Why Corporate Governance Matters

• Posted on: Feb 5 2018

Why Corporate Governance Matters

Today, it is essential for directors and officers of public companies to have an understanding of corporate governance. Essentially, this involves adhering to state and federal rules and regulations, meeting fiduciary obligations and establishing and implementing internal controls. Ultimately, an attorney with experience in internal investigations and corporate governance can provide guidance on these critical responsibilities.

Sarbanes-Oxley Compliance

The Sarbanes-Oxley Act of 2002 is designed to foster transparency in corporate governance and financial reporting. The law created a formal system of internal checks and balances designed to ensure the accuracy of corporate financial statements and balance sheets.

It is worth noting that the law imposes penalties for noncompliance, including fines and potential delisting of a company from public stock exchanges. In addition, chief executive officers and chief financial officers who knowingly submit incorrect certifications of financial statements can be held legally liable, risking fines and imprisonment.

What is good corporate governance?

There are a variety of concerns that executives must consider, such as governance structure and oversight, director and officer indemnification and insurance, risk management, and shareholder demands.

Because boards of directors are tasked with running corporate affairs, every board member must have a thorough understanding of corporate governance. Moreover, each member should be held accountable for his/her decisions. Boards must also work closely with senior management, conduct self-evaluations of their governance policies, and develop training programs for managers related to internal controls.

There is a wide range of other governance concerns, including best practices, codes of ethics, fiduciary duties, conflicts of interest, management succession plans and issues related to mergers and acquisitions and other corporate transactions. Finally, it is essential to establish training programs for employees at all levels of an organization.

Director Liability

Directors and officers can be held personally liable if a criminal proceeding or enforcement action causes significant financial losses for a company or a decline in its stock value. In addition, executives may also be held legally responsible for the unlawful actions of employees under their supervision.

The Takeaway

Corporate governance is more than a system of checks and balances. It is the ethical foundation of a business. At the same time, having proper internal controls can mitigate the risk of a regulatory enforcement action, shareholder disputes or civil litigation. Ultimately, establishing a governance structure requires the advice and counsel of an experienced attorney.