisation for fair treatment and opportunities for development, while customers may have claims for high-quality products and services. It is important for organisations to consider the claims of all stakeholders when making decisions.
Rules-Based VS Principles-Based Approach
There are two main approaches to corporate governance: rules-based and principles-based.
Rules-based corporate governance involves a set of specific rules and regulations that companies must follow in order to ensure good governance practices. These rules may be imposed by law or by industry-specific regulations. The benefit of a rules-based approach is that it provides a clear set of guidelines that companies can follow, which can help to ensure compliance and reduce the risk of misconduct. However, this approach may also be inflexible and may not take into account the specific needs and circumstances of individual companies.
Principles-based corporate governance involves a set of general principles that companies are expected to follow in order to ensure good governance practices. These principles may be outlined in codes of conduct or other guidelines. The benefit of a principles-based approach is that it allows companies to use their discretion and apply the principles in a way that is appropriate for their specific situation. This approach can be more flexible than a rules-based approach, but it may also be less clear and may be more difficult to enforce.
Family Structures VS Insider-Dominated Structures
Family structures refer to the ownership and control of a company by a family or group of families. Some benefits of a family structure in terms of corporate governance include:
- Stability and continuity: Family members are often committed to the long-term success of the company and may be more likely to take a long-term perspective on decision-making.
- Strong values and culture: Family-owned companies may have a strong set of values and a distinctive culture that is passed down from generation to generation.
- Personal commitment: Family members may be more personally invested in the success of the company, which can lead to a higher level of commitment and dedication to the business.
However, there are also potential problems with family structures in terms of corporate governance:
- Conflicts of interest: Family members may prioritize their own interests over those of the company or other stakeholders, which can lead to conflicts of interest.
- Limited diversity: It can be difficult for non-family members to advance within the company, which may lead to a lack of diversity in the leadership team.
- Complex decision-making: Decision-making within a family-owned company may be complex, particularly if there are multiple family members with different interests and perspectives.
Insider dominated structures refer to the ownership and control of a company by a small group of insiders, such as executives or major shareholders. Some benefits of an insider dominated structure in terms of corporate governance include:
- Efficiency: Insider dominated structures may be able to make decisions quickly and efficiently, as the decision-making process is centralized among a small group of insiders.
- Expertise: Insiders may have a deep understanding of the company and its operations, which can allow them to make informed decisions.
However, there are also potential problems with insider dominated structures in terms of corporate governance:
- Conflicts of interest: Insiders may prioritize their own interests over those of the company or minority shareholders, which can lead to conflicts of interest.
- Lack of transparency: Insider dominated structures may lack transparency and accountability, which can lead to mistrust from external stakeholders.
- Limited diversity: The leadership team in an insider dominated structure may be homogenous and may not represent the diverse perspectives and backgrounds of all stakeholders.
- Limited accountability: With a small group of insiders making decisions, it may be difficult to hold the leadership team accountable for their actions.
General Principles of Governance: Summary
In conclusion, corporate governance is a complex and multifaceted concept that involves balancing the interests of a company’s many stakeholders. It requires effective communication and trust between principals and agents, and a commitment to considering the needs and interests of all stakeholders. Ensuring good corporate governance is crucial for the long-term success of any organisation.
To help ensure your organisation has effective governance, conduct strategic analysis with methods such as benchmarking.