Why is corporate governance important?


Quick Answer

Corporate governance is important because it is a system that instills policies and rules for maintaining the cohesiveness of an organization. Corporate governance is meant to hold a company accountable while helping an organization steer clear of financial, legal and ethical pitfalls.

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Full Answer

Corporate governance is similar to the governance of a state. A lack of corporate governance can lead to profit loss, corruption and a tarnished image. This form of management is also designed to limit risk and eliminate corrosive elements within an organization with haste.

One principle of corporate governance is shareholder recognition, which is a policy that ensures that all shareholders have a say in the inner workings of a company. Shareholder recognition also secures the value of a company's stock. The rules and responsibilities of board members must also be made clear to make sure that everyone shares a uniform vision of the company's future. Stakeholder interest addresses the needs of participants who are not shareholders. Reaching out to nonmembers fosters better communication and relationships with members of the press and the community.

Ethical guidelines are also crucial to secure higher profit and keep the company out of legal trouble. These rules apply to employees and board members. Transparency must be apparent, which should take the form of record keeping and reports on income.

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