The Impact of Corporate Governance Practices on the Investment Decisions of Companies
Business organizations have guidelines that define and specify the roles of different stakeholders in decision-making processes. All stakeholders, including directors, managers, shareholders and auditors, have clearly-defined responsibilities. For instance, whereas shareholders are responsible for approving the appointment of directors, company boards set strategic road maps and play oversight roles over the management of companies. As such, adoption of corporate governance enhances the supervisory and managerial capacities of business organizations.
Corporate Governance Defined
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Corporate governance is a framework of stipulations that describe the limits within which each segment of stakeholders must operate to safeguard the interests of the organization. It establishes the scope of control that company boards, management teams and other stakeholders observe when performing their responsibilities. Corporate governance became prominent due to financial improprieties and scandals in several major corporations, with the demise of entities such as Lehman Brothers and Washington Mutual in 2008 and the global economic crisis that followed bringing corporate governance into particularly sharp focus.
Integrity Thresholds
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Companies that embrace corporate governance achieve greater accountability in their investment decision-making processes. Corporate governance sets high integrity thresholds for protecting the interests of shareholders, creditors, suppliers and employees. Company boards that seek to meet these thresholds must be accountable, ethical and sensitive in their investment decisions. As such, corporate governance enables company boards to prioritize accountability when making investment decisions.
Board Independence
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Corporate governance grants company boards sufficient independence from the management teams and other stakeholder in companies. It empowers company boards to perform duties without undue interference from the management or dominant shareholders. This way, directors can protect the investment objectives of companies from conflict of interests among competing parties.
Internal Controls
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Company boards have the power to impose financial controls and monitor reporting procedures. This oversight role protects the stakeholders of companies from fraud and misrepresentation of financial information. It eliminates past malpractices where some management teams misused their discretionary powers over internal processes to misappropriate investment resources and commit financial improprieties. Corporate governance has been effective in enhancing auditing and financial reporting standards.
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Writer Bio
Paul Cole-Ingait is a professional accountant and financial advisor. He has been working as a senior accountant for leading multinational firms in Europe and Asia since 2007. Cole-Ingait holds a Bachelor of Science Degree in accounting and finance and Master of Business Administration degree from the University of Birmingham.