The Organization of Effective Corporate Governance

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Effective corporate governance requires that everyone involved has clear and structured roles and responsibility. It also helps to foster an environment of work that values differences and promotes fairness and impartiality. These frameworks can be applied to a variety of organizations from large corporations to professional associations and families.

The board creates and approves corporate strategies that are designed to create sustainable long-term value; selects the chief executive officer (CEO) and supervises the management in operating the business; invests capital and assesses risks, manages them and sets the “tone at the top” for ethical behavior. The board usually consists of members from insiders including major shareholders, founders and executives as well as independent directors with experience in managing or directing large corporations. Independent directors are deemed to be beneficial for governance because they don’t have the same connections that are often found among insiders, which could lead to conflicts of interests.

The composition of the board is critical as members are often faced with complex technical issues, which require a variety of perspectives. Governance experts recommend that a board comprised of at a minimum a majority of independent directors. Diversity and tenure are also crucial to ensure that the board is able to effectively function, particularly when discussions are lengthy and laden with strong opinions. Board members who are new will bring fresh perspectives to the table, and those with a long tenure may provide continuity and knowledge of the institution.

The board is also accountable for understanding, evaluating and coordinating the annual operating budgets as well as plans of management. Additionally, the board, through its corporate governance committee and nominating committee, should be conducting regular shareholder outreach in order to discover and comprehend the views of major shareholders and communicate regularly with them regarding significant issues relevant to the company.

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