What is corporate governance?
Have you ever wondered how companies set short-term and long-term strategies for success? Corporate governance is the business practice wherein an elected board of directors enact company-wide policies to meet goals and reduce risk. Explore potential benefits and drawbacks of this practice in this in-depth guide.
By: Matt Whittle, Edited by: Mitch Jacobson
Last updated: June 11, 2025
Corporate governance defined
Corporate governance refers to the business structure through which shareholders elect a board of directors, who then set the policies that govern the company. Have you ever read the news and heard about shake-ups in the boardroom in the world's top companies? These events likely tie directly to corporate governance.
Put simply, corporate governance focuses on four "P's:"
- People: Stakeholders at every level comprise the core of corporate governance and establish guidelines for successful enterprise and accountability.
- Performance: In addition to financial achievement, the performance aspect of corporate governance considers the ethical implications of business.
- Process: Corporate governance dictates the policies and procedures for a company.
- Purpose: Ideally, businesses must consider their responsibility within the corporate world and beyond.
Benefits of corporate governance
With so many people having skin in the game, corporate governance theoretically ensures that company-wide goals are defined and met, thereby benefiting the business itself and anyone with a stake in the organization. Benefits include:
- Transparency: By communicating goals and strategies, a board of directors can remain accountable to internal and external stakeholders.
- Reduced Risk: With policies in place to assess and reduce risk, a company with effective corporate governance efforts can report its financial conduct to ensure compliance and sustainability.
- Ongoing Assessment: Shareholders have a say in who runs a board of directors. With regular evaluation of directors' effectiveness in leading a company, successful corporate governance can deliver consistent outcomes.
- Cooperation With Stakeholders and Shareholders: Good corporate governance considers the needs of all people with a stake in the company. When leaders listen to these needs, employees and stakeholders voices are heard.
- Adherence to Ethical Standards: Along with the damage that a scandal can bring to a brand, penalties for ethical breaches can affect the company's bottom line, thereby damaging its ability to meet employee and stakeholder needs.
Are there any drawbacks to corporate governance?
Drawbacks to corporate governance typically come about when comparing its theoretical frameworks vs. its empirical outcomes. Many scandals have occurred in the modern business space despite companies employing corporate governance efforts, after all. Stanford researchers have reported potential concerns with by-the-book strategies, board elections, and share structures. For example, boards may act too dogmatically for general "good business" without considering its company's specific sector, location, or reach. Research appears to be inconclusive on the benefits and drawbacks of staggering the election process — as in, not voting on each board member at the same time — with some evidence suggesting that the process makes mergers less common, and other research indicating that the process improves relations among businesses. It depends on the company.
To safeguard against these issues, board members should consider the specific needs of the company in question, thereby resulting in positive outcomes for shareholders.
Basic principles of corporate governance
- Legal Compliance: Policies set forth by a board of directors must adhere to the law and adapt over time to shift with any local or national changes. These regulations relate to financial reporting, privacy, labor, and international concerns.
- Equitability and Trust Among Shareholders: Investors provide the capital that allows a public company to exist. As such, corporate governance must ensure that shareholders at all levels should be heard. This develops trust among the board of directors, the company, and its shareholders.
- Investment Transparency: Shareholders and board members must disclose their investments to guarantee no conflicts of interest.
- Disclosure: Effective corporate governance includes communication to all stakeholders regarding the company's goals, performance, finances, and structure.
- Effective Board Structuring: Each company's shareholders needs to consider its specific needs when electing a board of directors. Then, the board must act in good faith to deliver on goals and meet stakeholder needs.
- Sustainability: In this context, sustainability refers to a company's ability to remain solvent and adhere to environmental and social standards.
The performance of large and small companies affect internal and external participants. The following section explores the differences among different links in this chain.
How do stakeholders differ from shareholders?
Both stakeholders and shareholders are affected by company-wide outcomes, but these terms differ. "Stakeholder" is a bit more abstract and refers simply to anyone impacted by an organization's success or failure, including customers, employees, and investors. "Shareholders" fall under the umbrella of "stakeholders" with one key difference: they own stock in the company.
So, because they have concrete investment in a company, shareholders are stakeholders, but not vice versa. As such, shareholders hold the responsibility of electing an organization's board of directors, who then represent the shareholders' interests and serve the company. The board then has a stake in the business' outcomes, and in some cases, may also own stock in the company.
Why you should learn more about corporate governance
If you participate in business as a current or future leader, worker, or shareholder, a knowledge of corporate governance can help maximize your success in the field. Consider the following examples:
- Manager: If you work in management but aim to ascend to the C-suite or board, knowing the ins and outs of corporate governance can help you achieve your goals and ultimately deliver results for shareholders.
- Shareholder: With enough stock in a company, you may want a say in how its leaders manage the business and take part in the board elections process. Learning about corporate governance allows you to identify key indicators of successful governance as you select the right people to lead the company.
- Employee: Employees are stakeholders in their companies — if business begins to fail, their jobs may disappear. As they search for employment, workers can identify companies with successful corporate governance efforts to ensure long-term success and sustainability.
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