According to Watt & Schwartz (2018), in modern organizations, the board of directors is fully responsible for implementing governance and appointing auditors who will optimally manage the governance structure. In this discussion, I will discuss the role of corporate governance in modern organizations and how governance can affect performance.
The Role of Corporate Governance in Modern Organizations:
The governance scandals that occurred in significant companies due to the lack of transparency and accountability led to the growth of stakeholders' awareness of the role of governance and auditing of the CEO's decisions and the ability of the Board of Directors to manage shareholders' interests more professionally (Davis, 2005), The role of corporate governance in modern organizations can be summarized as follows:
- Periodic auditing determines whether the organization is implementing its strategies properly or not.
- Governance Avoiding risks arising from poor decisions and the ability to stop them before they cause irreversible damage.
- Identifying blind spots that the board of directors and the CEO do not see and that hinder the organization from achieving its goals.
- It conflicts of interest between board members and stockholders and protects the organization's interests.
- Good governance controls the institution's internal regulations and the methods of exchanging reports to and from the board of directors.
The Impact of Corporate Governance on Corporate Performance:
According to (Pande & Ansari, 2014), good governance allows for more free exchange of ideas among board members; this serves to develop the company's strategies; this is done by providing a broader view to understand the operations and how these operations align with the company's long-term goals, governance also gives a comprehensive picture of the organization's culture and financial condition,
When auditors perform their roles in reviewing internal regulations and organizational charts, analyzing and documenting this information, and giving recommendations on them, these recommendations help to improve the performance of the company; that is when the senior management implements these recommendations and takes the necessary corrective actions, which leads to a lot of investors to invest in these institutions, which increases its capital, activity, and profits, and thus improves its financial performance.
According to (Naimah, 2017), each of the following has a direct impact on the excellent performance of companies:
- The independence of the audit committees is essential and leads directly to improving performance in the company.
- The number of periodic meetings of the company's board of directors with audit committees positively affects profitability.
- The audit quality carried out by the audit committees directly affects profitability.
Conclusion
According to (Child & Rodrigues, 2003), the primary purpose of corporate governance is to directly assist in building trust between the board of directors, investors, and stakeholders as a whole; the ideal government fosters more robust support for the board of directors to move in the right direction, by periodically disclosing flawless financial reports, it enhances the efficiency and effectiveness of the institution, in turn, it adds to the country's wealth and strengthens its economy.
References
Child, J., & Rodrigues, S. B. (2003). Corporate governance and new organizational forms: Issues of double and multiple agencies. Journal of Management and Governance, 7(4), 337-360.
Davis, G. F. (2005). New directions in corporate governance. Annu. Rev. Sociol., 31, 143-162.
Naimah, Z. (2017). The role of corporate governance in firm performance. In SHS Web of Conferences (Vol. 34, pp. 1-6).
Pande, S., & Ansari, V. A. (2014). A theoretical framework for corporate governance. Indian Journal of Corporate Governance, 7(1), 56-72.
Watt, D., & Schwartz, B. (2018). Governance in view: Corporate governance audits can generate significant value for organizations. Internal Auditor, 75(1), 48-53.