Principles of Corporate Governance (RATF)

Principles of corporate governanceWe discussed about Corporate Governance in our previous article as the system by which companies and other entities are directed and controlled. In this article we will discuss about the Principles of Corporate Governance. The boards of directors are responsible for governance of their companies and other entities. The shareholder’s role in governance is to appoint the directors and auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of board include setting the company’s strategic aims, providing the leadership to put into effect, supervising the management of the company and reporting to the shareholders on their stewardship. The board’s actions are subject to laws, regulations and shareholders in general meeting.

Principles of Corporate Governance

The principles of Corporate Governance is very simple – Responsibility, Accountability, Transparency and Fairness (RATF). These four principles can be applied in any situation or issue to check whether the governance is good or not. In corporate form of business, the governance issue arises because of separation of ownership and business. The principles of governance apply to both board of Directors and managers. Let’s discuss these principles:

  • Responsibility: Responsibility refers to managers taking responsibility of conducting the business in best interest of shareholders. Managers are responsible for stakeholders for their actions.
  • Accountability: Accountability relates to taking ownership of the actions and their consequences. Directors are accountable to shareholders for their decisions.
  • Transparency: Transparency and disclosures are critical to assess the accountability. It ensures that managers have taken right decisions by disclosing the appropriate decision details to the stakeholders.
  • Fairness: Fairness relates to the conduct of manager when there are multiples entities who are likely to be affected by their conduct. Managers need to be fair between different stakeholders like shareholders, lenders, consumers, supplier and society. For example, how managers should decide to invest money in pollution control equipment or not to control carbon emission. Shareholders might feel that this is unwanted expenditure while society could expect the company to improve the quality of environment. Manager need to apply fairness and behave like good corporate citizen.

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