From Wikipedia, the free encyclopedia Not to be confused with a corporate state, a corporative government rather than the government of a corporation Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, the board of directors, executives, employees, customers, creditors, suppliers, and the community at large. Corporate governance is a multi-faceted subject. An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. A related but separate thread of discussions focuses on the impact of a corporate governance system in economic efficiency, with a strong emphasis on shareholders' welfare. There are yet other aspects to the corporate governance subject, such as the stakeholder view and the corporate governance models around the world (see section 9 below). There has been renewed interest in the corporate governance practices of modern corporations since 2001, particularly due to the high-profile collapses of a number of large U.S. firms such as Enron Corporation and MCI Inc. (formerly WorldCom). In 2002, the U.S. federal government passed the Sarbanes-Oxley Act, intending to restore public confidence in corporate governance.
This section relies largely or entirely upon a single source. Please help improve this article by introducing appropriate citations to additional sources. (July 2010) It is common to suggest that corporate governance lacks definition. As a subject, corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. Many of the "definitions" of corporate governance are merely descriptions of practices or preferred orientations. For example, many authors describe corporate governance in terms of a system of structuring, operating and controlling a company with a view to achieve long term strategic goals to satisfy shareholders, creditors, employees, customers and suppliers, and complying with the legal and regulatory requirements, apart from meeting environmental and local community needs. However, there is substantial interest in how external systems and institutions, including markets, influence corporate governance.
 Shareholders can initiate 'precatory proposals' on various initiatives.´ The definition is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution. Eugene Fama and Michael Jensen's "The
. Fifty years later. was the domicile for the majority of publicly-traded corporations.Report of SEBI committee (India) on Corporate Governance defines corporate governance as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. the rights of individual owners and shareholders have become increasingly derivative and dissipated. Since that time. This notion stems from traditional philosophical ideas of virtue (or self governance) and represents a "bottom-up" approach to corporate governance (agency) which supports the more obvious "top-down" (systems and processes. It is about commitment to values. however. have historically been rejected by the board of directors. Berle and Means' monograph "The Modern Corporation and Private Property" (1932. state corporation laws enhanced the rights of corporate boards to govern without unanimous consent of shareholders in exchange for statutory benefits like appraisal rights. and because most large publicly traded corporations in the US are incorporated under corporate administration friendly Delaware law. and because the US's wealth has been increasingly securitized into various corporate entities and institutions. as of 2004. From the Chicago school of economics. the corporate bylaws. the analogous corporate constitutional documents (the memorandum and articles of association) can be modified by a supermajority (75%) of shareholders.e.United States
In the 19th century. In the 20th century in the immediate aftermath of the Wall Street Crash of 1929 legal scholars such as Adolf Augustus Berle. Corporate Governance is viewed as business ethics and a moral duty.
 Legal environment
In the United States. and Delaware law since Delaware. In the United States. about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company. Precatory proposals which have received majority support from shareholders. to make corporate governance more efficient. structural) perspective. but the results are nonbinding. Macmillan) continues to have a profound influence on the conception of corporate governance in scholarly debates today. See also Corporate Social Entrepreneurship regarding employees who are driven by their sense of integrity (moral conscience) and duty to society. and Gardiner C. corporations are governed under common law. Ronald Coase's "The Nature of the Firm" (1937) introduced the notion of transaction costs into the understanding of why firms are founded and how they continue to behave. i. even for several consecutive years. the Model Business Corporation Act.
 History . Individual rules for corporations are based upon the corporate charter and. shareholders cannot initiate changes in the corporate charter although they can initiate changes to the corporate bylaws. Means pondered on the changing role of the modern corporation in society. Edwin Dodd. less authoritatively. In the UK.
the East Asian Financial Crisis saw the economies of Thailand. therefore. Over the past three decades. Arthur Andersen. Kodak.g. Chandler. led to increased shareholder and governmental interest in corporate governance.
 Impact of Corporate Governance
The positive effect of corporate governance on different stakeholders ultimately is a strengthened economy. The California Public Employees' Retirement System (CalPERS) led a wave of institutional shareholder activism (something only very rarely seen before). as a way of ensuring that corporate value would not be destroyed by the now traditionally cozy relationships between the CEO and the board of directors (e. In 1997. broad efforts to reform corporate governance have been driven. According to Lorsch and MacIver "many large corporations have dominant control over business affairs without sufficient accountability or monitoring by their board of directors. Bold. AOL. Jr. The lack of corporate governance mechanisms in these countries highlighted the weaknesses of the institutions in their economies. wealth. Malaysia and The Philippines severely affected by the exit of foreign capital after property assets collapsed. Global Crossing. corporate directors¶ duties have expanded greatly beyond their traditional legal responsibility of duty of loyalty to the corporation and its shareowners. the following Harvard Business School management professors published influential monographs studying their prominence: Myles Mace (entrepreneurship). Honeywell) by their boards.: IBM. Indonesia.S. received considerable press attention due to the wave of CEO dismissals (e. Academy of Management Review). in part. as well as lesser corporate debacles. the massive bankruptcies (and criminal malfeasance) of Enron and Worldcom. In the first half of the 1990s. Marc Lane's book on best corporate governance practices.S." was first published in 1987. not infrequently back dated). corporate governance has been the subject of significant debate in the U.g. Tyco. The new version is updated annually with the most recent supplement for the year
. This is reflected in the passage of the Sarbanes-Oxley Act of 2002. Agency theory's dominance was highlighted in a 1989 article by Kathleen Eisenhardt ("Agency theory: an assessement and review". and hence good corporate governance is a tool for socio-economic development. the issue of corporate governance in the U. Accordingly. by the unrestrained issuance of stock options." Since the late 1970¶s. and around the globe. Journal of Law and Economics) firmly established agency theory as a way of understanding corporate governance: the firm is seen as a series of contracts. South Korea. Alfred D. He revisited his treatise on corporate governance in 2005. by the needs and desires of shareowners to exercise their rights of corporate ownership and to increase the value of their shares and. US expansion after World War II through the emergence of multinational corporations saw the establishment of the managerial class. such as Adelphia Communications. Jay Lorsch (organizational behavior) and Elizabeth MacIver (organizational behavior).Separation of Ownership and Control" (1983. (business history).. "Representing Corporate Officers and Directors. In the early 2000s.
the hallmark of institutional trading.1
. other investor groups. A one-notch positive difference on S&P¶s governance scoring scale corresponded. and other financial institutions). auditors and shareholders with insights for the compliance of new legislation. In a study  by Standard & Poor's Governance Services analysts back-tested the correlations of S&P¶s with corporate performance. With the goal of promoting positive social change. of which there are many). The study also points out that predictive power of corporate governance in terms of shareholder value exceeds its perception by financial markets. exchange-traded funds. or Chief Executive Officer² CEO). there has been a concurrent lapse in the oversight of large corporations. who usually had an emotional as well as monetary investment in the company (think Ford). Lane provides companies and their directors. Program trading. brokers. and the Board diligently kept an eye on the company and its principal executives (they usually hired and fired the President. such as wealthy businessmen or families. the majority of investment now is described as "institutional investment" even though the vast majority of the funds are for the benefit of individual investors. The results of these tests reveal the statistically significant and practically meaningful predictive power of the historical scores in terms of medium-term financial performance and growth in market cap. which are now almost all owned by large institutions.. markets have become largely institutionalized: buyers and sellers are largely institutions (e.2% in annualised sales growth and 7. insurance companies. worldwide.  (Moreover. buyers and sellers of corporation stocks were individual investors. corporate governance positively affects some key performance indicators. banks. The Board of Directors of large corporations used to be chosen by the principal shareholders.) Unfortunately. these statistics do not reveal the full extent of the practice.g. such as in mutual funds. However this growth occurred primarily by way of individuals turning over their funds to 'professionals' to manage. to an additional 5.who often had a vested. Over time. Note that this process occurred simultaneously with the direct growth of individuals investing indirectly in the market (for example individuals have twice as much money in mutual funds as they do in bank accounts). because of so-called 'iceberg' orders. mutual funds. On the microlevel. In this way.0% in annualised market cap growth over a three-year horizon. hedge funds. personal and emotional interest in the corporations whose shares they owned.2010.
 Role of institutional investors
Many years ago. averaged over 80% of NYSE trades in some months of 2007. See Quantity and display instructions under last reference. The rise of the institutional investor has brought with it some increase of professional diligence which has tended to improve regulation of the stock market (but not necessarily in the interest of the small investor or even of the naïve institutions. officers. pension funds. on average. rules and responsibilities in response to the avalanche of corporate accounting scandals.
 Parties to corporate governance
Parties involved in corporate governance include the regulatory body (e. the board of directors. aka." Since 1996. management. often still by large individual investors. and may be made up primarily of their friends and associates. such as officers of the corporation or business colleagues. creditors. "BW identified five key ingredients that contribute to superior performance. Finally. customers and the community at large. "Revolt in the Boardroom. the ownership of stocks in markets around the world varies. the interests of most investors are now increasingly rarely tied to the fortunes of individual corporations. [BusinessWeek has found]. the sale of derivatives (e. Not all are qualities unique to enterprises with retained family interests. Nowadays. this superior performance amounts to 8% per year. State Street Corp. "Look beyond Six Sigma and the latest technology fad.A recent study by Credit Suisse found that companies in which "founding families retain a stake of more than 10% of the company's capital enjoyed a superior performance over their respective sectorial peers. Other stakeholders who take part include suppliers. "poison pill" measures. exchange-traded funds (ETFs).g. So. One of the biggest strategic advantages a company can have. for example. Stock market index options . or the largest investment management firm for corporations. Since the marked rise in the use of Internet transactions from the 1990s. etc. employees.. whereas stock in the USA or the UK and Europe are much more broadly owned. Even as the purchase of individual shares in any one corporation by individual investors diminishes. But they do go far to explain why it helps to have someone at the helm² or active behind the scenes² who has more than a mere paycheck and the prospect of a cozy retirement at stake. these investors have even less interest in a particular company's governance. Forget the celebrity CEO." See also. Since the (institutional) shareholders rarely object. the majority of the shares in the Japanese market are held by financial companies and industrial corporations (there is a large and deliberate amount of cross-holding among Japanese keiretsu corporations and within S.g.
. therefore. But. but rarely."  In that last study. based on the idea that this strategy will largely eliminate individual company financial or other risk and.) are designed simply to invest in a very large number of different companies with sufficient liquidity. if the owning institutions don't like what the President/CEO is doing and they feel that firing them will likely be costly (think "golden handshake") and/or time consuming. Occasionally.) has soared. shareholders and Auditors). Korean chaebol 'groups') ." by Alan Murray. institutional investors support shareholder resolutions on such matters as executive pay and anti-takeover. they will simply sell out their interest. both individual and professional stock investors around the world have emerged as a potential new kind of major (short term) force in the direct or indirect ownership of corporations and in the markets: the casual participant. the largest pools of invested money (such as the mutual fund 'Vanguard 500'. is blood lines. the President/CEO generally takes the Chair of the Board position for his/herself (which makes it much more difficult for the institutional owners to "fire" him/her). The Board is now mostly chosen by the President/CEO. the Chief Executive Officer.
It is their responsibility to endorse the organization's strategy. performance orientation. effective operations. suppliers receive compensation for their goods or services. A key factor is an individual's decision to participate in an organization e. and disclosure in financial reports.
Key elements of good corporate governance principles include honesty. human. All parties to corporate governance have an interest. Partly as a result of this separation between the two parties. workers and management receive salaries. In return these individuals provide value in the form of natural. Customers receive goods and services. there has been an opportunity for a reversal of the separation of ownership and control problems because ownership is not so diffuse. With the significant increase in equity holdings of investors. openness. responsibility and accountability. If some parties are receiving more than their fair return then participants may choose to not continue participating leading to organizational collapse. develop directional policy. whether direct or indirect. appoint. and commitment to the organization. mutual respect. The Company Secretary. senior executives should conduct themselves honestly and ethically. through providing financial capital and trust that they will receive a fair share of the organizational returns. supervise and remunerate senior executives and to ensure accountability of the organization to its owners and authorities.
. in the effective performance of the organization. known as a Corporate Secretary in the US and often referred to as a Chartered Secretary if qualified by the Institute of Chartered Secretaries and Administrators (ICSA). social and other forms of capital. benefits and reputation. Of importance is how directors and management develop a model of governance that aligns the values of the corporate participants and then evaluate this model periodically for its effectiveness. This separation of ownership from control implies a loss of effective control by shareholders over managerial decisions. Commonly accepted principles of corporate governance include:
Rights and equitable treatment of shareholders: Organizations should respect the rights of shareholders and help shareholders to exercise those rights.g. a system of corporate governance controls is implemented to assist in aligning the incentives of managers with those of shareholders. while shareholders receive capital return.The shareholder delegates decision rights to the manager to act in the principal's best interests. especially concerning actual or apparent conflicts of interest. They can help shareholders exercise their rights by effectively communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings. In particular. Directors. A board of directors often plays a key role in corporate governance. is a high ranking professional who is trained to uphold the highest standards of corporate governance. compliance and administration. trust and integrity.
remains an ambiguous and often misunderstood phrase. There are issues about the appropriate mix of executive and non-executive directors. factual information.y y
Interests of other stakeholders: Organizations should recognize that they have legal and other obligations to all legitimate stakeholders. John G. Corporate governance must go well beyond law. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear. 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. written objectives. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making.
Issues involving corporate governance principles include:
y y y y y y y y
internal controls and internal auditors the independence of the entity's external auditors and the quality of their audits oversight and management of risk oversight of the preparation of the entity's financial statements review of the compensation arrangements for the chief executive officer and other senior executives the resources made available to directors in carrying out their duties the way in which individuals are nominated for positions on the board dividend policy
Nevertheless "corporate governance. many organizations establish Compliance and Ethics Programs to minimize the risk that the firm steps outside of ethical and legal boundaries. efficient and transparent administration and strive to meet certain well defined. and the commitment to run a transparent organization. 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. It is something much broader. That is not so." despite some feeble attempts from various quarters. the degree and extent to which the board of Director (BOD) exercise their trustee responsibilities (largely an ethical commitment).
. a former member of the General Motors board of directors. Because of this. The quantity. It needs to be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties. wrote: "The Board is responsible for the successful perpetuation of the corporation. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. though. quality and frequency of financial and managerial disclosure. for it must include a fair. Integrity and ethical behaviour: Ethical and responsible decision making is not only important for public relations. For quite some time it was confined only to corporate management. but it is also a necessary element in risk management and avoiding lawsuits.these should be constantly evolving due to interplay of many factors and the roles played by the more progressive/responsible elements within the corporate sector. It is important to understand. that reliance by a company on the integrity and ethics of individuals is bound to eventual failure. Smale.
For example. however. operating efficiency. Internal auditors are personnel within an organization who test the design and implementation of the entity's internal control procedures and the reliability of its financial reporting Balance of power: The simplest balance of power is very common. Executive directors possess superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes. and a third group check that the interests of people (customers. require that the President be a different person from the Treasurer. It could be argued. with its legal authority to hire. Different board structures are optimal for different firms. One group may propose company-wide administrative changes.
 Mechanisms and controls
Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse selection. Regular board meetings allow potential problems to be identified. an independent third party (the external auditor) attests the accuracy of information provided by management to investors. audit committee. that executive directors look beyond the financial criteria. discussed and avoided.
. the ability of the board to monitor the firm's executives is a function of its access to information. and can elicit myopic behaviour. therefore. This application of separation of power is further developed in companies where separate divisions check and balance each other's actions. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. ex ante. shareholders. Moreover. safeguards invested capital. are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behaviour.That responsibility cannot be relegated to management. fire and compensate top management. they may not always result in more effective corporate governance and may not increase performance. to monitor managers' behaviour. Internal control procedures and internal auditors: Internal control procedures are policies implemented by an entity's board of directors. Whilst nonexecutive directors are thought to be more independent. It may be in the form of cash or non-cash payments such as shares and share options.
 Internal corporate governance controls
Internal corporate governance controls monitor activities and then take corrective action to accomplish organisational goals. and compliance with laws and regulations. and other personnel to provide reasonable assurance of the entity achieving its objectives related to reliable financial reporting. management. Examples include:
Monitoring by the board of directors: The board of directors." However it should be noted that a corporation should cease to exist if that is in the best interests of its stakeholders. superannuation or other benefits. employees) outside the three groups are being met. Perpetuation for its own sake may be counterproductive. Such incentive schemes. another group review and can veto the changes. An ideal control system should regulate both motivation and ability.
Monitoring costs: A barrier to shareholders using good information is the cost of processing it. Imperfections in the financial reporting process will cause imperfections in the effectiveness of corporate governance. Supply of accounting information: Financial accounts form a crucial link in enabling providers of finance to monitor directors. and even the definition of the accounting entity. This should. One area of concern is whether the auditing firm acts as both the independent auditor and management consultant to the firm they are auditing. which suggests that the small shareholder will free ride on the judgements of larger professional investors. The directors of the company should be entitled to expect that management prepare the financial information in compliance with statutory and ethical obligations.
 Role of the accountant
Financial reporting is a crucial element necessary for the corporate governance system to function effectively. the efficient market hypothesis (EMH) asserts that financial markets are efficient). Accountants and auditors are the primary providers of information to capital market participants. The traditional answer to this problem is the efficient market hypothesis (in finance. Examples include:
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competition debt covenants demand for and assessment of performance information (especially financial statements) government regulations managerial labour market media pressure takeovers
 Systemic problems of corporate governance
Demand for information: In order to influence the directors. the shareholders must combine with others to form a voting group which can pose a real threat of carrying resolutions or appointing directors at a general meeting. especially to a small shareholder. criteria for recognition. and rely on auditors' competence. This may result in a conflict of interest which places the integrity of financial reports in doubt due to client pressure to appease
. The exercise of this choice to improve apparent performance (popularly known as creative accounting) imposes extra information costs on users. External corporate governance controls
External corporate governance controls encompass the controls external stakeholders exercise over the organisation. Current accounting practice allows a degree of choice of method in determining the method of measurement. In the extreme. be corrected by the working of the external auditing process. it can involve nondisclosure of information. ideally.
However. In discussions of accounting practices with Arthur Andersen.
Company · Business
Sole proprietorship Partnership (General · Limited · LLP) Corporation Cooperative
. the partner in charge of auditing. The Enron collapse is an example of misleading financial reporting. more fundamentally. the third party was an entity in which Enron had a substantial economic stake. to select and dismiss accounting firms contradicts the concept of an independent auditor. The power of the corporate client to initiate and terminate management consulting services and.management. or if the informed user is unable to exercise a monitoring role due to high costs (see Systemic problems of corporate governance above). good financial reporting is not a sufficient condition for the effectiveness of corporate governance if users don't process it. Changes enacted in the United States in the form of the SarbanesOxley Act (in response to the Enron situation as noted below) prohibit accounting firms from providing both auditing and management consulting services. Enron concealed huge losses by creating illusions that a third party was contractually obliged to pay the amount of any losses. views inevitably led to the client prevailing. Similar provisions are in place under clause 49 of SEBI Act in India. However.
A. · more
Corporate governance Limited liability · Ultra vires Business judgment rule Internal affairs doctrine De facto corporation and
S corporation · C corporation LLC · LLLP · Series LLC Delaware corporation Nevada corporation Massachusetts business trust Delaware statutory trust
UK / Ireland / Commonwealth Limited company (by shares · by guarantee Public · Proprietary) Unlimited company Community interest company
European Union / EEA
SE · SCE · SPE · EEIG
AB · AG · ANS · A/S · AS · GmbH K. · Oy · S. · N.
demarcating a clear line between acceptable and unacceptable behaviour. Because enlightened directors
. It allows the sector to determine what standards are acceptable or unacceptable. They may be ill-equipped to deal with new types of transactions not covered by the code. risk. Principles on the other hand is a form of self regulation. as opposed to a real. They both deter bad actors and level the competitive playing field. There are various integrated governance. It also pre-empts over zealous legislations that might not be practical. Rules also reduce discretion on the part of individual managers or auditors. even if clear rules are followed. rather than treat them as separate entities. however. Moreover. They are more likely to be supportive of the senior management team.this is harder to achieve if one is bound by a broader principle. greater enforcement is not always better.
Enforcement can affect the overall credibility of a regulatory system. one can still find a way to circumvent their underlying purpose . for taken too far it can dampen valuable risk-taking. In practice. this is largely a theoretical. risk and compliance solutions available to capture information in order to evaluate risk and to identify gaps in the organization¶s principles and processes. Nevertheless.corporation by estoppel Piercing the corporate veil Rochdale Principles
Contract · Civil procedure
 Rules versus principles
Rules are typically thought to be simpler to follow than principles. This type of software is based on project management style methodologies such as the ABACUS methodology which attempts to unify the management of these areas. In practice rules can be more complex than principles.
 Action Beyond Obligation
Enlightened boards regard their mission as helping management lead the company.
what most distinguishes enlightened directors from traditional and standard directors is the passionate obligation they feel to engage in the day-to-day challenges and strategizing of the company. most of the time. as well as smaller companies. In Europe. there is a considerable variation in corporate governance models around the world. the chaebols in South Korea and many others are examples of arrangements which try to respond to the same corporate governance challenges as in the US.
The book Money for Nothing suggests importing from England the concept of term limits to prevent independent directors from becoming too close to management and demanding that directors invest a meaningful amount of their own money (not grants of stock or options that they receive free) to ensure that the directors' interests align with those of average investors.
 Corporate governance models around the world
Although the US model of corporate governance is the most notorious. Enlightened directors go far beyond merely meeting the requirements on a checklist. the main problem is the conflict of interest between widely-dispersed shareholders and powerful managers. complex companies. since after a filing. enlightened directors recognize that it is not their role to be involved in the day-to-day operations of the corporation.strongly believe that it is their duty to involve themselves in an intellectual analysis of how the company should move forward into the future. directors have to cover more of their own legal bills and are frequently sued by bankruptcy trustees as well as investors. These differ according to the variety of capitalism in which they are embedded. Enlightened boards can be found in very large. They do not need Sarbanes-Oxley to mandate that they protect values and ethics or monitor CEO performance.
 Anglo-American Model
There are many different models of corporate governance around the world. Overall. the heavy presence of banks in the equity of German firms . the enlightened board is aligned on the critically important issues facing the company. At the same time. The liberal model that is
. enlightened boards do not feel hampered by the rules and regulations of the Sarbanes-Oxley Act. the main problem is that the voting ownership is tightly-held by families through pyramidal ownership and dual shares (voting and nonvoting). In the United States. The intricated shareholding structures of keiretsus in Japan. where the controlling families favor subsidiaries for which they have higher cash flow rights. They lead by example. Unlike standard boards that aim to comply with regulations. Unlike traditional boards. Another proposal is for the government to allow poorly-managed businesses to go bankrupt. This can lead to "self-dealing". enlightened boards regard compliance with regulations as merely a baseline for board performance.
or corporate control. usually known as the chief executive officer. with board members beholden to the chief executive whose actions they are intended to oversee. although the codes linked to stock exchange listing requirements may have a coercive effect. they should provide explanations concerning divergent practices. and the community. The board of directors is nominally selected by and responsible to the shareholders. For example. by their stock exchange. acquiring another company. As a rule. Each model has its own distinct competitive advantage. Frequently. if they are public. The coordinated model that one finds in Continental Europe and Japan also recognizes the interests of workers. normally. In the United States. they must disclose whether they follow the recommendations in those documents and. but are merely asked to rubberstamp the nominees of the sitting board. but the bylaws of many companies make it difficult for all but the largest shareholders to have any influence over the makeup of the board. but needs to get board approval for certain major actions.
 Codes and guidelines
Corporate governance principles and codes have been developed in different countries and issued from stock exchanges. where not. whereas the coordinated model of corporate governance facilitates incremental innovation and quality competition. The CEO has broad power to manage the corporation on a daily basis.
. individual shareholders are not offered a choice of board nominees among which to choose. including more than half of the Fortune 500. such as hiring his/her immediate subordinates. Such disclosure requirements exert a significant pressure on listed companies for compliance. raising money. customers. In the United States. However. major capital expansions. compliance with these governance recommendations is not mandated by law.common in Anglo-American countries tends to give priority to the interests of shareholders. there are important differences between the U. which some see as a conflict of interest. Other duties of the board may include policy setting. recent approach to governance issues and what has happened in the UK. or associations (institutes) of directors and managers with the support of governments and international organizations. a corporation is governed by a board of directors. suppliers. The highest number of companies are incorporated in Delaware. The liberal model of corporate governance encourages radical innovation and cost competition. institutional investors.S. decision making. companies quoted on the London and Toronto Stock Exchanges formally need not follow the recommendations of their respective national codes. members of the boards of directors are CEOs of other corporations. Perverse incentives have pervaded many corporate boards in the developed world. which has the power to choose an executive officer. companies are primarily regulated by the state in which they incorporate though they are also regulated by the federal government and. However. This is due to Delaware's generally management-friendly corporate legal environment and the existence of a state court dedicated solely to business issues (Delaware Court of Chancery). corporations. monitoring management's performance. managers. or other expensive projects.
One of the most influential guidelines has been the 1999 OECD Principles of Corporate Governance. For example.
 Ownership structures
Ownership structures refers to the various patterns in which shareholders seem to set up with respect to a certain group of firms. This internationally agreed benchmark consists of more than fifty distinct disclosure items across five broad categories:
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Auditing Board and management structure and process Corporate responsibility and compliance Financial transparency and information disclosure Ownership structure and exercise of control rights
The World Business Council for Sustainable Development WBCSD has done work on corporate governance. It is a tool frequently employed by policy-makers and researchers in their analyses of corporate governance within a country or business group. the guidelines issued by associations of directors (see Section 3 above). and in 2004 created an Issue Management Tool: Strategic challenges for business in the use of corporate responsibility codes. For example. private sector associations and more than 20 national corporate governance codes. Norman Veasey. standards and frameworks relevant to the sustainability agenda. other international organisations.
. One issue that has been raised since the Disney decision in 2005 is the degree to which companies manage their governance responsibilities. do they merely try to supersede the legal threshold. or should they create governance guidelines that ascend to the level of best practice. may have a wider multiplying effect prompting other companies to adopt similar documents and standards of best practice. and frameworks. however. it still considers its provisions and several prominent Delaware justices. The OECD remains a proponent of corporate governance principles throughout the world.Most states' corporate law generally follow the American Bar Association's Model Business Corporation Act. particularly on accountability and reporting.And ownership can be changed by the stakeholders of the company. Such documents. a "snap-shot" of the landscape and a perspective from a think-tank/professional association on a few key codes. including former Delaware Supreme Court Chief Justice E.This document aims to provide general information. in other words. Building on the work of the OECD. corporate managers and individual companies tend to be wholly voluntary. standards. The GM Board Guidelines reflect the company¶s efforts to improve its own governance capacity. the United Nations Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) has produced voluntary Guidance on Good Practices in Corporate Governance Disclosure. participate on ABA committees. While Delaware does not follow the Act. This was revised in 2004.
while others found no relationship between external board membership and profitability. In a recent paper Bhagat and Black found that companies with more independent boards are not more profitable than other companies. whenever possible. cross-share holdings.
. rings. research into the relationship between specific corporate governance controls and some definitions of firm performance has been mixed and often weak. to locate the ultimate owner of a particular group of firms.
The results of previous research on the relationship between firm performance and executive compensation have failed to find consistent and significant relationships between executives' remuneration and firm performance. and external and internal monitoring devices may be more effective for some than for others. and webs. It is unlikely that board composition has a direct impact on profitability. In a separate study Business Week enlisted institutional investors and 'experts' to assist in differentiating between boards with good and bad governance and found that companies with the highest rankings had the highest financial returns. Antunovich et al. Not all firms experience the same levels of agency conflict.Generally. Other studies have linked broad perceptions of the quality of companies to superior share price performance.
 Corporate governance and firm performance
In its 'Global Investor Opinion Survey' of over 200 institutional investors first undertaken in 2000 and updated in 2002. Egypt and Russia). Low average levels of pay-performance alignment do not necessarily imply that this form of governance control is inefficient. The size of the premium varied by market. The following examples are illustrative. from 11% for Canadian companies to around 40% for companies where the regulatory backdrop was least certain (those in Morocco.
 Board composition
Some researchers have found support for the relationship between frequency of meetings and profitability. and was responsive to investors' requests for information on governance issues. The idea behind the concept of ownership structures is to be able to understand the way in which shareholders interact with firms and. In a study of five year cumulative returns of Fortune Magazine's survey of 'most admired firms'. one measure of firm performance. Some examples of ownership structures include pyramids. undertook formal evaluation of its directors. concentration ratios) and then making a sketch showing its visual representation. found that those "most admired" had an average return of 125%. On the other hand. whilst the 'least admired' firms returned 80%. They defined a well-governed company as one that had mostly out-side directors. who had no management ties.e. McKinsey found that 80% of the respondents would pay a premium for well-governed companies. Others have found a negative relationship between the proportion of external directors and profitability. ownership structures are identified by using some observable measures of ownership concentration (i.
. in particular. However. The results suggest that increases in ownership above 20% cause management to become more entrenched.S. Some argue that firm performance is positively associated with share option plans and that these plans direct managers' energies and extend their decision horizons toward the long-term. corporate stock buybacks for U. in part. A compendium of academic works on the option/buyback issue is included in the study Scandal by author M. performance of the company. use of options faced various criticisms. Gumport issued in 2006. rather than the short-term.S. Numerous authorities (including U. Federal Reserve Board economist Weisbenner) determined options may be employed in concert with stock buybacks in a manner contrary to shareholder interests. that point of view came under substantial criticism circa in the wake of various security scandals including mutual fund timing episodes and. and various alternative implementations of buybacks surfaced to challenge the dominance of "open market" cash buybacks as the preferred means of implementing a share repurchase plan.Some researchers have found that the largest CEO performance incentives came from ownership of the firm's shares. A particularly forceful and long running argument concerned the interaction of executive options with corporate stock repurchase programs. the backdating of option grants as documented by University of Iowa academic Erik Lie and reported by James Blander and Charles Forelle of the Wall Street Journal. These authors argued that. A combination of accounting changes and governance issues led options to become a less popular means of remuneration as 2006 progressed. while other researchers found that the relationship between share ownership and firm performance was dependent on the level of ownership. and less interested in the welfare of their shareholders. Standard & Poors 500 companies surged to a $500 billion annual rate in late 2006 because of the impact of options. Even before the negative influence on public opinion caused by the 2006 backdating scandal.