Understanding corporate governance and disclosure is important for any business to succeed. Whether big or small, it doesn’t matter; governance and disclosure are helpful to all companies. But what is corporate governance and disclosure? Read on and learn what they mean and how they benefit a corporation.
What is Corporate Governance?
Corporate governance is basically a system that controls and dictates how a company’s board of directors or executives governs it. It involves balancing the interests of everyone involved with the company, from the shareholders, the customers, the government, the general public, and more.
Corporate governance, if done right, helps build trust with investors as well as the customers and community. It allows the company to make ethical decisions that will benefit everyone, from the stakeholders to the customers. As a result, good corporate governance helps build long-term trust. It promotes financial viability making the company a good investment option for people in the market.
Basic principles of good governance include accountability to all, transparency to the people, fairness, and responsibility for a company’s actions.
Bad corporate governance could lead to the company failing to achieve its stated goals and could lead to a complete breakdown of the company. It could lead to public scandals resulting in major losses and even bankruptcy.
What is Disclosure?
Disclosure is a part of good corporate governance. It basically involves releasing all important and relevant information regarding the corporation to the public. What does relevant information mean? The relevant information is all information that could influence a potential investor’s decisions. This means all facts and figures, innovations being made, procedures and processes, and more. Any piece of information, whether good or bad, that could affect the finances of a company or could influence potential investors needs to be made public.
Since the stock market crash back in 1929, the Securities and Exchange Commission (SEC) passed two acts that enforced disclosure requirements. The lack of transparency of company operations intensified the financial crisis that happened during that time. The SEC now requires and enforces disclosure requirements for any business or firm listed on United States stock exchanges. All companies must follow SEC regulations.
The basic concept is that all parties involved with a company should have equal access to all information to remain fair. Disclosure requirements aren’t related to companies only, but investment managers, analysts, and brokerages must follow these requirements and disclose any relevant information.