With the development of the media, small corporate scandals are now known to the public. The phrase “governance is effective/not effective” is often used in such cases. But what does this governance mean in the first place, and why is it important for companies? In this article, we will explain the meaning of the word governance and measures to strengthen it.
Table of contents
- What does governance mean?
- Benefits of good governance
- Measures to strengthen governance
What does governance mean?
“Governance” originally meant “government”, “control”, or “management”. Due to the broad scope of the term, corporate governance is sometimes referred to specifically as “corporate governance.”
Governance, as the term suggests, is the proper management and control of a company. For example, governance is concerned with whether the decision-making and activities of an organization are rationally organized and whether the organization is operated under firm control. Therefore, strengthening governance is considered essential for improving corporate credibility and for sustainable and healthy growth.
How to use governance?
In what situations is governance used in actual business scenes?
First of all, one of the most common usages is to “make governance effective”. This is an expression used when you want to tighten the management of your team or subordinates, or when you want to operate an IT system safely. On the other hand, if a subordinate is having trouble with a business partner, but the boss is completely unaware of it, or if a system that allows anyone to access important information, I would say, “Governance is not effective.” It is used in such a way as to say that the company is not In short, it can be said that it is used in the sense of “a solid management system is in place”.
Also, if you are an employee of a listed company, you may have many opportunities to hear the term “(Corporate) Governance Code”. These guidelines were established by the Financial Services Agency and the Tokyo Stock Exchange, and are mandatory guidelines for listed companies. These guidelines describe how to protect the rights and equality of shareholders and how to disclose information appropriately. As for the usage of words, expressions such as “following the governance code” or “observing the governance code” will become more common.
Differences between words that are often confused with governance
Words that are similar or easily confused with governance include “compliance,” “risk management,” and “government.” I will explain the difference in meaning.
The word “compliance” is usually translated as “compliance with laws and regulations”. It is not just corporate law, criminal law, and other laws that are subject to compliance. For example, it includes a wide range of internal regulations, social common sense and morals, and social responsibilities and corporate ethics required of companies as members of society. If compliance is the “goal”, governance is the “means” to achieve it. For example, if you want to strengthen internal controls in order to create an organization that protects compliance, you can use the phrase “strengthen governance to improve compliance.”
“Risk management” refers to efforts to grasp potential troubles in continuing corporate activities and to consider and prepare countermeasures in advance. Even a company that has good governance in normal times may not be able to do so in an emergency. In addition, in order to prevent the company from falling into an “emergency” in the first place, it is necessary to carefully consider how to avoid risks by conducting corporate activities. Risk management is required as a means to maintain control of an organization at all times, or as part of an organization’s governance function.
The above two concepts are closely related to governance, but the last one, “government,” is different. Both words have the same origin and have a common meaning of “governance”. However, since government mainly refers to a governing body or system such as “government”, its usage is completely different from the business term “governance”, which means “a company properly controls itself”. Please be aware that “strengthen the government” and “enable the government” are incorrect usages.
Benefits of good governance
Efforts by companies to strengthen governance lead to the following three benefits. Let’s check the details to ensure stable business operations.
Prevention of internal improprieties
The first benefit is that it helps prevent internal improprieties. If a company has a well-established management system, it will be difficult for employees to deviate from their authority and commit fraud. Even if complete fraud prevention is not possible, it can be expected to have the effect of limiting the extent of damage and making early detection of fraud easier. If the organizational management of the board of directors is properly carried out, it will be easier to prevent fraud by management.
Increase corporate value
The second advantage is that the corporate value increases. Companies with solid governance tend to be supported by society and can be expected to improve their corporate value. If the social credibility increases, the evaluation from investors will improve, so you can expect an improvement in cash flow. Other than that, it is also possible that the turnover rate has decreased, and that it is easier to attract excellent human resources as a white company.
A third advantage is compliance. As mentioned earlier, governance can be viewed as a means of becoming a compliance-conscious company. Therefore, strengthening governance is also effective as a compliance measure. Companies with strong internal controls are less likely to experience internal compliance violations such as sexual harassment and power harassment.
Measures to strengthen governance
So, what should we actually do to strengthen our organizational management system? Below, we will introduce measures to strengthen governance.
Measure 1 is internal control. This is probably the most popular way to strengthen governance. Specifically, this includes formulating internal rules and creating a system for conducting regular internal audits. If the method of organizational management changes, it may not fit the current situation, so it is important to review it regularly even after it is formulated.
The second measure is risk management. As mentioned earlier, risk management means identifying potential risks in advance and creating a system that can respond to them. Especially in recent years, the globalization of corporate activities and the explosive increase in business data have made risk management even more important.
For example, there are cases where a large amount of customer information is leaked on the Internet due to a slight operational error in the system. Such scandals greatly damage the social credibility of the company and sometimes lead to compensation for damages. It is extremely important to implement risk management to prevent troubles that could lead to loss of social credibility, and to quickly recover in the unlikely event that they do occur.
Governance is a term that means proper management and control of a company. By strengthening governance, companies can prevent internal fraud and improve social credibility. When working to strengthen governance, it is important to thoroughly develop internal regulations and other matters, as well as to work firmly on various risk management.