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Corporate Governance – Avoiding Common Financial Problems

When we talk of corporate governance, what immediately comes into our minds? Usually, we think of companies that are very big and well-known. The term was originally used in the context of management governance, to refer to the way in which a company manages its resources. Corporate governance is actually the set of rules, mechanisms and procedures used by different stakeholders to run and to manage a company. Therefore, principles and rules identify the allocation of resources and jobs among all the stakeholders.

In general, there are two types of stakeholders: board members and shareholders. A board is the body that creates rules for corporate governance and decides on the proper way of making share holders aware of the companies’ activities. On the other hand, shareholders are the ones who own shares of the company and are entitled to have their interests protected and maintained.

Generally, a governance committee is created by a board. The committee is made up of the directors and other stakeholders. The board serves as the steering principle of corporate governance. The committee is supposed to meet at least once in every six months and it may have members from all the different parts of the business.

There are many guiding principles found in corporate governance, including the five-year plan and the supervisory policies. Also, there are corporate governance strategies such as asset protection, liability and compensation, liquidity, and borrowing, among others. However, there are some companies who have adopted more extreme measures in their attempt to improve the standing of their boards. These companies include Enron and WorldCom, who were shut down because of their extremely extreme and drastic measures taken against their directors.

As part of its corporate responsibility, the U.S. Securities and Exchange Commission play an important role in ensuring that U.S. companies follow the law. This agency protects the rights of investors by making necessary amendments to the federal securities laws and by protecting the stock exchange rules and regulations. This agency was established by the US Congress to prevent improper trading of securities by the companies and by preventing them from taking advantage of their own shareholders. In order for companies to be able to trade on the US stock market, they need to register with the SEC. In order to maintain effective corporate governance practices, the SEC creates and enacts rules and regulations that help to make the system work.

When a company is incorporated, there are some shareholders who become the company’s creditors. This group of highly vested individuals bear the risk of the company in case it loses its shareholders or if it does not succeed in raising capital. There are corporate governance strategies that help to minimize this risk, such as reducing the amount of equity the company has and changing the ownership structure when it becomes almost impossible to do so. A new company needs to raise capital in order to expand and it may not be possible to obtain private investors willing to help finance a business. Other measures the SEC develops include requiring senior management to designate a personal stakeholder to cover all investment decisions.

There are also strategies that seek to reduce the risks posed by mergers and acquisitions. When two companies in different industries engage in a transaction, one or both of the companies can suffer a devastating blow, causing irreparable harm to the investors who bought into the deal. The primary reason for this is that the SEC does not allow corporate governance practices to intervene in the merger process or in determining which companies will acquire other companies. The SEC views the transaction as being based on purely economic factors, without any regard for the strategic nature of the transaction. Merely implementing a corporate governance plan, however, won’t prevent bad mergers and acquisitions.

One way for a company to use its corporate governance activities to protect itself against the risk of acquisition is to offer a highly diluted stock option. This allows a company to obtain a lower price for its stock when it makes an acquisition, because the option is only allowed to achieve a specific value. If the market conditions change and the acquisition doesn’t materialize, the option may be exercised, resulting in a realized cost savings for the company. Another way for a company to protect its assets is to sell its stocks at a point at which they’re valued below their book value. A company must wait a specified period of time before selling its shares to realize any of these benefits. Both of these methods, however, are considered risky by the SEC, and the SEC has no current plans to implement them.

Corporate Governance – Avoiding Common Financial Problems
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