What Is Corporate Governance?


A business is a structured entity in which individuals work together in a working environment dedicated to providing a product or service. In a business, individuals work together to either produce and sell goods or services or acquire other items for use. Others purchase the goods and/or services from the business owner. In order to make a profit, a business must earn a return on investment that is equal to or more than its expenses over a period of time. A business could be a publicly traded company or a privately held partnership. A privately-held partnership has neither limited nor unlimited liability.

A corporation is not a business in the conventional sense. Rather, a corporation is organized as a legal entity separate and distinct from the individuals running it. Corporations are managed by boards of directors elected by the shareholders. Individual stakeholder’s rights are not protected in the management of corporations; in fact, these rights may even be prohibited.

Under the law, a corporation is generally subjected to two major restrictions based on profits and loss. First, a corporation cannot make a profit unless it actually sells a product or service and incurs a cost. Second, if the corporation does make a profit, a portion of this profit must be paid to the shareholders as their share of profits. Most companies that are publicly traded have several key stakeholders, including customers, employees, suppliers, government entities, property managers, and the stockholders themselves. In addition, most businesses operate at a loss, which represents the difference between the gross revenue earned and the total expenses incurred. A company is required to maximize both opportunities for revenue growth and cost savings.

Profit and loss must be properly determined in order to maximize returns. In the case of a publicly-traded company, management must use a variety of tools to arrive at a good profit figure. The total revenue factor, or EBIT, is used to track the profitability of a firm. This means the firm’s total revenue less net income from investments, less total expenses, and any profit and premium capital.

An essential tool in profit maximization is economic value, also referred to as market price. The market price is the amount by which the present value of all of a firm’s tangible assets less its liabilities is greater than the total equity. Present value is equal to the amount of money a firm would pay to liquidate its invested assets and invest in new ones. The total economic value of a firm refers to the entire net worth of the firm’s ownership equity less the goodwill of the firm. A company’s ability to generate profits is dependent upon its ability to create and service new services or products that consumers need and will pay for.

Social responsibility is another important concept that should be included within the corporate veil. Economic value added is considered the creation and development of value-added services, products, or activities by the firm. Social responsibility refers to the extent to which the firm relates its social, environmental, and human issues to the public and shareholders. These key terms are crucial in determining the overall health of a company as they pertain to its profitability.

Key Terms Important to Corporate Governance Include CAPA (Chief Operating Officers), PRSA (Chief Public Accounting Officer), CPA (Chief Public Accountants), CFO (Chief Financial Officers), and SOA (Social Enterprise Attorneys). A key objective of corporate governance is to protect the interests of stakeholders (shareholders, employees, suppliers, and customers). A corporation must have an environment where all stakeholders can participate and build a strong, non-fragile working relationship. To facilitate this process, corporations must have a board of directors that is elected or appointed by the Board of Directors and includes a mix of public and private sector experience.

The key to successful management is the ability to build a strong and inclusive working relationship with all of the stakeholders. Stakeholders must be at ease when it comes to being considered for important business decisions. The success of a firm is based upon the satisfaction of its stakeholders, the ability to make informed decisions with regards to profitability and risks, and a high level of corporate responsibility. Firms must continually assess the risks to their business and develop ways to mitigate those risks.