Basic Roles And Principles Of Corporate Governance

The term “corporate governance” is used to summarize all processes of the management and supervision of a company. This concerns the internal organization including regulations and guidelines, monitoring functions and their means. Originally, the term only described procedures for controlling the shareholders against the management of a company. Meanwhile, however, it has been expanded so that e.g. Relations between different stakeholders, internal structures of company management or external factors.

The fact that the corporate governance issue has become increasingly important in recent years is mainly due to the numerous cases of Mismanagement. In view of the constantly growing competitive pressure due to globalization, appropriate measures for monitoring company decisions are also necessary.

If a company is understood as a grouping of different stakeholders under uniform management, the task of corporate governance is to realize the best possible handling of all relationships and contracts of the individual groups. One differentiates the shareholder and the stakeholder approach. The former only considers the relationship between shareholders and management.

In addition, the stakeholder approach also encompasses the interests of employees, suppliers, creditors and other groups associated with the company and is therefore a more holistic but also more complex concept. The aim is to provide the best possible conditions for a profitable value creation while at the same time safeguarding the interests of the various stakeholders. To achieve this, the various requirements must be fulfilled in order to be able to use the available resources optimally for the success of the company.

In principle, four different areas of corporate governance are to be distinguished:

  1. General purpose of the company
  2. Structures, processes, people of management
  3. Evaluation of management activities
  4. Company communication

In the framework of organizational controls, stakeholders can exercise certain information and monitoring rights, which means they can better assess and mitigate potential risks. The Supervisory Board of a company, for example. Represents all shareholders against the management of the company and can, if necessary, control the management board.

In the case of so-called market controls, which are externally motivated, on the other hand, a self-control and coordination are established which is determined by the relationship between supply and demand. For example, Management’s wrong decisions from the market with price declines, Share sales.

The most important basic principles of corporate governance are:

  1. Division of Power
  2. Transparency
  3. Reduction of conflicts of interest
  4. Motivation of individual parties

 Also the policy tries to regulate in the corporate governance of enterprises. In 1999 the “OECD Principles of Corporate Governance” were adopted. This should lead to an international harmonization of the governance systems and to establish some minimum standards as the basis for national laws. These general principles are divided into five areas:

  1. Shareholders’ rights
  2. Equal treatment of shareholders
  3. Role of stakeholders
  4. Disclosure and transparency
  5. Obligations of the Supervisory Board

In many countries Corporate Governance Code is adopted already. In Germany, which was adopted by the Federal Government in 2002, is intended to supplement the German Stock Corporation Act and includes guidelines for the boards of listed companies. However, since this is not a legitimate law, compliance is not obligatory.

There are eight principles of corporate governance which have been designed to be applicable to all organizations covered by the Code.

Principle 1: Governance structure
Principle 2: The Structure of the Board and Its Committees
Principle 3: Director’s appointment procedures
Principle 4: Directors’ duties, remuneration and performance
Principle 5: Risk Governance and Internal Control
Principle 6: Reporting with Integrity
Principle 7: Audit
Principle 8: Relations with Shareholders and other key Stakeholders

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