Corporate governance is the term used to describe the balance among participants in the corporate structure who have an interest in the way in which the corporation is run, such as executive staff, shareholders and members of the community. Corporate governance directly impacts the profits and reputation of the company, and having poor policies can expose the company to lawsuits, fines, reputational damage, and loss of capital investment. Here are five common pitfalls your corporate governance policies should avoid.
1) Conflicts of interest
Avoiding conflicts of interest is vital. A conflict of interest within the framework of corporate governance occurs when an officer or other controlling member of a corporation has other financial interests that directly conflict with the objectives of the corporation. For example, a board member of a solar company who owns a significant amount of stock in an oil company has a conflict of interest because, while the board he or she serves on represents the development of clean energy, they have a personal financial stake in the success of the oil industry. When conflicts of interest are present, they deteriorate the trust of shareholders and the public while making the corporation vulnerable to litigation.
2) Oversight issues
Effective corporate governance requires the board of directors to have substantial oversight of the company’s procedures and practices. Oversight is a broad term that encompasses the executive staff reporting to the board and the board’s awareness of the daily operations of the company and the way in which its objectives are being achieved. The board protects the interests of the shareholders, acting as a check and balance against the executive staff. Without this oversight, corporate staff might violate state or federal law, facing substantial fines from regulatory agencies, and suffering reputational damage with the public.
3) Accountability issues
Accountability is necessary for effective corporate governance. From the top-level executives to lower-tier employees, each level and division of the corporation should report and be accountable to another as a system of checks and balances. Above all else, the actions of each level of the corporation is accountable to the shareholders and the public. Without accountability, one division of the corporation might endanger the success of the entire company or cause stockholders to lose the desire to continue their investment.
4) Transparency
To be transparent, a corporation must accurately report their profits and losses and make those figures available to those who invest in their company. Overinflating profits or minimizing losses can seriously damage the company’s relationship with stockholders in that they are enticed to invest under false pretenses. A lack of transparency can also expose the company to fines from regulatory agencies.
5) Ethics violations
Members of the executive board have an ethical duty to make decisions based on the best interests of the stockholders. Further, a corporation has an ethical duty to protect the social welfare of others, including the greater community in which they operate. Minimizing pollution and eschewing manufacturing in countries that don’t adhere to similar labor standards as the U.S. are both examples of a way in which corporate governance, ethics, and social welfare intertwine.
Don’t let your company fall victim to these five common mistakes.
To ensure that your corporate governance policies best balance the interests of your company, stockholders, and others, contact the qualified business lawyers at J. Muir & Associates today.
Other articles:
