Corporate Governance

Corporate Governance

Corporate Governance

We noticed that it is not always clear to business owners what Corporate Governance exactly entails and why they should know this. So, we summarized that below:

Governance refers specifically to a transparent set of rules, controls, policies and resolutions, put in place to direct corporate behavior, and anchored in the articles of incorporation, bylaws, and stock ownership guidelines.

It involves balancing the interests of the management, staff, shareholders, suppliers, financiers, government, customers, and the community. It entails objectives, action plans, internal controls, performance measurement and disclosure.

Communicating a firm's corporate governance is a key component of investor relations. A competent board of directors is crucial in this. It can affect equity valuation. Proxy advisors and shareholders are important stakeholders who affect governance indirectly.

Board of Directors

The board of directors represent the company's shareholders. They are appointed by other board members, and elected by the shareholders. They are tasked with making decisions ref. corporate officer appointments, dividend policy, executive compensation, and social or environmental concerns.

Boards are often made up of influential insiders and independent outsiders with experience managing/directing similar size companies. Independents help align shareholder interest with those of the insiders.

Questionable Governance

Corrupted corporate governance has implications for the company's financial health, reliability, integrity or obligation to its shareholders, like:

  • Poorly cooperating with auditors of a proper scale. This will lead to spurious or non-compliant financial results.
  • Poor executive compensation packages. It will not create an optimal incentive for corporate officers.
  • Poorly structured boards. This makes it very difficult for shareholders to oust ineffective incumbents.

Shareholder Rights

Besides the shareholder rights stated in a company’s charter, the next 6 shareholder rights should apply to any company:

  • An Entitlement to Dividends.
  • The Right to Transfer Ownership.
  • The Right to Sue for Wrongful Acts.
  • Ownership in a Portion of the Company’s assets.
  • Opportunity to Inspect Corporate Books and Records.
  • Personal or Proxy Voting Power on Major Issues, such as electing directors and approving crucial changes, like mergers or liquidation.

It is normally a good thing when senior insider executives own shares as well. However, they may get involved in some unusual deals to artificially increase the stock's price and then quickly sell their own shares for a profit.

As an investor in a company, you own a portion of the company, but you do NOT own property of the company. Bank, Investor, or Bondholder loans have to be paid back, before you get anything.

If a company becomes insolvent, the debtors get paid first from the company's assets. Any money left over from the sale of the remaining assets is distributed to the stockholders.

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