Corporate governance is the system of rules, practices, and processes that a company implements in its operations. It regulates the functioning of the entire enterprise and its structures. It contributes to the proper development of the company. From this article, you will learn what is the corporate governance. Let’s find out more about its elements, principles and goals.
Table of Contents
- What is corporate governance?
- What are the elements of corporate governance?
- What are the rules of corporate governance?
- What are the examples of corporate governance?
- What does corporate governance look like in a limited liability company?
- What are the key goals of corporate governance?
- Corporate governance – summary
What is corporate governance?
Corporate governance is also known as corporate supervision or corporate management. It covers all areas of running a business – from planning and managerial control to reporting.
There are three perspectives on corporate governance:
- The narrow (legal) approach. It refers to the distribution of competences and relations between bodies of a capital company.
- The broad approach (resulting from the OECD principles of 2015). It refers to relationships with stakeholders and the transparency of a company’s actions.
- The broadest (systemic) approach. It refers to a system of legal and economic institutions ensuring the proper and economically efficient functioning of joint-stock companies. It also resolves conflicts of interest among involved parties.
In simple terms, corporate governance is about the network of relationships between entities managing companies, their bodies, partners, shareholders, and other stakeholders. It allows the establishment of the company’s goals and means of achieving them. It also enables monitoring of their progress.
What are the elements of corporate governance?
The most important elements of corporate governance include:
- Acting in the company’s interest,
- Fair treatment of shareholders, contractors, and employees,
- Disclosing conflicts of interest,
- Defining goals and monitoring their achievement,
- Building organizational structure, roles, and responsibilities,
- Defining the information and communication system,
- Risk management,
- Establishing an internal control system,
- Independent internal and external audit.
What are the rules of corporate governance?
The rules of corporate governance vary depending on the industry. The specific nature of a given company also matters. However, there are certain general rules that apply to every system. These include:
- Transparency and openness,
- Responsibility of the management board,
- Protection of shareholder rights,
- Independence of supervisory bodies,
- Fair treatment of shareholders,
- Social and environmental responsibility,
- Effective internal control system,
- Long- and short-term perspectives in operations,
- Ethical conduct,
- Reliability in financial reporting.
What are the examples of corporate governance?
Corporate governance in Poland is governed by legal regulations and a set of voluntary principles aimed at ensuring the effective and ethical management of companies.
The Best Practice of WSE Listed Companies 2021 is an example of corporate governance in Poland. It is a set of rules influencing the relationships of listed companies. It has an impact on their market environment. Corporate governance is crucial for building their competitive position. The Committee of Good Practices shapes the corporate governance environment in Poland. It operates since 2001 at the Warsaw Stock Exchange. The Committee’s recommendations focus mainly on listed companies. Yet, they can be also valuable for other capital companies.
The Best Practice of WSE Listed Companies 2021 is the latest regulation in this area. It consists of 6 chapters:
I. Disclosure policy and communication with investors
II. Management Board and Supervisory Board
III. Internal systems and functions
IV. General Meeting and relations with shareholders
V. Conflicts of interest and related party transactions
These practices do not cover matters regulated by existing legal provisions. Violating them may lead to sanctions, including:
- Obligation to repair damage
- Fine up to 5 million PLN
- Exclusion of securities from the regulated market
- Imprisonment for up to 5 years.
What does corporate governance look like in a limited liability company?
A limited liability company is one of the most commonly chosen forms of business in Poland. It is known for its flexibility in shaping the organizational structure. However, certain corporate governance rules determine how it should be managed. They also specify the rights and obligations of its shareholders. Key aspects related to corporate governance in a limited liability company include:
- Articles of association,
- Liability of shareholders,
- Rights of shareholders,
- Operations of the general meeting of shareholders,
- Operations of the management board,
- Supervisory board’s operations,
- Financial reporting,
- Handling conflicts,
- Compliance with legal requirements and ethical principles.
Corporate governance in a limited liability company can be tailored to individual needs. This usually occurs through modifications to its articles of association. Adhering to best practices in this area allows for effective business management.
What are the key goals of corporate governance?
The primary goal of corporate governance is to create mechanisms that support:
- Effective management,
- Efficient supervision,
- Respect for the rights of partners or shareholders,
- Transparent communication of the company with the market.
It is also essential to provide proper incentives for the company’s bodies and management to achieve set goals. These refer to goals that are in the interest of both the company and its partners or shareholders. It is worth noting that the supervision and procedures should make it easier to follow the implementation of business plans. They should also promote the efficient use of the company’s resources.
Corporate governance – summary
Corporate governance aims to increase the efficiency and credibility of the company. Therefore, it is beneficial to implement it regardless of the size of the enterprise.