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The Organization of Effective Corporate Governance

Effective corporate governance requires that all stakeholders have clear and defined roles and obligations. It also assists in promoting an environment of work which values diversity and encourages fairness. These frameworks can be applied to a variety of organizations that range from large corporations to professional associations and families.

The board creates and approves corporate strategies to generate sustainable value over time; selects the chief executive officer (CEO) and supervises the management of the business. The board also allocates capital for investment, assesses and manages risks and sets the “tone at the top” for ethical conduct. The board typically comprises a mixture of insiders, such as founders, major shareholders and executives. They are additionally joined by independent directors with experience in managing or directing large corporations. Independent directors are deemed to be beneficial for governance because they do not have the same connections that often exist among insiders, which can lead to conflicts of interest.

The composition of the board is important since board members are often faced with technical issues which require a variety of perspectives. To this end, experts in governance generally recommend that a board comprise at least an equal number of independent directors. Diversity and tenure are also essential to ensure that the board can effectively function, especially in cases where discussions are lengthy and laden with opinions. New board members will bring fresh perspectives to the table, and those with a long time on the board can provide continuity and institutional know-how.

The board is also accountable for understanding, evaluating and directing the annual operating budgets as well as plans of management. The board, through its corporate governance and nominating committee, must also conduct regular outreach to major shareholders to identify their views and communicate with them on a regular basis about important issues that affect the business.




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