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A corporate governance system represents the framework of policies and procedures companies use to manage their operations. Large organizations are typically users of a corporate governance system because they can have vast operations spread over a wide geographical range. Governance is often specific or unique to each company, although a few basic styles may exist in the business environment. Two common systems are dispersed control and concentrated systems. Dispersed systems are also known as market-based corporate governance, since these organizations have typically sold shares to investors who have an ownership in the business. This creates a significant shift in how companies operate.
A dispersed corporate governance system will outline the specific responsibilities of each individual in the organization. These responsibilities help shareholders have a well-defined role for each individual who is responsible for advancing the company’s mission and generating financial returns. A board of directors is often comprised of significant individuals in this type of governance system who are the eyes and ears of shareholders. Board members keep the company’s management in check and ensure that all managers and employees act appropriately and ethically within the business environment. One questionable or illegal action can create a situation that reduces the company’s value for shareholders.
Organizations that use a concentrated corporate governance system may or may not be publicly held, although many are privately owned. Privately owned companies do not have shareholders and typically do not have a board of directors that can influence the company. This system allows business owners and managers to operate the company as they see fit, creating a more open environment for completing business tasks or activities. Private companies with a board of directors may use these individuals for professional advice about the company’s operations. This may be a prelude to a company going public and shifting its corporate governance system from concentrated to a dispersed model.
Corporate governance is driven by the market-driven factors of capital and financial returns. Both concentrated and dispersed systems look to increase the financial wealth of individuals, whether they are internal or external, to the company. Governance practices provide specific direction for engaging in business relationships, using contracts to secure economic resources, evaluate individual or departmental performances, and create a structure to limit the dominance of one individual or department. Companies with international operations can have extensive governance policies, since foreign operations may need to comply with another country’s business environment standards. This creates another level of governance that can increase the bureaucracy of both concentrated and dispersed governance systems.