What are Corporate Governance Guidelines?

Corporate governance guidelines document the way a business is directed or controlled. They serve as guidelines for board members on how to oversee upper management. Intended to display a culture of transparency to stakeholders, corporate governance guidelines also serve as a form of internal auditing. Potentially valuable public relations tools, they help communicate ethical practices and management policy to stakeholders.

Parties directly affected by corporate governance guidelines include the chief executive officer (CEO), the board of directors, and upper management. These guidelines give shareholders a sense that directors are held accountable for their decisions. In countries or organizational structures that allow for shareholder participation in upper management decisions, procedures for input can also be stipulated in the guidelines.

Clear corporate governance guidelines outline the responsibilities of the board of directors. Stipulated processes include board eligibility requirements, meeting schedules, and committees and performance evaluations. Written responsibilities help hold board members accountable for their duties, both legally and through public awareness.

Corporate governance also dictates how directors are chosen, compensated, and evaluated. This attempts to ensure there is a system to check the power of the CEO. Guidelines often include clauses about the importance of continuing director education and the process of director evaluation.

Determination of Independence procedures exist to ensure there is no conflict of interest between directors and their stake in the company. In the U.S., these stipulations often attempt to meet the requirements set by the New York Stock Exchange’s requirements for audit committees. Eradicating conflicts of interest can encourage public support as well as safeguard companies against legal scrutiny.

Publishing of corporate governance guidelines communicates corporate culture in regard to ethics and disclosure. This can improve public perception as well as define a set of procedures to ensure commitment to ethical actions. The statement of these ethical policies provides a framework of action that can help safeguard against the risk of ethical ambiguity by serving as a reminder of procedure. Guidelines may also include clauses to ensure the financial integrity of accounting procedures.

Effective corporate governance is difficult to ensure, however, and some organizations find the guidelines of little use in day-to-day management. This can be due to a lack of upward information from managers to the board of directors. Guidelines hope to eradicate conflict of interest, but if the CEO is the main port of communication between the organization and the board, information can be misrepresented. Governance guidelines with internal audit processes seek to remove this lack of upward information.