What is the purpose of corporate governance? 

What exactly is governance and why is it important?

Well, it’s not that complicated. It’s just the rules around doing business.

If you’re a registered company, there are certain reporting obligations that you have in order to protect the shareholders, the investors in your business. Good governance also helps to add value to your business so that when you’re looking at getting more investors on board or actually selling your business in the future, you can demonstrate why it’s worth what you say it’s worth.

An example here might be if you’ve got a startup and someone’s developed a piece of software. Now, that piece of software might have some value, and the person who created it might be entitled to receive some money from the business at some point in time once it’s making revenue.

Actually documenting the rights of the company and the developer shareholder are very important because if you’ve got an investor who wants to come into the company, or you’ve got someone who wants to buy the business, they need to know that the business owns that software and on what terms it owns it, because it can make a big difference to the valuation of the business. That is one of the first points of information around governance – ensuring that all the key players in the business understand the rules for the business.

There’s a lot of questions around what level of detail you need to have, but that’s a separate conversation. Typically, a company will have at least a constitution or replaceable rules, and a shareholder agreement governing the relationship between the shareholders.