Corporate governance best practices are the characteristics or styles that large organizations use to run their operations. Large organizations — often publicly held companies — use governance to ensure a standard of operational performance throughout their departments and divisions. Corporate governance best practices may include control, trust, sovereignty, and influence. Each of these styles can work individually or in tandem to ensure each individual in the company understands his or her responsibility to internal and external business stakeholders. For publicly held companies, shareholders are typically the largest group of outside stakeholders who rely on corporate governance.
Control in corporate governance relates to the ability of executive-level and operational managers to run operations the best way possible. These individuals work at the forefront of a company’s operations and will influence how well the company lowers costs or raises sales revenue. Large organizations and publicly held companies will usually have a board of directors who act on behalf of shareholders. While the board plays an important role for these individuals, corporate governance best practices should restrict the board to an overview capacity since board members may not have the best understanding for running the company.
Trust is displayed by shareholders who place their faith — and financial resources — in a company expecting a financial return. Board members, directors, and executive managers who fail to safeguard this trust may be seen as unethical or unaccountable for their actions. Organizations that require each individual to act in a manner that protects the trust of outside stakeholders can improve their corporate governance best practices and possibly earn higher marks from current and future shareholders.
Sovereignty in corporate governance places distinct roles and limitations on each major group in an organization. While all groups in an organization should attempt to work together, allowing one group to exert more power or influence over another can lead to tough management situations. Shareholders usually have the ability to vote by proxy for board members or other major issues at the publicly held company’s annual meeting. Current board members or managers who exert undue influence on large portion of shareholders can undermine the company’s corporate governance best practices.
Influence can also be a tool shareholders use to create changes in a company for their advantage. This practice is seen when an individual or investment group attempts to purchase large amounts of a company’s stock in hopes of gaining ownership or change the company’s practices. Board members and executive managers can create specific limitations in their company’s corporate governance to ensure shareholders have limited influential power in the company.