Corporate Governance Explained

The first corporations were invented to share risk on distant ocean voyages. Since no single investor wanted to be responsible for an entire ship, the crew and potentially a huge volume of valuable cargo, the idea of sharing the risk among many investors sounded like a good idea. When it became possible to shift liability from investors to the corporation itself, the modern economy became possible.

Since a corporation is capable of entering into legal agreements, shielding its owners from risk and owning assets, it is necessary for its shareholders to have a formal system in place to determine exactly what the organization has resolved to do. Balancing these decisions so all the stakeholders in a company are protected is called corporate governance. The modern corporate structure is what makes governance possible.

Who is the Corporation?

From a legal standpoint, the board of directors is the only entity that can obligate a corporation. The best way to imagine a board is to think of it as a private legislature that deliberates and votes on matters of importance to the corporation. In most states, there are fairly complex regulations that dictate how often the board must meet and what constitutes a binding resolution. A board can hire management for the company and delegate its powers to them as well. This is generally how a chief executive officer is appointed.

Who is the Board?

A board of directors doesn’t get appointed automatically. In almost every company, the board is elected by shareholders. Since the shareholders are ultimately the owners of the corporation’s assets, it is their responsibility to conscientiously govern their enterprise by appointing a board. Once the board is in place, it may then act on the shareholders’ behalf to institute policies in their best interests.


Governance is that set of responsibilities a board has and the process by which they carry them out. A good example of proper governance is if an outside entity makes an offer to buy the company. While a CEO might have the authority to negotiate with the buyer, the board and eventually the shareholders must approve any sale. Not only is this likely codified in law, it is almost certain to be part of the company’s by-laws, which are resolutions the board must follow when managing a corporation.

These policies and the objectives behind them are all part of a larger concept called Governance, Risk Management and Compliance, or GRC. What is the meaning of GRC? The best way to imagine how GRC works is to imagine everything about a company and then take away its products and services. Whatever activities the employees, executives, directors and shareholders participate in besides the products and services is almost guaranteed to be part of the organization’s GRC.

GRC is the infrastructure that allows the corporation to function under the laws and regulations of its chartering government. Consider a publicly traded company, for example. Every three months, public companies in the United States are required to file their earnings and accounting statements with the Securities and Exchange Commission. Unless they comply with this rule, they can’t be a public company. Following those regulations and making sure the filings are done properly is part of GRC.

When most people encounter a corporation, it is usually through its products, logo, services and so on. What they don’t see are all the GRC activities that take place behind the scenes that allow the company to operate.