Corporate Governance

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Summary

What is Corporate Governance? Meaning.

Corporate Governance is the whole of all policies, procedures and rules directing and controlling a company, governing the relationships between its shareholders, (stakeholders), directors and management, as defined by the applicable laws, the corporate charter, the company's bylaws, and formal policies.

 

Primarily it is about managing top management, building in checks and balances to ensure that the senior executives pursue strategies that are in accordance with the corporate mission.

 

It consists of a set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled.

 

Organizations should respect the rights of shareholders and help shareholders to exercise their rights. But also organizations should recognize that they have legal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers.

It is extremely difficult to serve and protect the interests of all stakeholders under one common denominator.

That's why the corporate governance structure of a firm aims at creating a force field in which future behaviors and decisions will lead to maximum wealth generations for the shareholders, considering the interest of all stakeholders.  In other words: corporate governance governs the relationships among the many players involved (the stakeholders) and the goals for which the corporation is governed. The principal players are the shareholders, management and the board of directors. Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large.


3 Functions of Corporate Governance (Trickler, 1994):

  1. Forming function: influence the forming of the corporate mission. A related important part of corporate governance deals with accountability, fiduciary duty and mechanisms of auditing and control. In this sense, corporate governance players should comply with codes to the overall good of all constituents.

  2. Performance function: help improving the performance of the company, by judging strategy proposals brought forward by the top management or even actively participating in the strategy formation process. A related focus is economic efficiency, both within the corporation (such as the best practice guidelines) as well as externally (national institutional frameworks). In this "economic view", the corporate governance system should be designed in such a way as to optimize results. Some argue that the firm should act not only in the interest of shareholders, but also of all the other stakeholders.

  3. Conformance function: ensure and monitor conformance to the corporate mission and strategy.

Note that the term "Corporate Governance" actually has multiple meanings:

  • A legal meaning, depending on the country where a firm resides or operates.

  • The processes by which companies are directed and controlled.

  • Encouragement of companies' compliance with codes (as in corporate governance guidelines).

  • A field in economics, which studies the many issues arising from the separation of ownership and control.

  • The framework of rules, relationships, systems and processes within and by which fiduciary authority is exercised and controlled in corporations.

Corporate Governance regimes differ considerably between countries. In designing a corporate governance regime, 3 issues are particularly relevant (Trickler, 1994)

  1. Board Structure (Two-tier / One-tier)

  2. Board Membership (are employees represented or not)

  3. Board Tasks and Responsibilities

The interest in Corporate Governance is seasonal, it can be said that low stock market levels are conducive for more attention for the governance practices within corporations. A recent example were the high-profile collapses of such firms as Enron and WorldCom and the burst of the Internet Bubble which let to a lot of attention for the topic, especially to Corporate Governance Rating. Critics said however that had Sarbanes-Oxley preceded Enron they probably would have checked the boxes on that too.


Corporate Governance is strongly related to other concepts such as Corporate Transparency, Corporate Accountability, and Corporate Responsibility.


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