In business, corporate governance is a system of rules and practices that help guide how a company is directed, managed, and controlled.
Effective corporate governance is essential for the long-term success of any company as it ensures that a company is run responsibly and ethically, achieves its objectives, and builds trust with its stakeholders.
Diversifying the Board of Directors
According to the Harvard Law School Forum of Corporate Governance, research shows that companies with diverse boards of directors have 33% greater financial returns than less-diverse peers. As the corporate world becomes far more integrated across global markets, diversity can improve a company’s outlook.
A diverse board of directors can bring a range of perspectives, experiences, and skills to the table, which can help the board make better decisions and mitigate risks. Diversity in the boardroom can also enhance the company’s reputation, increase innovation, and improve corporate social responsibility.
Ensuring Director Independence
Effective boards are made up of directors with a wide range of skills, experiences, and backgrounds who can challenge management when necessary. They also regularly evaluate their performance and that of individual directors to ensure that the board is functioning effectively.
Whenever a company includes internal management within the board, this can skew results and make for biased or unfair decision-making, proving detrimental down the road.
Executive Compensation Review
Boards should review executive compensation regularly and ensure that it is not incentivizing excessive risk-taking or short-term results.
Moreover, executive compensation should be transparent to stakeholders. To achieve this, many boards tie compensation with performance metrics aligned with the company’s long-term objectives.
Research shows there are more balanced objectives when executive compensation is linked to financial returns.
Director Training and Board Evaluations
In many cases, management can benefit from learning about relevant topics such as corporate governance, risk management, and financial reporting. Regular board evaluations are also essential to ensure that the board functions effectively and individual directors perform their duties competently.
Checks and balances are essential for company leadership and can help hold leaders accountable as needed.
Shareholder Rights and Takeover Provisions
In corporate business, shareholders are fundamental to a company’s health, performance, and longevity. Consequently, the rights of shareholders are critical elements in effective governance.
Shareholders can elect directors and vote on crucial issues such as executive compensation, mergers and acquisitions, and other transactions. Boards should be transparent and ensure shareholders can access information about the company and its operations.
Well-drafted takeover provisions are also important, as these protect the interests of shareholders. Takeover provisions can include measures to prevent hostile takeovers, such as:
- Poison pills
- Macaroni Defense
- Stock repurchase guidelines
- Shark repellents
- Standstill agreements
- Pac-Man defense
With these provisions, shareholders can exercise greater control over the company and prevent actions that may not align with their interests.
General Policies and Guidelines
Policies and guidelines are essential elements of effective corporate governance. The board should establish policies and guidelines that guide how the company is run and how decisions are made.
These policies may cover topics such as:
- Risk management
- Social responsibility
- Financial reporting
- Environmental sustainability
Furthermore, the board should ensure that these policies and guidelines are communicated effectively to all stakeholders, including employees, customers, and shareholders. This can build trust with stakeholders and enhance the company’s reputation.
The Woods Lonergan Difference
Effective corporate governance is essential for any company’s success. Well-balanced policies can establish a framework for decision-making, risk management, and accountability, building trust with stakeholders to ensure a company can operate responsibly and ethically.
At every scale of operation, Woods Lonergan’s business attorneys are experienced in providing guidance to corporate entities on how to conduct themselves effectively by offering assistance with:
- Facilitating shareholder or unit owner voting processes
- Conducting reviews of corporate records
- Establishing and enforcing board authority
- Structuring boards and committees for optimal performance
- Defending against or challenging improper corporate actions
- Improving communication between shareholders and management.
We believe that Boards are most effective when is an alignment between their mission, collaborative processes, and structure. Our purpose is to deliver trusted legal counsel to boards, empowering them to evolve into strategic assets for their organizations.
Woods Lonergan represents business law clients across New York City. If you’re dealing with a corporate governance matter, book a consultation with us today to learn more.