What is Corporate Governance? Why is it needed?
October 02, 2023
What is Corporate Governance? Why is it needed?
Corporate governance is the invisible force that guides the actions and decisions of companies, shaping their success and impact on society. While often discussed in boardrooms and academic circles, its significance extends far beyond, affecting employees, shareholders, customers, and the communities in which businesses operate.
The primary goal of corporate governance is to ensure that the company operates in an ethical, transparent, and responsible manner while maximizing value for its shareholders.
Good corporate governance is seen as a cornerstone of a well-functioning and sustainable business. It helps attract investors, lowers the cost of capital and reduces the likelihood of corporate scandals and fraud.
In this article, we delve into the intricate world of corporate governance, exploring its principles, practices, and importance in today's business landscape.
What are the foundations of Corporate Governance?
At its core, corporate governance is the framework of rules, practices, and processes by which a company is directed and controlled. It serves as the compass that ensures the business acts ethically, transparently and in the best interests of all stakeholders. Five fundamental principles that underpin corporate governance are as follows:
- Transparency
- Accountability
- Responsibility
- Fairness
- Independence
What are some challenges and issues in corporate governance?
- Shareholder activism: Activist shareholders may push for changes in company strategy, governance, or executive leadership.
- Board independence: Ensuring that boards of directors have a sufficient number of independent directors who can make unbiased decisions is an ongoing challenge.
- Ethical conduct: Maintaining a culture of ethics and integrity throughout an organization can be challenging.
- Regulatory Compliance: Keeping up with ever-evolving corporate governance regulations and reporting requirements can be challenging for companies operating in multiple jurisdictions.
- Compliance with codes and standards: Companies need to comply with various governance codes, standards, and best practices, which can be complex and demanding.
Why is good governance important?
Regulatory landscape on corporate governance
- Central Bank of UAE’s Corporate Circular number 83/2019 concerning Governance Regulations and Standards, which aimed to standardize corporate governance practices for banks in the UAE
- Securities & Commodities Authority’s Decision no. (3/Chairman) of 2020 concerning the Joint Stock Companies Governance Guide
- Cabinet’s new Decision no. (2/9g) of the year 2023 on the Governance System for Federal Government Boards
- DFSA Rule Book which contains several guidelines, reading materials and listing of applicable legislations to DIFC based entities
- The ADGM regulation on Corporate Governance Code, which was issued by the FSRA in March 2023
What is the future of corporate governance?
The future of corporate governance is expected to be shaped by several key trends and developments. While it is challenging to predict the exact course it will take, here are some potential aspects and trends that may influence the future of Corporate Governance:
- Environmental, Social, and Governance (ESG) Integration: ESG factors are becoming increasingly important in corporate governance and are likely to be integrated into governance practices, affecting everything from reporting to executive compensation.
- Technology and Digital Transformation: The adoption of technology, including artificial intelligence (AI) and Blockchain, is likely to impact corporate governance. These technologies can enhance transparency, streamline reporting, and improve shareholder engagement.
- Cybersecurity and Data Privacy: With the growing importance of data, cybersecurity and data privacy are becoming critical governance concerns. Boards will need to prioritize cybersecurity risk management and ensure compliance with data protection regulations like GDPR and CCPA.
- Regulatory Changes: Governments and regulatory bodies around the world are continually updating corporate governance regulations. Changes in regulations can significantly impact governance practices, and companies will need to adapt to remain compliant.
How MBG helps
- Ensuring adequate corporate governance practices amongst all subsidiaries, wherever applicable.
- Assess governance maturity, improve/design governance operating models, charters, policies and procedures and delegation of authority matrices.
- Independent performance assessment of the board and its committees.
- Conduct board and senior management training programs.
- Provide an independent anonymous whistleblowing hotline through a case management tool. Clients' stakeholders can use this mechanism to escalate all concerns.
- Prepare templates for the annual corporate governance reports.
- Independent assessment of internal audit, risk management, and compliance functions.
- Develop a risk and compliance management operating model, and policies and processes.
