Corporate Governance & Legal Regulations

Good leadership is fundamental to the success of any business. In the corporate world, leadership can take many forms, and it is often changing and evolving with the needs of employees, shareholders, and consumers. In order to ensure that a business is able to develop a solid leadership structure that can also responsively adapt to success or failures, many owners and investors find that a focus on corporate governance is required.

What Is Corporate Governance?

Corporate governance is the complex set of structures and positions used to control a corporation. This typically includes roles for officers, directors, a board, and shareholders. Through a corporate governance structure, owners and participating members can detail the rights and responsibilities of various positions of authority in a corporation and ensure that their corporate governance is in conformity with existing state and federal civil and criminal laws.

Principles of Corporate Governance

In the wake of many high-profile cases involving corruption and fraud within corporate entities, there has been an increasing focus on good corporate governance and how to enforce such governance through the use of domestic and international laws. In response, several notable accountability mechanisms have been established that seek to provide best practices and procedures for corporate governance, while also creating enforcement mechanisms to deal with the bad acts of officers, directors, and shareholders.

There are the three main sources of corporate governance principles widely followed today. These include the Cadbury Report, the Principles of Corporate Governance, and the Sarbanes-Oxley Act. These three sources have several common goals that they seek to establish through good corporate governance. These include:

• Ensuring that corporations respect the rights of shareholders and afford them equal treatment;
• Comprehensively defining the roles and responsibilities of a corporate board;
• Ensuring that officers and board members act with integrity and ethically; and
• Promoting disclosure and transparency among corporations.

Principles of corporate governance also promote internal regulation as opposed to external punishment in the form of lawsuits or fines. This includes granting the board of directors the power to monitor the actions of the corporation, including the ability to hire or fire those who may be causing problems, and conducting regular board meetings to discuss issues as they arise. Likewise, corporations are urged to regularly conduct internal auditing procedures as well as providing avenues for whistleblowers to alert corporations of concerns and protections for whistleblowers so that they are not retaliated against.

Regulation of Corporate Governance

Despite the best efforts of all involved, problems with corporate governance do arise, whether because of institutional inadequacies that prevent proper oversight or bad acts by individual actors. When this happens, and individuals are hurt as a result, a variety of laws permit for corporations as well as their officers and directors to be sued.

One of the most influential laws regulating corporations and their governance is the Sarbanes-Oxley Act, which requires corporations to implement certain procedures, such as providing disclosure of financial conflicts and requiring executive officers to fully review financial statements. If corporations and their officers fail to abide by the governance requirements of the law, they can be investigated, fined, and otherwise punished for these inadequacies.

If corporate governance issues lead to fraud or corruption in international markets, corporations and their officers may also find themselves liable under anti-corruption laws, such as the Foreign Corrupt Practices Act and the UK Bribery Act. These Acts impose harsh penalties on corporations for engaging in corruption, and the government has been known to enforce millions of dollars in fines when corporations are found guilty.

Last reviewed October 2024