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What are the different corporate governance mechanisms for Financial Management?

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Corporate governance is the system of rules, practices, and processes that guides how a company is run and how it creates value for its shareholders and stakeholders. Financial management is the function of planning, organizing, directing, and controlling the financial activities of a company, such as capital budgeting, financing, investing, and reporting. Corporate governance and financial management are closely related, as they both aim to align the interests of managers and owners, and to ensure accountability, transparency, and efficiency. In this article, we will explore some of the different corporate governance mechanisms for financial management, and how they can help or hinder the performance and sustainability of a company.

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Julio Juan Prieto

Chief Executive Industry X - Iberia / Aerospace & Defense lead - Europe
Elvira B. Cavalcanti Presta

Governance Board Member, Audit Committee Member, CFO, IRO

1 Board of directors

The board of directors is the elected group of individuals that represents the shareholders and oversees the management of the company. The board has the authority and responsibility to hire, fire, and evaluate the top executives, to set the strategic direction and goals of the company, to monitor the financial performance and risk management, and to approve major decisions and policies. The board of directors is a key corporate governance mechanism for financial management, as it can influence the allocation of resources, the capital structure, the dividend policy, and the corporate social responsibility of the company. However, the board of directors can also face challenges, such as conflicts of interest, information asymmetry, agency problems, and external pressures.

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Julio Juan Prieto

Chief Executive Industry X - Iberia / Aerospace & Defense lead - Europe
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The role of the board of directors in defining and aligning company strategy cannot be overstated. As the custodians of the organization's overall direction and vision, the board plays a pivotal role in setting strategic objectives and ensuring that the action plan of the company is in sync with these overarching goals. The board provides invaluable insight and guidance on key strategic decisions, considering factors such as market trends, competitive landscape, and stakeholder expectations. By leveraging their diverse expertise and perspectives, board members help shape a cohesive and forward-thinking strategy that positions the company for long-term success.

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Fidel E. Acevedo

Finance & Operations Executive | Strategic Business Partner | Management Consultant | Actuary | MBA
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Effective boards foster a culture of ethical governance and play a crucial role in financial management by overseeing financial reporting, ensuring accuracy, and transparency. Board members are responsible for identifying, and mitigating risks while ensuring compliance with regulations. Additionally, the board oversees executive management, selecting, evaluating, and aligning executive compensation with the company's strategic goals. These functions are vital for maintaining financial integrity, managing risks effectively, and ensuring the company's leadership is geared towards achieving strategic objectives. Boards should have a balanced mix of skills, experiences, and perspectives to enhance decision-making and oversight capabilities.

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2 Audit committee

The audit committee is a subcommittee of the board of directors that oversees the financial reporting and auditing processes of the company. The audit committee is composed of independent directors who have financial expertise and who are not involved in the day-to-day operations of the company. The audit committee has the power and duty to appoint, compensate, and supervise the external auditors, to review and approve the financial statements and disclosures, to ensure the compliance with accounting standards and regulations, and to investigate any financial irregularities or fraud. The audit committee is a vital corporate governance mechanism for financial management, as it can enhance the reliability, accuracy, and integrity of the financial information, and protect the interests of the shareholders and stakeholders.

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Elvira B. Cavalcanti Presta

Governance Board Member, Audit Committee Member, CFO, IRO
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Comitês de Auditoria têm crescido em importancia e se tornado cada vez mais relevantes como órg?os de apoio aos Conselhos de Administra??o. No Brasil, a Lei 13.303/2016 (“Lei das Estatais”) define, no Art. 24, que a empresa pública e a sociedade de economia mista dever?o possuir em sua estrutura societária Comitê de Auditoria Estatutário como órg?o auxiliar do Conselho de Administra??o, ao qual se reportará diretamente. Além disso, o regulamento do Novo Mercado da B3, define como obrigatória a instala??o de Comitê de Auditoria, estatuário ou n?o, como órg?o de assessoramento ao Conselho de Administra??o.

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Margarita Reyes Medina

Corporate Governance Independent Board Director / Finance Director / Global Corporate Finance & Investment Director / Risks & Compliance Director / Cryptocurrency Legal framework adaptation Director
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Audit Committee : Independent oversight by independent directors not involved in the daily company’s operations and vital in corporate governance assurance. it is the accuracy and reliability financial information ongoing transparency buffer for investors, shareholders and stakeholders at all assisting a local government to fulfil its governance and oversight responsibilities in relation to financial reporting and the external auditors commitments; monitoring the effectiveness of company internal control and risks management systems and ensuring compliance (law and regulation) and ethics standards in which the company reputation and integrity operates

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Manoj Biswas

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Rightly pointed out. But my experiences said another thing. Although we know a vital accountability tool of a company ( bank or nonbank), no one can play this type of role. It has several reasons such as political or non political issues behind it. If you can establish the governance structure, you have to be able to make a strong & neutral audit committee for protecting the interests of the shareholders as well as depositors.

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Rama Venugopal

30 years exp in Business Consulting, Management Systems Consulting, Strategic Consulting
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Businesses can implement multiple gorvernance frameworks that are available in the country. We have National and International Frameworks too. Responsible Business Conduct Guidelines introduced my MCA , BRSR Reporting introduced by SEBI has essential framework. ISO has released many standards for Governance , infact some are sector specific too. BIS, Nationa Stds orgn in India has released beautiful Governance Frameworks in the country. Governance frameworks need to address both financial and non financial systems , structures as well. Infact some Regulations have introduced Governace spec also in Regulatory framework.

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Julio Juan Prieto

Chief Executive Industry X - Iberia / Aerospace & Defense lead - Europe
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In essence, and based on my experience, the audit committee serves as a cornerstone of corporate governance, bolstering financial management practices and promoting transparency and accountability within the organization. Its diligent oversight contributes significantly to maintaining trust and confidence in the company's financial reporting processes. It is critical to ensure the right credibility in front of the ecosystem: stakeholders, clients, employees, suppliers, funders. The audit committee must act as a safeguard against financial irregularities and fraud. Its oversight not only enhances the reliability of financial information but also protects the interests of shareholders and funders.

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3 Compensation committee

The compensation committee is another subcommittee of the board of directors that determines the remuneration and incentives of the top executives and key employees of the company. The compensation committee is composed of independent directors who have knowledge and experience in human resources and organizational behavior. The compensation committee has the authority and obligation to design, approve, and evaluate the compensation plans, such as salaries, bonuses, stock options, and benefits, and to align them with the performance and strategy of the company. The compensation committee is an important corporate governance mechanism for financial management, as it can motivate and retain the talent, reduce the agency costs, and signal the value and culture of the company.

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4 Shareholder rights

Shareholder rights are the legal and contractual rights that the owners of the company have in relation to the company and its management. Shareholder rights include the right to vote on major issues and elect the board of directors, the right to receive dividends and share in the profits, the right to access information and inspect the books, the right to sue the company or its managers for misconduct or breach of fiduciary duty, and the right to sell or transfer the shares. Shareholder rights are a fundamental corporate governance mechanism for financial management, as they can empower and protect the shareholders, and ensure their participation and representation in the company.

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5 External governance

External governance refers to the external factors and forces that can affect the governance and financial management of the company, such as the market, the law, the regulation, and the society. External governance can provide incentives and constraints for the company and its managers, and influence their behavior and decisions. For example, the market can discipline the company through the price and availability of capital, the law can enforce the contracts and rights of the parties, the regulation can set the standards and rules for the financial reporting and auditing, and the society can demand the social and environmental responsibility of the company. External governance is a significant corporate governance mechanism for financial management, as it can complement and supplement the internal governance, and promote the efficiency, accountability, and sustainability of the company.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What are the different corporate governance mechanisms for Financial Management?

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1 Board of directors

2 Audit committee

3 Compensation committee

4 Shareholder rights

5 External governance

6 Here’s what else to consider

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