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What are the Different Kinds of Corporate Governance Mechanisms?

By Osmand Vitez
Updated Feb 28, 2024
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Corporate governance mechanisms are the policies, guidelines, and controls to manage an organization and reduce inefficiencies. Business owners and leaders use these mechanisms to help managers and employees understand the acceptable behavior when completing business functions. Corporate governance can also provide motivation factors in an organization. Goals and objectives may include incentives to reward individuals for following a company’s internal operating standards. Common corporate governance mechanisms include a board of directors, internal controls, balancing power, and compensation.

Large organizations and publicly held companies use a board of directors to ensure the interest of shareholders or outside investors is earning sufficient financial returns. Board members are typically voted in by shareholders at annual meetings. Each member serves a set number of years and has the responsibility to oversee directors and executive managers, create a mission or vision for the company, set compensation levels for officers, and deal with any significant internal or external conflicts. The board of directors is typically comprised of individuals who do not work directly for the company. This provides an objective opinion for governing the organization.

Internal controls represent corporate governance mechanisms that are standard policies and procedures each individual follows within an organization. These controls help protect and safeguard a company’s business or financial information. Controls are often at the corporate level because executive managers are responsible for all business operations and financial reporting. Internal and external audits help ensure these controls are sufficient and do not create an overly restrictive working environment. Internal controls may also be driven by laws and regulations from government agencies. Companies may need to implement internal controls to avoid penalties or fines.

Balancing power in an organization is a common set of corporate governance mechanisms. Organizations often set up multiple departments, divisions, and managers to divide responsibility and limit the number of tasks one individual completes. This ensures that no one individual can overextend the organization’s resources. Creating this check-and-balance system can also create a certain amount of flexibility for companies to add additional corporate governance mechanisms. This also helps companies merge subsidiaries into their operations with as few issues as possible.

Compensation is a performance-based type of management structure. These corporate governance mechanisms offer individuals bonuses, company shares, compensation increases, additional time off or other benefits. This helps companies improve performance by offering managers and individuals the opportunity to personally benefit by working hard in the organization. Organizations often use this mechanism to tap into the creative traits of their employees who can help find new ways to accomplish tasks and objectives.

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