Corporate governance is a term that refers broadly to the rules, processes or laws by which businesses are operated, regulated and controlled. It is the framework of rules and practices by which a Board of Directors ensures accountability, fairness and transparency in the firm's relationship with all of its stakeholders. The principal stakeholders are the shareholders, management and the Board of Directors. Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large.
As an investor, you have a role to play in corporate governance. You have the right to vote on many important issues, including board members and significant corporate transactions. You may also be asked to vote on more specific proposals that may affect the company you have invested in as well as environmental or social practices and policies.
Though you have the right to vote on many important issues, you don’t have the right to vote on the company’s day-to-day business operations or changes in management. These matters fall under the responsibilities of the Board of Directors. Though their responsibilities may vary from company to company and state to state, generally, the Board of Directors has the responsibility of overseeing a company’s management and acting in the best interest of a company’s shareholders. Their duties generally include:
- Hiring, firing and supervising the corporation’s Chief Executive Officer (CEO)
- Approving major corporate strategic decisions
- Establishing executive compensation
- Inspecting the company’s auditing and financial reporting
The practice of sound corporate governance has succeeded in attracting a good deal of public interest because of its importance to a company’s ability to create value for its stakeholders.
Institutional investors, including pension funds, mutual funds, banks, money managers and hedge funds, have established corporate governance policies related to proxy voting. In most cases, these policies can be found on the fund’s website. In addition, institutional investors often make these policies available and report on how they voted their proxies.