Corporate governance is the framework that defines the relationship between shareholders, management, the board of directors, and other stakeholders, to help influence how a company operates. It aims to protect shareholder rights, enhance disclosure and transparency, facilitate effective functioning of the board and provide an efficient legal and regulatory enforcement framework. Good corporate governance should encourage shareholder participation and provide proper incentives for the board and management to follow objectives that are in the interests of the company and its shareholders.
Typically, a company’s corporate governance structures and practices deal with key issues such as:
- Is the company managed in the best interests of all shareholders?
- Are decisions made on an ethical and responsible basis?
- Is there recognition and management of the various risks to the company?
- Are the board and management accountable to shareholders for their actions?
Link to corporate performance
There has been considerable research undertaken into the link between corporate governance and company performance and following both the global financial crises and a series of high profile corporate failures, the area has become an increasing focus point for investors.
We believe that adherence to high standards of corporate governance leads to better long-term investment performance, and so focus investment only on the best governed companies within the S&P/ASX 100 Index.
There are a number of differing criteria used to assess and measure a company’s corporate governance frameworks. A number of factors that are typically considered in the assessment of a corporation’s governance standards include the following:
- board structure, diversity and experience
- board accountability
- financial disclosure and internal controls
- shareholder rights
- executive compensation
- ownership structure and related parties
- social and environmental impact.