Corporate governance is a system of policies, processes, and rules that delineate the relationship and balance of power between shareholders, management, the Board of Directors, and other significant stakeholders. Effective corporate governance policies must be consistent and enforceable.
The theory of corporate governance has been around for centuries, but the term corporate governance came into play in the U.S. during the 1970s. Like all legal and corporate concepts, corporate governance continues to develop and adapt to the changing business world. For example, in 2002, the federal government enacted the Sarbanes-Oxley Act to encourage transparency in financial reporting and corporate governance in order to protect investors and the public from corporate mismanagement and fraud. Good corporate governance practices can be hard to establish and implement, but some 2021 trends shaping the future include the following:
Define the relationships among the Board of Directors and management
Directors, corporate executives, and other leaders must clarify the blurred lines of responsibility and claim their established roles and relationships. This process may include confirming procedures for monitoring the board.
Address the unpredictability of social changes
Recent years have seen an upsurge of fiscal, social and political uncertainty. As a result, corporate leaders must address economic issues as well as social fragmentation and inequality.
Expediting diversity, equity, and inclusion issues
Many corporations are finally beginning to acknowledge and address the disparities in the business world relating to ethnicity, race, gender inequality, and other underrepresented groups. By the end of 2021, the law requires that companies headquartered in California have at least one director from an underrepresented community. Corporations need leaders who are skilled, knowledgeable, and farsighted. Therefore, to be effective, a diverse board is desirable.
Implementing risk management strategies
Corporations benefit from new technology in this rapidly changing technological environment, but there are also risks involved, such as a dangerous data breach. Climate change is another risk that affects many companies. As a result, boards must establish effective risk management strategies, such as a disaster recovery plan, reviewing and updating them as needed.
Conceptualizing the corporation’s future
Satya Nadella, executive chairman and CEO of Microsoft, asks corporate boards to “re-imagine” the organizational mission. Innovations such as virtual board and shareholder meetings, remote manufacturing techniques, and A.I. bots may have originated out of necessity. However, they are becoming a part of the future of corporate governance.
As with all business practices, corporate governance will continue to evolve. Adapting to the needs of the future means resting on a solid foundation. As always, good corporate governance practice includes reviewing the composition of the board regularly. In addition, built-in safeguards are required to ensure integrity in all matters related to corporate reporting. Transparency, disclosure, responsibilities, interests, and transactions of all parties, even in bad times, are at the heart of corporate governance.