Why Is Your Company’s Corporate Governance Important?

What makes a company successful? You might say profits, a focus on innovation, or expansion. But there’s one key factor that many people forget when they talk about success: corporate governance.

“Corporate governance” isn’t just a buzzword. It’s the system — including controls, policies, and leadership structure — that guides your company’s behavior as a corporation. 

More than just a set of rules, corporate governance is a roadmap that can lead your business to success. Here’s a look at why your company’s corporate governance is so important.

It’s an Essential Part of Risk Management

No company is immune to risk. But when your business has strong corporate governance, you can reduce your chances of suffering a major setback and ensure that your employees know how to recognize and respond to different kinds of risk. 

That’s largely because effective corporate governance practices include codifying risk management protocols. For example, thorough corporate governance will usually address the following:

  • How to handle mergers and acquisitions
  • What corporate strategies to use in different situations
  • How to handle public relations challenges (like an executive coming under fire for something they said on social media)
  • How to manage vendor relationships

If your company finds itself mired in a scandal or facing another unexpected challenge, the last thing you want is for your leadership to scramble. When executives and board members understand exactly what policies to follow, they’ll be able to keep the company on track. 

It Eases Investors’ Minds

Would you invest your money in a company that seems generally disorganized and has no set governance policies? Probably not. If you want to win over would-be investors, you need to show them that they can be confident in your business’s corporate governance. 

When investors see that you’re a business they can trust, they’ll be more likely to grant you access to the funds you need to grow. Of course, corporate governance isn’t the only thing you need to secure investors, but it’s an excellent start.

It Improves Decision-Making

You might be able to make decisions for yourself on the fly and suffer no ill effects. However, when it comes to corporate decision-making, having a set process is essential. Corporate decisions affect both individual employees and your business as a whole. When making decisions, most stable companies do the following:

  • Bring diverse perspectives together
  • Consider both long-term and short-term effects
  • Examine how different strategies will impact long-term value creation
  • Follow a pre-set process or decision-making structure

If your business’s corporate governance is solid, you already have a decision-making protocol in place. This kind of protocol takes the guesswork out of the equation and lets board members and other leaders focus exclusively on the problem at hand. As you might expect, that often leads to better decision-making.

It Garners Support for the Company

“Support” is a broad term — it can refer to funding from investors, profits from purchases, or even the public perception of your company. Support is essential for long-term success, but many business owners take it for granted until they no longer have it.

So how does corporate governance influence support for your company? Here are a few examples:

  • When investors see that your business is governed by clear principles and protocols, they’re more likely to offer financial support
  • Strong corporate governance policies can avert PR crises before they happen, preserving public support for your business
  • Corporate governance shapes corporate strategy, and corporate strategy helps you successfully predict which products or services will be the most profitable

Losing any kind of support can be devastating for your business. It’s much better to prevent loss of support with good governance than to try to regain support once you’ve lost it.

It Makes It Easier to Keep Up With Regulatory Compliance

Some industries are more tightly regulated than others. And in many industries, running afoul of regulations — even accidentally — can lead to considerable fines, sanctions, legal action, and even reputational damage.

In most industries, regulations are constantly changing. If you want your business to stay compliant, it’s not enough to just check in on regulatory requirements every now and then. Usually, you need a dedicated employee (or a whole department, depending on the size of your company) to track regulatory compliance. 

That person or department follows set procedures for monitoring your company’s compliance. Those set procedures are part of your business’s corporate governance.

It Improves Staff Retention

When you think of the benefits of strong corporate governance, employee retention might not be the first thing that comes to mind. In many cases, staff retention is a secondary benefit of having strong corporate governance. 

In a sense, a business without corporate governance is like a country without laws. Even if everyone involved wants what’s best for the business, the sheer confusion over the lack of clear processes makes it hard to get anything done. 

Most people don’t want to work in a chaotic workplace. It adds unnecessary stress throughout the workday, but that’s not all. If the higher-ups at a company are wrapped up in figuring out how to deal with crises, stay on top of regulations, and strategize, they likely aren’t making employee well-being a priority. In a situation like this, most people would rather find work elsewhere.

On the flip side, a company with strong corporate governance will likely have protocols in place to keep employees happy, recognize and promote top performers, and shape a positive company culture. When your employees feel happy and supported, they’re much more likely to stay.

Success Starts With Robust Corporate Governance

Strong corporate governance can help your company avoid risks, retain quality employees, and grow profits. And while it might sound tedious to come up with a collection of policies that make up a corporate governance strategy, it’s an indispensable part of building a successful company. 

When you have a focused and motivated board of directors and an executive team eager to improve the company, you’ll be well on your way to building a strong system of corporate governance.