Corporate governance is the system by which a company is controlled. While the term “corporate governance” traditionally refers the functioning of a corporation, looser modern usage may include other entity types as well. The goal in corporate governance is to help the company maximize its returns while complying with the duties apportioned to the company and the people acting on its behalf.
Common Corporate Governance Issues
Corporate governance, in a broad sense, involves numerous items, such as correctly making distributions, electing members of a board of directors, electing officers, preserving records, issuing shares, raising capital, calling and holding the correct meetings for the Board of Directors and shareholders, and knowing who has the authority to bind the company through contracts. When an entity is created, the first items of importance are corporate governance issues, such as how the company is set up and how the company will operate.
Often businesses get into trouble because the people acting on behalf of the businesses decide to solve problems according to what they believe is fair and not according to how the business is structured. Proper corporate governance requires knowing and following the laws and contracts that control which actions may be taken by directors, officers, and shareholders. Proper corporate governance also requires the preservation of individual rights while acting in the company’s best interest.
Both closely-held corporations and publically traded companies need proper corporate governance to avoid significant liabilities, such as the forced dissolution of the company.
Handling Corporate Governance Issues
The first concern in corporate governance is setting up a business to match how the company will actually be run on a day-to-day basis. Businesses need governing documents which are designed to help the company accomplish this goal.
Proper corporate governance requires a balance between meeting obligations and having the flexibility to pursue the right course of action for the company both now and in the future. A company needs to be able to adapt, but there must also be protections in place to protect against mismanagement.
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