What is good corporate governance? 9 characteristics (with examples)
Governance is the process by which corporations establish their rules and policies and implement and monitor them. Yet, it’s good corporate governance specifically that’s become the watchword in the business landscape. Groups and individuals holding positions of power must have a sense of accountability and a means of carrying out checks and balances if they want to govern successfully.
Good governance typically leads corporations to achieve their goals ethically and comply with regulatory expectations and best practices. In successfully fulfilling their mission and plans through corporate governance, corporations will enhance their prosperity and find favor in the eyes of their shareholders.
For this reason, good governance underpins successful businesses today, where expectations around ESG (environmental, social and governance) issues like sustainability and diversity are ever-growing. Focusing on such matters encourages a mature governance framework, helping organizations make the right decisions at the right time.
“Good governance is ultimately what is right for the company, for the long-term health of the company.” — Marc Hodak, Partner, Farient Advisors
This article will help you take the essential first steps on your organization’s journey to good governance by explaining:
- What good governance is
- The nine principles of good corporate governance
- Examples of good governance in action
- A proven process for ensuring good corporate governance
- The role of technologies, such as board management solutions, in solidifying your organization’s commitment to good governance
What is good corporate governance?
UNESCAP (the UN’s Economic and Social Commission for Asia and the Pacific) summarizes good governance as “participatory, consensus oriented, accountable, transparent, responsive, effective and efficient, equitable and inclusive and follows the rule of law.”
As a result, good governance:
- Minimizes the potential for corruption
- Increases inclusion and the ability to benefit from diverse thinking
- Reacts to the needs of society, both now and in the future
PwC believes that “Good corporate governance contributes to sustainable economic development by enhancing the performance of companies, increasing access to external capital and improving confidence in the market, which leads to stability.” In other words, it’s about taking responsibility for an organization’s ESG and related principles, like corporate social responsibility and governance, for a set time, ultimately leaving the organization in better shape than it was when you were at the helm.
“We need to challenge not good governance as a rule, but the standards that have been ossified over time.” — Marc Hodak, Partner, Farient Advisors.
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Download the guideWhy is good corporate governance important?
In a corporate context, good governance sets the tone and environment for all individuals or stakeholders to have a voice. A commitment to good corporate governance means:
- Embedding diversity and inclusion from the top of the organization: Governance fosters a diversity of perspectives, backgrounds and experiences at the leadership level — ensuring decisions reflect the needs of all stakeholders.
- Putting in place a governance framework: A framework acts as a guide that covers all the characteristics of good governance to ensure you capture every aspect of the task with transparency, accountability and fairness.
- Demanding good board practices: As in other areas of business, the role of the board of directors is a central one when it comes to ensuring your approach embraces all elements of good governance. This includes regularly evaluating board performance, prioritizing independence in board composition and separating powers between the board and management.
The importance of good corporate governance to shareholders
To shareholders, good corporate governance is a reflection of their best interests. Comprehensive governance practices promote transparency, accountability and ethical decision-making, all of which build confidence that the board is acting for the good of shareholders.
Thorough oversight and regular evaluations underscore the board’s commitment to its fiduciary duties, as do mechanisms that mitigate conflicts of interest. Together, these practices create a good corporate governance approach that shareholders trust to safeguard their investments.
Good corporate governance benefits
Good corporate governance benefits stakeholders at all levels of the organization by:
- Enhancing transparency: Boards build trust and reduce the risk of mismanagement by implementing clear communication about company operations, financial performance and strategic decisions.
- Increasing accountability: A clear governance structure places specific responsibilities on specific people, making it easier to hold them accountable for responsible and ethical behavior.
- Improving risk management: Companies with good corporate governance practices have mechanisms for proactively identifying, assessing, and managing risks, minimizing potential breaches and damages.
- Attracting investors: Investors are drawn to companies that responsibly steward their investments. Strong corporate governance practices indicate transparency and stability as a path to growth.
- Complying with regulations: Good governance is built around legal and regulatory compliance. Following those practices helps reduce the risk of penalties and legal challenges.
- Growing sustainably: Governance balances short-term gains and long-term growth. Walking that fine line aligns corporate strategy and shareholder interests, boosting the company’s outlook.
Principles of corporate governance
The principles of corporate governance are the foundational guidelines that ensure a company is well-directed and controlled. There are five core principles: accountability, fairness, transparency, responsibility and communication. Below, we take a closer look at each and how they support good governance.
1. Accountability
Accountability is a crucial characteristic of good governance, just as it is in many other areas of business and societal life. Boards of directors are accountable to groups and individuals affected by their decisions, including their shareholders, stakeholders, vendors, employees and the general public.
Transparency and the rule of law go hand-in-hand with accountability; transparency is one of the core values of good governance, and it both drives and evidences accountability.
2. Transparency
Good corporate governance requires that records and processes are transparent and available to shareholders and stakeholders. Financial records should not be inflated or exaggerated. You should present reporting to shareholders and stakeholders in ways that enable them to understand and interpret the findings.
Transparency means stakeholders should be informed of key corporate contacts and told who can answer questions and explain reports, if necessary. Corporations should provide enough information in their reports to give readers a complete view of the issues.
3. Fairness
Good governance’s “participatory” nature requires that boards and organizations become more equitable and diverse. Moreover, these diverse board members and employees cannot be silent partners; they need an active voice in corporate decision-making. The board may play a key role in driving diversity, but equally, diversity within the board itself drives better thinking. But beware of tokenism; the importance of transparency in good governance cannot be overstated. Strong, well-composed boards both include and value the views of people with various skills, talents, abilities, experiences and perspectives.
Boards should expect all of their members to participate in board meetings, and a commitment to good corporate governance practices demands that board chairs facilitate meetings in ways that draw out the perspectives of all board directors.
4. Responsibility
One of the essential principles of corporate governance is the board of directors’ responsibility. They must provide consistent and proactive oversight, ensuring everything from strategy to risk management, financial reporting and legal compliance runs smoothly. However, the board can’t fulfill its duties at any cost.
Instead, the board must act in good faith, with due diligence and care. A board’s fiduciary duty to act in the company’s and stakeholders’ best interests is fundamental because it prioritizes the greater good above all.
5. Communication
The boardroom is an appropriate forum for hosting robust discussions and debates. In fact, it’s expected. Some of the most heated debates result in the best decisions, as representatives from many different walks of life come together with varying perspectives.
Good corporate governance means securing agreement from these discussions. Consensus-oriented decision-making has to consider this diverse group’s different needs and perspectives to deliver a broad consensus that will serve the best interests of communities and companies.
Other key principles of corporate governance
Corporate governance principles are interconnected; while it all starts with the five core principles, many other characteristics underpin good governance. These include:
6. Responsiveness
All too often, crises and controversies can overtake the corporate world’s focus. A timely response to the unexpected is crucial, with corporations that practice good governance usually able to prioritize swift and honest communication with shareholders and stakeholders.
7. Effectiveness and efficiency
As planners and overseers, board directors are responsible for conducting their duties effectively and efficiently. Many corporations also consider the environmental impact as they perform their duties and responsibilities. For example, using the drive for good governance as an impetus for digital transformation, an organization may transition from manual paper processes to more environmentally friendly software solutions, such as the integrated suite of board leadership and collaboration tools.
8. Equity and inclusiveness
Each board director has an equal seat at the board table. Each director can and should use their voice to share their experiences, opinions and philosophies to enhance and broaden discussions. No one should feel left out or that their views have less meaning than others.
This same ethos should permeate the entire organization, with a culture of diversity and inclusion underpinning all of your operations. Diversity, equity and inclusion (DEI) are core elements of good governance.
9. Rule of law
The rule of law means boards should be fair and impartial in their collaborations and decision-making. Certain circumstances may require boards to seek outside counsel, guidance or expertise from external, third-party experts. Good corporate governance requires boards to act ethically, honestly and with the utmost integrity, whether making decisions themselves or working with third parties.
10. Strategic vision
One of the primary responsibilities of board directors is strategic planning, which includes the organization’s mission, vision and values statements. Strategic planning leads boards to understand where the corporation is going and how it will get there. Good corporate governance requires a robust planning process, incorporating action plans, budgets, operating plans, analysis, reporting and much more. The strategic plan holds board members accountable for their decisions and for monitoring their goals. Strategic planning also includes risk management and protecting the company’s reputation, and as such, is an opportunity for organizations to put into practice many of the good governance principles they espouse.
Global standards: The G20/OECD Principles of Corporate Governance
Corporate governance principles can also be more formal and well-documented. The G20/OECD Principles of Corporate Governance are the most widely accepted global governance standard. The OECD first developed them, and the G20 later endorsed them as a tool for governments, regulators and companies to create sound governance frameworks.
There are six guiding principles for this standard:
- Ensuring the basis for an effective corporate governance framework: The G20/OECD principles mandate that legal, regulatory and institutional frameworks should promote transparent and fair markets. Complying with the rule of law is also essential, as it clearly defines roles for different actors: owners, board members, regulators, and more.
- Establishing the rights and equitable treatment of shareholders: Governance must protect shareholders’ rights, including proper voting, share transfers and information access. This includes encouraging shareholder participation and promoting equal treatment of all shareholders, including minorities.
- Promoting transparency with institutional investors, stock markets and other intermediaries: Encourage accountability and visibility for institutional investors and market intermediaries. Aligning incentives with long-term performance and stewardship can promote a more equitable, values-based approach to growth.
- Defining the role of stakeholders: Recognize the rights and contributions of stakeholders — employees, creditors, customers and more — and encourage active cooperation. Like the core governance principles, the OECD/G20 guidelines focus on fostering sustainable operations, ethical behavior and risk awareness.
- Ensuring disclosure and transparency: The OECD/G20 principles make visibility more concrete. It mandates the timely, accurate disclosure of all material matters, both financial and non-financial. Disclosures should include financial results, ownership structure, related-party transactions, risk factors and sustainability data.
- Maintaining the responsibilities of the board: The board should remain effective and accountable and oversee management, strategy, risk and internal controls. While doing so, the board must act in the company's and its shareholders' best interests.
Examples of good governance
What does good governance look like? There are numerous examples of best practices regarding corporate governance principles.
Some things you may also look for:
- Is your board diverse and inclusive, with various voices able to share their views?
- Is your board managed methodically, with meetings, documents and processes captured via a board portal that facilitates strong governance?
- Do your directors lead from the front on issues of ethics and compliance?
- Can you demonstrate compliance with regulatory and reporting requirements like NIST 800-171 and SOX?
- Is your sustainability reporting up to scratch?
- Are you working towards environmental best practices on issues like Scope 1, 2 and 3 emissions and emerging contaminants?
- Are you proactive around ESG reporting, even when there is no legal imperative to report?
- Do you have sufficient — and sufficiently robust — internal controls to measure progress in all these areas?
Effective governance starts here
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Discover moreCompanies with good corporate governance
Understanding strong governance principles is important, but what do they look like in practice? Here are two companies actively building good corporate governance frameworks:
Saturn Oil and Gas
As Calgary, Alberta-based private oil exploration company, Saturn Oil and Gas (formerly Ridgeback Resources) navigated a roll-up acquisition and restructuring in 2016. The company struggled to adapt its paper processes to facilitate operations across the globe.
Because the company’s governance was tied to stakeholder engagement, they needed a more seamless solution. They:
- Adopted a governance platform: Implementing the Diligent governance platform eliminated the need for multiple siloed systems, uniting key stakeholders around the globe in an encrypted and collaborative virtual environment.
- Prioritized secure meetings and collaboration: Saturn Oil and Gas engaged the board, investors and other remote stakeholders in the course of its governance. Diligent has enabled boards to communicate with investors actively and transparently, building trust in its best practices.
- Implemented board materials management: Saturn Oil and Gas’s board management staff tapped into the platform’s real-time access to board materials from any device, making it easier to standardize board meeting preparation. Virtual board meetings also promoted more consistent communication without sacrificing security.
CitiusTech
CitiusTech is a global health information technology company that provides healthcare technology services and solutions to payers, providers and medtech and life sciences organizations worldwide. Its 8,500 employees serve more than 140 organizations, creating a complex web of stakeholders with distinct responsibilities.
The organization is also incorporated in both India and the U.S., challenging the company to coordinate across time zones. To maintain good corporate governance practices, CitiusTech:
- Doubled down on corporate governance: CitiusTech wanted to attract international board talent. It knew having a robust board portal would send a strong message that it values its directors and will provide the tools they need to grow.
- Implemented board and leadership collaboration tools: The Diligent board portal empowered CitiusTech to move off of email and into an encrypted environment built around governance best practices.
- Improved meeting management: Planning and executing at least one board meeting per quarter — along with committee meetings — became difficult to do manually. Using technology streamlined meeting processes and ensured compliance.
- Document sharing and notifications: Part of governance is ensuring boards have accurate insights to make informed decisions. Using a board platform facilitated secure information sharing with automated notifications to ensure boards are abreast of key documents and data.
How to ensure good corporate governance
While there is no silver bullet for good governance, technology solutions are the solid foundation for thriving governance practices. Modern platforms collect and analyze much information about your business activities, which can help optimize your processes.
1. Leverage data
The average organization generates a lot of data. Every day, users create 2.5 million quintillion bytes of data, much of which companies collect and store.
This data includes information on products, goals, customer sentiment and almost every other business activity. The proper data management and visualization tools can transform these facts into useful information to monitor the ESG criteria that inform good corporate governance.
Diligent organizes data into powerful dashboards that filter and present essential information from various sources. News, your own data, and stakeholder surveys all combine in a single suite of tools to create a powerful feedback loop that monitors every decision your company makes.
2. Keep up with news and public opinion
For every action, there’s a reaction. Each decision you make plays out over the long run. Irresponsible activities that eventually hurt shareholders and stakeholders usually start as a small ripple that turns into a tidal wave.
If your company decides to reduce costs by cutting quality, the grumbling of customers will eventually impact your bottom line — and those customers will find another place to go.
News and public opinion are terrific and underutilized sources of information. Many organizations fail to realize customer and stakeholder perceptions until it’s too late.
3. Know where your organization stands
All this information helps you understand your risk and where you stand within your industry. Are you a leader in the field, or is there room for improvement?
Your data helps you create gaps, and SWOT analysis reports. These are the basis from which to generate risk and other corporate strategies.
4. Establish informed policies and strategies
With a complete understanding of your business environment, including how you meet ESG criteria for risks and opportunities, you can create a good corporate governance strategy to mitigate risk.
Data-driven decision-making is not just a trend; it’s a necessity. Companies with a more mature data strategy often see a 2.5 times improvement in all company outcomes. Establish policies and guide your organization using the four principles of data governance.
5. Be transparent, accountable, fair and responsible
Planning and data are only helpful with the drive to deploy them correctly. It’s up to you to act with the right data-based strategies.
Present and own your decisions. Act on the insights you gain responsibly. Avoid the pitfalls of bad data governance.
Drive value with better decision-making
Good corporate governance is multi-faceted but ultimately achievable. Yet, there is no one-size-fits-all approach to management. How quickly and effectively you achieve good corporate governance best practices depends on your organization’s maturity. The more advanced your organization is at foreseeing risk, the better your board will become at making the right decisions at critical times.
Both robust technology and governance maturity are essential pieces of that puzzle. Download the governance maturity checklist from Diligent to learn the most important steps you can take to propel your progress toward good corporate governance.
FAQs
What are the key principles of corporate governance?
The core principles of corporate governance include accountability, transparency, fairness and responsibility. These guide how companies are directed and controlled. Strong corporate governance ensures that decision-making is ethical, oversight is effective, and the rights of shareholders and stakeholders are protected.
Why is corporate governance important for companies?
Corporate governance is essential for building trust, stability and long-term success. It helps prevent fraud and mismanagement, improves access to capital, enhances reputation and aligns a company’s strategy with stakeholders' interests. Good governance also supports regulatory compliance and effective risk management.
How do the G20/OECD Principles of Corporate Governance apply in practice?
The G20/OECD Principles provide a global benchmark for best practices. In practice, they guide companies and regulators to:
- Protect shareholder rights
- Promote board independence and accountability
- Improve disclosure and transparency
- Encourage stakeholder engagement
- Strengthen oversight of risk and sustainability
Companies often apply these principles through board policies, audit and risk committees, ethics codes and stakeholder engagement strategies.
What’s the difference between corporate governance and management?
Corporate governance refers to the framework of rules, processes and structures that guide a company’s direction and oversight. On the other hand, management involves the day-to-day operations and decision-making by executives and staff. Governance sets the overall direction, while management executes it.
What are examples of poor corporate governance?
Famous corporate scandals like Enron and Theranos are prime examples:
- Enron manipulated financial statements and lacked independent board oversight, leading to its collapse.
- Theranos misled investors and regulators about its technology due to poor board scrutiny and transparency.
Both highlight the dangers of weak governance: unchecked power, lack of accountability and a failure to protect stakeholders.
How is corporate governance related to ESG?
Corporate governance is the “G” in ESG, and it underpins the success of environmental and social initiatives.
Strong governance ensures that ESG goals are stated and embedded in strategy, measured and reported transparently. This includes board-level oversight of climate risk, ethical supply chains, diversity policies and more. Without good governance, ESG efforts can fall short or become mere box-checking.
Related resources
Corporate Governance
Corporate governance is a system of accountability for the boardroom to fight corruption and ensure that businesses follow a code of ethical conduct.
Board of directors
Depending on the organization, a board of directors is the group of individuals who are tasked to oversee an organization and guide it's overall performance
Why is corporate governance so important?
Strong corporate governance builds trust and boosts reputation, leading to higher valuation. It prevents scandals and ensures ethical practices. Learn more!
