IT Governance

Why Corporate Governance Still Fails?

It takes some combination of people, rules, procedures, processes to manage an organization. This is how corporate governance is defined. Corporate governance forms the basis for board members to make informed decisions that consider many environments – economic, social, market, and regulatory environments. It aims at creating long-term value and sustainability for all its stakeholders. How often do organizations follow corporate governance? In this article at Standford Business, Patrick J. Kiger explains that even after decades of examining corporate governance practices, business researchers still fail to understand which factors led to effective governance.

The Roots of the Problem

“Whenever some major company is caught in an embarrassing scandal, whether it is financial fraud, environmental harm, or revelations of widespread sexual harassment, scrutiny predictably is directed at the organization’s board of directors,” explains Patrick. The board of directors is expected to protect shareholders’ interests by overseeing the company’s management strategy.  One of the root causes of failed corporate governance includes generalizing and advocating one-size-fits-all solutions without considering the differences in individual companies’ size, location, or industry. Furthermore, board members’ failure to clearly define the central concepts and terminology in the debate over governance often makes it challenging to examine supporting evidence and its effects.

Besides, an individual’s fitness to serve on boards must be collected from their resumes, such as board affiliation or ownership in the company. Organizations must also consider their effort, diligence and analyze how well they contemplate the stakeholders’ interests at heart while decision-making.

Misconceptions About Board’s Responsibility

Experts believe that there’s a widespread misunderstanding of what boards do. The role of the board in corporate governance includes:

  • Defining the purpose of the company
  • Identifying the relevant stakeholders
  • Defining the values by which the company will perform its duties
  • Monitoring risks across the organization
  • Monitoring compliance
  • Assuring an effective succession for the chair and the board

Board members have no information about the incentive structure deep in the organization. If the organization faces risks, the board gets input on the managers’ risk management steps. However, they are not out there micromanaging every employee.

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