Corporate governance is a set of rules, practices, and processes designed to protect the interests of all stakeholders in a company, including shareholders, employees, customers and the communities where the company operates. They ensure a transparent and accountable decision-making process within corporate entities. To learn about the different types of corporate entities that are available in the U.S., you can read Brown Rudnick's article on that subject by clicking here.
The main pillars of corporate governance are:
- fiduciary duties
- compliance
- shareholder rights
Fiduciary Duties: Directors and officers owe fiduciary duties to the company and its shareholders. These fiduciary duties typically include the duty of care, duty of loyalty, and duty of good faith. The duty of care requires directors and officers to act with the care that a reasonably prudent person would exercise in similar circumstances. The duty of loyalty requires them to prioritize the interests of the company over their personal interests. The duty of good faith entails honest and fair dealing as directors and officers carry out day-to-day tasks for the benefit of the company.
Compliance: Companies are required to comply with various legal requirements in the countries where they operate. Failure to comply with applicable laws can bring about fines, penalties, and reputational damage to the company. Regular internal and external audits ensure ongoing adherence to the selected corporate governance guidelines. To learn relevant considerations about how to conduct an internal investigation, you can read Brown Rudnick's article on that subject by clicking here.
Shareholder rights: Most legal systems contemplate disclosure requirements about the company's financial performance to allow shareholders to make informed decisions. Mechanisms for making such decisions by, attending annual or special meetings, or voting by proxy are key. Protecting minority shareholders is critical to prevent abuse of power by majority shareholders or the company's management. Adopting transparency guidelines, fair treatment and accountability strengthen the position of minority shareholders.
Companies operating in more than one jurisdiction should take to into account the laws of the countries where they operate so as to implement consistent governance practices internationally. Reconciling the relevant legal systems and practices is key for maintaining trust, ensuring accountability and fostering sustainable growth.
The Organisation for Economic Co-operation and Development (OECD) and the International Corporate Governance Network (ICGN) aim to provide common principles that can serve as a foundation for effective governance practices worldwide. Solid corporate governance guidelines will allow growing companies to welcome institutional investors, such as pension funds, insurance companies, hedge funds, endowments and sovereign wealth funds as they typically invest in companies that offer a unified approach to corporate governance across jurisdictions.
In the U.S. the Sarbanes-Oxley Act (SOX Act), enacted in 2002, aims to enhance corporate governance and financial transparency by establishing standards for accounting practices, financial disclosure and the responsibilities of corporate boards and executives. In addition to playing a central role in implementing and enforcing the SOX Act, the Securities and Exchange Commission (SEC), plays a key role in setting and enforcing disclosure requirements, proxy regulations and transparency standards for public companies. While privately held companies are not subject to the SOX Act or the SEC's governance requirements, they are subject to state law, contractual arrangements and may voluntarily adhere to guidelines established by industry associations as well as market practices. To learn about key considerations to take into account when establishing a presence for your business in the U.S., you can read Brown Rudnick's article on that subject by clicking here.
Globalization and technology highlight the need for transparency in corporate governance. As information flows across borders at unprecedented speeds, investors, regulators and the public demand real-time access to corporate information which requires companies to adopt comprehensive reporting mechanisms, adhere to international accounting standards and embrace digital tools to enhance transparency and accountability. In that regard, Blockchain technology can enhance corporate governance by offering transparency, traceability and security in record-keeping. Smart contracts on a blockchain can automate and enforce governance rules, reducing the risk of fraud and improving accountability. To learn about incorporating smart contracts into your business, you can read Brown Rudnick's article on that subject by clicking here.
The legal landscape of corporate governance is dynamic and faces ongoing developments and reforms. As businesses increasingly operate across borders understanding and implementing effective corporate governance practices become crucial for maintaining trust, ensuring accountability and fostering sustainable growth.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
