The principles of corporate governance that are implemented and the model that is chosen, decides how well a corporate governance system works, that is, whether it is good or bad governance. As we have seen, good governance can be identified by taking into consideration certain characteristics. Since all these aspects have been covered, we also need to think about the possibility of inefficiencies occurring from moral hazard and adverse selection. This is where the mechanisms and controls come in.
The main objective of a corporate governance framework is push the company towards achieving its goals and ambitions and at the same time being able to safeguard and satisfy the needs of the stakeholders. There are mainly three types of corporate governance mechanisms-
Internal mechanism: these include the rules and regulations that already exist within the company. Controls are needed to carry out monitoring activities with respect to the various processes being carried out in the organization and then accordingly actions are taken for exceptional cases which do not match the expected outcome, i.e., incase the business seems to be going awry.
For example, the board would have certain systems in place to carry out monitoring activities and similarly would have certain rubrics in place which specify what is to be done and what is not to be done. Certain established internal policies need to be followed throughout the company. The internal mechanisms established are the first set of controls that get established in any organization.
These mechanisms majorly focus on meeting the internal objectives of the corporation, pertaining to the internal stakeholders such as the employees and managers.
It is imperative to carry out smooth functioning of the organization’s internal proceedings and put in place proper performance measurement systems.
For these purposes, software tools like VComply can be put to use which provides you with excellent monitoring capabilities. A manager or someone having the same amount of power can track and monitor his team’s work by using VComply and thus ensure smooth functioning. Also, as soon as any discrepancies creep up, the system immediately notices it and therefore it is much easier for the manager to identify and rectify faults.
External Mechanism: as suggested by name, this mechanism is carried out by parties that are external to the particular organization, i.e., they aren’t a part of the organization and are usually not stakeholders. These can be regulators or even the government.
This mechanism mainly ensure that the corporation is “lawfully” correct and complies to all the legal regulations. Managing debt too, comes under this. External organizations usually provide a certain set of guidelines to be followed for the best outcomes, but it is the business’ prerogative to decide whether they want to follow these or not. External stakeholders are the ones who need to be kept informed,
Independent Audit: an audit statement aims to serve both the internal as well as external stakeholders of a corporation together. Auditing of the financial statement helps helps investors, employees, shareholders and regulators to come to a conclusion regarding the financial standing of the company. It provides best of both worlds- a limited idea regarding the internal workings of the company as well as its future prospects. The board is responsible for monitoring the financial status of the company. A conflict of interest may arise in case the auditing firm is both the independent auditor and management consultant to the corporation they are providing their services too.
These mechanisms, cumulatively make sure that the corporation doesn’t sway away from its path to success.
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