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What Is the Relationship between Corporate Finance and Corporate Governance?

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  • Written By: Esther Ejim
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 22 September 2016
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Corporate finance and corporate governance are two business terms that refer to the running of an organization. Corporate finance refers to all of the decisions relating to finance made by firms, while corporate governance refers to the structure put in place to monitor the way a company is run. When talking about corporate finance and corporate governance, one of the images that may easily come to mind is that of big companies or organizations like Microsoft® Corporation or Apple® Inc. The fact of the matter is that the corner deli also incorporates the principles of corporate finance and corporate governance in its operations. The main difference in these terms is in the scope of the application.

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In the case of the corner deli, the owner will oversee virtually all of the functions relating to his or her shop. The owner will manage the purchase of items like soda, confectioneries, fast food, snacks and other items with which the deli is stocked. He or she will also determine how much to pay employees, when to raise their pay, what time to close and open the shop, and from which suppliers to order stock. All of these are decisions that affect the finance of the deli shop. Because the deli is a little concern, the corporate finance and corporate governance all fall to the owner. The kinds of decisions he or she makes and how he or she implements them determine the success or lack of success of the deli.

On the other hand, big corporations need to be efficiently monitored so as to effectively manage how the decisions made affect the profitability of the organization. Big corporations like Apple® and Microsoft® cannot be monitored by just one person. They are public-owned companies with a lot of shareholders who must be accounted for. Any decision made will affect the vested interest of all of the stakeholders. As such, groups like a board of trustees, external auditors, credit agencies, and principal shareholders are all part of the body of corporate governance that contribute to the monitoring of the corporate finance.

The main purpose of the different governing bodies is to ensure that reckless financial decisions are not made. This will improve the confidence of investors and provide better returns to the shareholders who own stock in the business. Where there is a breakdown between corporate finance and corporate governance, the results could be disastrous for the shareholders who may lose all of their investments as the organization crumbles.

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