Corporate governance is defined as the framework of rules that provide direction for a company’s business functions. These guidelines helped executives, board members and other managers run a company in order to achieve its long-term goals and manage crises. Ultimately, corporate governance is intended to add value to a company while benefitting the company’s stakeholders.
Corporate governance encompasses the interests of all parties involved in an enterprise such as its shareholders, suppliers, financiers, consumers and the overall community in which the firm exists. Therefore, corporate governance involves all components of a company’s management team.
The corporate governance framework generally consists of three main points of focus:
- The contracts between the company and it’s stakeholders in terms of distributing responsibilities, rights and rewards;
- Procedures for reconciling conflicting interests;
- And the procedures for proper supervision and the transparency of information, serving as a system of checks and balances.
The lack of proper corporate governance became a prominent issue after companies such as energy trading firm Enron went bankrupt in 2001 due to an internally inspired accounting fraud.
After the Enron and other corporate crime scandals, the U.S. Congress passed the Sarbanes-Oxley Act (SOX) in 2002 in order to restore shareholder and consumer confidence. The act, implemented by the SEC, is intended to create more transparency in terms of a company’s accounting methods and other key practices. More specifically, the SOX regulations require a firm’s executives to certify the accuracy of financial information and require boards of directors to take a more active role in governance.