Why Is Corporate Governance Important?

Corporate governance is important as it enables organisations to achieve their goals, make formal decisions, control risks and assuring compliance. Good corporate governance incorporates a set of rules that define the relationship between stakeholders, management and the board of directors of a company and influence how the company is operating. 

why is corporate governance important

What Does Corporate Governance Do?

Corporate governance is about making your business work better while abiding by the rules. The most basic function of corporate governance is to see that a business strategy is made effective by the company’s executives and workers, as Deloitte explains in a report.

Good management is, of course, critical for the operation of a company. But managers need direction in order to prioritise operations and to allocate funds.

It is the board of directors that is the principal agent for corporate governance: The board is given a mission by shareholders, translates that mission into specific elements of strategy, and then provides direction for management, which makes it all happen.

When the board does all this, it takes into account two factors: 1) Strategy must be inflected by compliance – in other words, the board relies on good corporate governance to make sure it plays by the rules; and 2) The board evaluates the risks involved in strategy implementation, sets the company’s risk appetite and then uses the tools of corporate governance, like the audit committee and internal controls, to make sure that no dangerous risks are left unmanaged.

The Harvard Law Forum writes: “The UK Corporate Governance Code exists because companies do not exist in isolation. Successful and sustainable businesses underpin our economy and society by providing employment and creating prosperity. To succeed in the long-term, directors and the companies they lead need to build and maintain successful relationships with a wide range of stakeholders. These relationships will be successful and enduring if they are based on respect, trust and mutual benefit. Accordingly, a company’s culture should promote integrity and openness, value diversity and be responsive to the views of shareholders and wider stakeholders.”

When Corporate Governance is Ignored

Bad things happen when corporate governance is ignored. We all know the example of Sports Direct, a UK company in which the board just ignored all the corporate governance safeguards that good businesses should take into account, and whose board attempted to avoid all responsibility as the company plunged into failure.

This is why the UK Code of Corporate Governance “provides that the board is responsible for policies and practices which reinforce a healthy culture and that the board should engage with the workforce through one, or a combination, of a director appointed from the workforce, a formal workforce advisory panel and a designated non-executive director, or other arrangements which meet the circumstances of the company and the workforce,” as the Harvard Law Forum points out.

Want to find about 2019 corporate governance priorities & challenges for your board? Read more here.

The Benefit of Good Corporate Governance

With a good corporate governance framework in place, supported by a healthy corporate culture, the organisation should see direct benefit. Risk is controlled; procedures are streamlined and consistent, as one commentator notes.

These benefits include:

  • Efficient processes — due to repeatability and consistency of tasks.
  • Visibility of errors — repeatability and consistency quickly highlight nonconformities in the processes.
  • Reduced costs — repeatability and consistency eliminate waste from scrap, rework and other costly inefficiencies.
  • Smoother-running operations — ‘fire-fighting’ is eliminated and operations are either ‘conform’ or ‘non-conform’.
  • Compliance is assured — with a culture that supports corporate governance and products in the market — product that reaches the market meets the intended specifications and works correctly.

However, there are also broader benefits of good governance that can have a much wider and far-reaching positive impact on the business, as follows:

  • Culture — consistently good governance as an input at all levels creates as an output a culture of excellence. Those that ‘swim against the tide’ stand out against the ‘blueprint’ or ‘DNA’ of the organisation. The leadership’s behaviour defines the behaviour of the workforce, and it becomes far easier in such circumstances to fit in with the defined culture.
  • Reputation — good governance delivers good products, which, in turn, lead to good business performance. The reputation of a company can make or break it in the market.
  • Clarity — all organisations have issues, problems and nonconformities. An organisation with good governance can isolate these, reducing the impact on the market and very often containing the risk internally.
  • Financial sustainability — good governance reduces the threat of safety, legal, performance and warranty concerns that can severely impact an organisation and its stakeholders and/or interested parties. These stakeholders and/or interested parties may be customers, directors, staff, suppliers, shareholders and even whole communities.

With these benefits, good governance should be attractive to all organisations and their leadership. Now that, in the UK, private companies are also legally subject to the corporate governance code, it’s important that they perceive the potential benefit of applying it.

Want to improve your board performance? Learn what the 7 most exceptional board practices are.

Diligent Governance Cloud Supports Good Corporate Governance

Even while the market has placed the importance of practising good corporate governance in the limelight, governance solutions have lagged behind risk and compliance solutions.

Diligent designed the Governance Cloud with the processes of board directors, executives, general counsels and company secretaries in mind. No other company offers such a comprehensive array of software tools that are cohesive and connected to fully meet the needs of today’s board directors.

The few governance solutions that are in the market today have largely been fragmented and disconnected from other processes. Board members, general counsels and company secretaries are realising the need for governance solutions that help them manage governance activities effectively and efficiently. Boards need products to help them streamline duties for compliance, regulation and governance while keeping all processes in a highly secure, confidential platform.

What is the Governance Cloud? The Governance Cloud, the only integrated modern governance solution that enables organisations to achieve best-in-class governance. As organisations grow more complex and regulations more stringent, the scope of governance responsibilities evolves. The Governance Cloud allows boards of directors to meet the demands in the boardroom and beyond with the ability to select the products they need that help them to perform their best and to work within their allotted budgets.


Learn how Diligent’s modern governance solution can empower today’s board members and company secretaries to achieve key outcomes. Request a demo today

Board Portal Buyer’s Guide

With the right Board Portal software, a board can improve corporate governance and efficiency while collaborating in a secure environment. With lots of board portal vendors to choose from, the whitepaper contains the most important questions to ask during your search, divided into five essential categories.

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