Definition
Corporate governance is the set of processes, customs, policies, laws and institutions
affecting the way in which a corporation is directed, administered or controlled. Corporate
governance also includes 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. Corporate governance is a multi-faceted subject. An important
theme of corporate governance deals with issues of accountability and fiduciary duty,
essentially advocating the implementation of policies and mechanisms to ensure good
behavior and protect shareholders. Another key focus is the economic efficiency view,
through which the corporate governance system should aim to optimize economic results,
with a strong emphasis on shareholders welfare. There are yet other aspects to the
corporate governance subject, such as the stakeholder view, which calls for more attention
and accountability to players other than the shareholders (e.g.: the employees or the
environment).
Relevant rules include applicable laws of the land as well as internal rules of a corporation.
Relationships include those between all related parties, the most important of which are the
owners, managers, directors of the board, regulatory authorities and to a lesser extent
employees and the community at large. Systems and processes deal with matters such as
delegation of authority. The corporate governance structure specifies the rules and
procedures for making decisions on corporate affairs. It also provides the structure through
which the company objectives are set, as well as the means of attaining and monitoring the
performance of those objectives.
Corporate governance is used to monitor whether outcomes are in accordance with plans
and to motivate the organization to be more fully informed in order to maintain or alter
organizational activity. Corporate governance is the mechanism by which individuals are
motivated to align their actual behaviors with the overall participants.
How do we define good corporate governance?
Good corporate governance is about compliance and performance. Good corporate
governance should provide proper incentives for the board and management to pursue
objectives that are in the interests of the company and shareholders and should facilitate
effective monitoring, thereby encouraging firms to use resources more efficiently. Studies
have found that firms with better corporate governance characteristics tend to perform
better. Stock returns of firms with good corporate governance practices are significantly
greater than returns for firms with bad corporate governance practices. It also reduces
expropriation of corporate resources by managers and lenders and investors are more
willing to provide funds leading to lower costs of capital. Good corporate governance can
be pointed as:
* Board members act in the best interest of shareholders.
* The company acts in a lawful and ethical manner in all their dealings.
* All shareholders have the same right to participate in company governance and are
treated fairly by the Board and management.
* The board and committees act independently of management
* All relevant company information is provided in a timely manner
Objective of the good corporate governance
The primary objective of sound corporate governance is to contribute to improved
corporate performance and accountability in creating long term shareholder value.
Rights and equitable treatment of shareholders: Organizations should respect the rights of
shareholders and help shareholders to exercise those rights. They can help shareholders
exercise their rights by effectively communicating information that is understandable and
accessible and encouraging shareholders to participate in general meetings.
Accountability: Accountability is a key objective of good governance. Not only
governmental institutions but also the private sector and civil society organizations must
be accountable to the public and to their institutional stakeholders. In general an
organization or an institution is accountable to those who will be affected by its decisions
or actions. Accountability cannot be enforced without transparency and the rule of law. In
reality, the civil society must prevent itself from getting accustomed to poor governance.
Interests of other stakeholders: Organizations should recognize that they have legal and
other obligations to all legitimate stakeholders.
Role and responsibilities of the board: The board needs a range of skills and understanding
to be able to deal with various business issues and have the ability to review and challenge
management performance. It needs to be of sufficient size and have an appropriate level of
commitment to fulfill its responsibilities and duties. There are issues about the appropriate
mix of executive and non-executive directors. The key roles of chairperson and CEO
should not be held by the same person.
Integrity and ethical behavior: Organizations should develop a code of conduct for their
directors and executives that promotes ethical and responsible decision making. It is
important to understand, though, that systemic reliance on integrity and ethics is bound to
eventual failure. Because of this, many organizations establish Compliance and Ethics
Programs to minimize the risk that the firm steps outside of ethical and legal boundaries.
Disclosure and transparency: Organizations should clarify and make publicly known the
roles and responsibilities of board and management to provide shareholders with a level of
accountability. They should also implement procedures to independently verify and
safeguard the integrity of the companys financial reporting. Disclosure of material matters
concerning the organization should be timely and balanced to ensure that all investors have
access to clear, factual information.
Responsiveness: Good governance requires that institutions and processes try to serve all
take holders within a reasonable timeframe.
Consensus oriented: There are several actors and as many view points in a given society.
Good governance requires mediation of the different interests in society to reach a broad
