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The Concept of Corporate Governance Report

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Updated: Jul 16th, 2021

Executive Summary

This paper is developed to explain the basic aspects of corporate governance and its implementation in organizations. The definition of the concept of corporate governance, as well as the discussion of corporate governance mechanisms, are provided. Moreover, the paper gives considerable attention to the topic of ethical decision-making in business. The importance of ethical behaviour, particular stages of making an ethical decision, along the advantages and disadvantages of establishing a corporate code of ethics are discussed.

Introduction

The concept of corporate governance, as well as its mechanisms, is an integral part of efficient decision making in business. Moreover, ethical considerations also play a significant role in this process. This paper aims to address the primary aspects of the mentioned issues.

Explanation of the Concept of Corporate Governance

According to Lam (2014), corporate governance (CG) is among the seven essential components of the enterprise risk management (ERM) framework. Each of the elements of the ERM framework is focused on the implementation of specific tools and requirements for managing a particular aspect of the organization’s structure (Lam 2014). Corporate governance could be described as a set of organizational practices that are concerned with the Board of Directors’ performance and stakeholder communication.

Accordingly, the importance of corporate governance for the company and its shareholders is evident. As the contemporary business environment is continuously changing and new socio-economic issues arise, the role of corporate governance as the foundation of adequate decision-making in the current political climate is of high significance (Weldon 2018). With the implementation of corporate governance mechanisms, the company will be able to establish a well-functioning risk management strategy that would defend the company’s position in the market and the interests of the company’s shareholders (Lam 2014).

As per the significance of corporate governance for the wider society, it is possible to mention that responsible decision-making in business can have a vast impact on the economic, environmental, and social progress of the society (Weldon 2018).

Mechanisms of Corporate Governance

Further, since the basic aspects of the concept of corporate governance and its importance for the company and society as a whole were discussed, it is possible to move to the investigation of the more specific aspects of CG. In particular, this section is dedicated to the explanation of the mechanisms of corporate governance and their practical implementation. Primarily, there are three types of CG mechanisms: internal mechanisms, external mechanisms, and independent audit (Lam 2014).

Internal mechanisms play an important role as they represent the most fundamental element in the system of corporate governance (Lam 2014). Internal mechanisms include the most basic and essential aspects that define the performance of a company. These mechanisms include the decision-making by the internal stakeholders (mainly the owners and top management of the firm, but employees and middle management are also included) in such aspects as performance management, production, operations, and policy development (Lam 2014).

The external mechanisms represent the relationships of a particular company with its external stakeholders, such as industry associations, unions, and government regulators (Weldon 2018). The primary purpose of this type of CG is to ensure that the company complies with the external industry standards. Lastly, the mechanism of the independent audit allows retrieving meaningful information on the level of internal performance and the future of the company.

All of the mentioned mechanisms of corporate governance should be implemented and performed by a company to establish a comprehensive and well-regulated system that would ensure the company’s success (Lundqvist 2015). The key features of good practice in this area are the following. First of all, it is essential that corporate governance would have a strict top-down structure, where decision-making is made at the top management and owners’ level, and then it is implemented further at middle management and employee levels (Lundqvist 2015). Another feature that is critical is the consideration of ethical standards by the company.

The Importance of Ethical Behavior in Business

The previous section mentions ethical behaviour as one of the components of the successful implementation of corporate governance mechanisms. Therefore, this section will dwell upon the investigation of ethical decision-making in the context of corporate management. First of all, it is critical to understand that acting ethically and acting legally are two distinctive approaches to executing corporate governance (Falck & Heblich 2015). Even though it gives the company the right to designate its operations as “morally appropriate,” following legal regulations only ensures that the company is formally “right.” There are such situations in which compliance with the legal norms does not mean that the company is also acting ethically. The appropriate example of such a situations is the gentrification of historical buildings.

Accordingly, why is it important for a company to act ethically? Firstly, the reputation of the violator of moral norms can significantly aggravate the overall public image of a company (Falck & Heblich 2015). Secondly, in some situations, ethical decision-making is necessary because it has to consider humanity over the profits of the company (for example, in cases where business directly affects the lives of particular individuals). Thirdly, ethical performance will ensure that the company will have good relationships with the government and other representatives in the industry as well as from other industries (Falck & Heblich 2015).

Thus, there will be a greater chance that a company, which implements ethical decision-making, will be perceived as more reliable, and it will be well-respected. Also, it is necessary to consider the contribution to social support as another ethical tool.

Stages of Ethical Decision-Making

The importance of ethical decision making could be hardly denied; however, it is also important to comprehensively understand how to implement this approach. Accordingly, it is possible to state that there are several stages of ethical decision-making. First of all, it is crucial to gather all relevant fact facts to define the ethical issue at stake (Falck & Heblich 2015). Secondly, the identification of the affected parties, possible consequences, and the ethical obligations or norm within and outside the company should be conducted (Falck & Heblich 2015). Thirdly, it is needed to outline the plan of action and implement it, considering the most ethically appropriate decision in a particular situation.

A Corporate Code of Ethics: Advantages and Disadvantages

Another aspect of ethical decision-making that is of high interest to discuss is the development of a corporate code of ethics, also known as a code of conduct (Falck & Heblich 2015). It is a widely recognized practise among various organizations in different industries to have a set of moral and ethical rules and regulations for the company’s employees and managers. Accordingly, what are the advantages and disadvantages of having such a code in one’s organization?

Evidently enough, the advantages of the establishment of a code of ethics are numerous, as the company ensures that there is a set of regulations that can help the company to make decisions that comply with the moral standards of society. Also, such ethical codes regulate the internal relationships, making a well-designed structure of hierarchical relations between managers and employees of the company. Regarding the disadvantages, it is possible to mention inequality that can be implied by the rules of the code, making top management members more favours.

Reference List

Lam, J 2014, Enterprise risk management: From incentives to controls, 2nd edn, Wiley London, England.

Lundqvist, SA 2015 ‘Why firms implement risk governance–Stepping beyond traditional risk management to enterprise risk management’, Journal of Accounting and Public Policy, vol. 34, no. 5, pp.441-466.

Falck, O & Heblich, S 2015 “Corporate social responsibility: Doing well and doing good”, in A Ni & M Van Wart (eds), Building business-government relations, Routledge, New York, NY, pp. 175-196.

Weldon, MN 2018 ‘Corporate governance, compliance, social responsibility, and enterprise risk management in the Trump/Pence era’, Transactions: The Tennessee Journal of Business Law, vol. 19, no. 1, pp. 275-305.

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IvyPanda. 2021. "The Concept of Corporate Governance." July 16, 2021. https://ivypanda.com/essays/the-concept-of-corporate-governance/.

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IvyPanda. (2021) 'The Concept of Corporate Governance'. 16 July.

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