Corporate governance 

is the collection of mechanisms, processes and relations used by various

parties to control and to operate a corporation.[1][need quotation to verify][2] Governance structures and principles
identify the distribution of rights and responsibilities among different participants in the corporation
(such as the board of directors, managers, shareholders, creditors, auditors, regulators, and
other stakeholders) and include the rules and procedures for making decisions in corporate affairs.
[3]
 Corporate governance is necessary because of the possibility of conflicts of interests between
stakeholders,[4] primarily between shareholders and upper management or among shareholders.
Corporate governance includes the processes through which corporations' objectives are set and
pursued in the context of the social, regulatory and market environment. These include monitoring
the actions, policies, practices, and decisions of corporations, their agents, and affected
stakeholders. Corporate governance practices can be seen[by whom?] as attempts to align the interests of
stakeholders.[5][need quotation to verify][6][page  needed]
Interest in the corporate governance practices of modern corporations, particularly in relation
to accountability, increased following the high-profile collapses of a number of large corporations in
2001–2002, many of which involved accounting fraud; and then again after the financial crisis in
2008.[citation needed]
Corporate scandals of various forms have maintained public and political interest in the regulation of
corporate governance. In the U.S. these have included scandals surrounding Enron and MCI
Inc. (formerly WorldCom). Their demise led to the enactment of the Sarbanes–Oxley Act in 2002,
a U.S. federal law intended to improve corporate governance in the United States. Comparable
failures in Australia (HIH, One.Tel) are associated[by whom?] with the eventual passage of the CLERP
9 reforms there (2004), that similarly aimed to improve corporate governance.[7] Similar corporate
failures in other countries stimulated increased regulatory interest (e.g., Parmalat in Italy).

Contents

 1Background
o 1.1Principal–agent conflict
o 1.2Principal–principal conflict (the multiple principal problem)
o 1.3Other themes
 2Other definitions
 3Principles
 4Models
o 4.1Continental Europe (Two-tier board system)
o 4.2India
o 4.3United States, United Kingdom
o 4.4Founder centrism
 5Regulations
o 5.1Sarbanes–Oxley Act
 6Codes and guidelines
o 6.1Organisation for Economic Co-operation and Development principles
o 6.2Stock exchange listing standards
o 6.3Other guidelines
 7History
o 7.1Early history
o 7.2United States
o 7.3East Asia
 o 7.4Saudi Arabia
 8List of countries by corporate governance
 9Stakeholders
o 9.1Responsibilities of the board of directors
o 9.2Stakeholder interests
o 9.3"Absentee landlords" vs. capital stewards
 9.3.1United Kingdom
o 9.4Control and ownership structures
 9.4.1Family control
 9.4.2Diffuse shareholders
o 9.5Proxy access
 10Mechanisms and controls
o 10.1Internal corporate governance controls
o 10.2External corporate governance controls
o 10.3Financial reporting and the independent auditor
 11Systemic problems
 12Issues
o 12.1Executive pay
o 12.2Separation of Chief Executive Officer and Chairman of the Board roles
 13See also
 14References
 15Further reading
 16External links

Background[edit]
The need for corporate governance follows the need to mitigate conflicts of interests between
stakeholders in corporations.[4] These conflicts of interests appear as a consequence of diverging
wants between both shareholders and upper management (principal–agent problems) and among
shareholders (principal–principal problems),[8] although also other stakeholder relations are affected
and coordinated through corporate governance.

Principal–agent conflict[edit]
In large firms where there is a separation of ownership and management, the principal–agent
problem can arise between upper-management (the "agent") and the shareholder(s) (the
"principal(s)"). The shareholders and upper management may have different interests. The
shareholders typically desire returns on their investments through profits and dividends, while upper
management may also be influenced by other motives, such as management remuneration or
wealth interests, working conditions and perquisites, or relationships with other parties within (e.g.,
management-worker relations) or outside the corporation, to the extent that these are not necessary
for profits. Those pertaining to self-interest are usually emphasized in relation to principal-agent
problems. The effectiveness of corporate governance practices from a shareholder perspective
might be judged by how well those practices align and coordinate the interests of the upper
management with those of the shareholders. However, corporations sometimes undertake initiatives,
such as climate activism and voluntary emission reduction, that seems to contradict the idea that
rational self-interest drives shareholders' governance goals.[9]:3
An example of a possible conflict between shareholders and upper management materializes
through stock repurchases (treasury stock). Executives may have incentive to divert cash surpluses
to buying treasury stock to support or increase the share price. However, that reduces the financial
resources available to maintain or enhance profitable operations. As a result, executives can
sacrifice long-term profits for short-term personal gain. Shareholders may have different
perspectives in this regard, depending on their own time preferences, but it can also be viewed as a
conflicting with broader corporate interests (including preferences of other stakeholders and the
long-term health of the corporation).

Principal–principal conflict (the multiple principal problem)[edit]

The principal–agent problem can be intensified when upper management acts on behalf of multiple
shareholders—which is often the case in large firms (see Multiple principal problem).[8] Specifically,
when upper management acts on behalf of multiple shareholders, the multiple shareholders face
a collective action problem in corporate governance, as individual shareholders may lobby upper
management or otherwise have incentives to act in their individual interests rather than in the
collective interest of all shareholders.[10] As a result, there may be free-riding in steering and
monitoring of upper management,[11] or conversely, high costs may arise from duplicate steering and
monitoring of upper management.[12] Conflict may break out between principals,[13] and this all leads to
increased autonomy for upper management.[8]
Ways of mitigating or preventing these conflicts of interests include the processes, customs, policies,
laws, and institutions which affect the way a company is controlled—and this is the challenge of
corporate governance.[14][15] To solve the problem of governing upper management under multiple
shareholders, corporate governance scholars have figured out that the straightforward solution of
appointing one or more shareholders for governance is likely to lead to problems because of the
information asymmetry it creates.[16][17][18] Shareholders' meetings are necessary to arrange
governance under multiple shareholders, and it has been proposed that this is the solution to the
problem of multiple principals due to median voter theorem: shareholders' meetings lead power to be
devolved to an actor that approximately holds the median interest of all shareholders, thus causing
governance to best represent the aggregated interest of all shareholders.[8]

Other themes[edit]
An important theme of governance is the nature and extent of corporate accountability. A related
discussion at the macro level focuses on the effect of a corporate governance system on economic
efficiency, with a strong emphasis on shareholders' welfare.[19] This has resulted in a literature
focused on economic analysis.[20][21][22]

Other definitions[edit]
Corporate governance is variously given narrower definitions in particular contexts.
Corporate governance has also been more narrowly defined as "a system of law and sound
approaches by which corporations are directed and controlled focusing on the internal and external
corporate structures with the intention of monitoring the actions of management and directors and
thereby, mitigating agency risks which may stem from the misdeeds of corporate officers".[23]
Corporate governance has also been defined as "the act of externally directing, controlling and
evaluating a corporation"[24] and related to the definition of Governance as "The act of externally
directing, controlling and evaluating an entity, process or resource".[25] In this sense, governance and
corporate governance are different from management because governance must be EXTERNAL to
the object being governed. Governing agents do not have personal control over, and are not part of
the object that they govern. For example, it is not possible for a CIO to govern the IT function. They
are personally accountable for the strategy and management of the function. As such, they
"manage" the IT function; they do not "govern" it. At the same time, there may be a number of
policies, authorized by the board, that the CIO follows. When the CIO is following these policies, they
are performing "governance" activities because the primary intention of the policy is to serve a
governance purpose. The board is ultimately "governing" the IT function because they stand outside
of the function and are only able to externally direct, control and evaluate the IT function by virtue of
established policies, procedures and indicators. Without these policies, procedures and indicators,
the board has no way of governing, let alone affecting the IT function in any way.
One source defines corporate governance as "the set of conditions that shapes the ex
post bargaining over the quasi-rents generated by a firm".[26] The firm itself is modelled as a
governance structure acting through the mechanisms of contract.[27][28][29][19] Here corporate governance
may include its relation to corporate finance.[30][31][32]

Principles[edit]
Contemporary discussions of corporate governance tend to refer to principles raised in three
documents released since 1990: The Cadbury Report (UK, 1992), the Principles of Corporate
Governance (OECD, 1999, 2004 and 2015), and the Sarbanes–Oxley Act of 2002 (US, 2002). The
Cadbury and Organisation for Economic Co-operation and Development (OECD) reports present
general principles around which businesses are expected to operate to assure proper governance.
The Sarbanes–Oxley Act, informally referred to as Sarbox or Sox, is an attempt by the federal
government in the United States to legislate several of the principles recommended in the Cadbury
and OECD reports.

 Rights and equitable treatment of shareholders:[33][34][35] Organizations should respect the rights

of shareholders and help shareholders to exercise those rights. They can help shareholders
exercise their rights by openly and effectively communicating information and by encouraging
shareholders to participate in general meetings.
 Interests of other stakeholders:[36] 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.
 Role and responsibilities of the board:[37][38] The board needs sufficient relevant skills and
understanding to review and challenge management performance. It also needs adequate size
and appropriate levels of independence and commitment.
 Integrity and ethical behavior:[39][40] Integrity should be a fundamental requirement in choosing
corporate officers and board members. Organizations should develop a code of conduct for their
directors and executives that promotes ethical and responsible decision making.
 Disclosure and transparency:[41][42] Organizations should clarify and make publicly known the
roles and responsibilities of board and management to provide stakeholders with a level of
accountability. They should also implement procedures to independently verify and safeguard
the integrity of the company's 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.

Models[edit]
Different models of corporate governance differ according to the variety of capitalism in which they
are embedded. The Anglo-American "model" tends to emphasize the interests of shareholders. The
coordinated or multistakeholder model associated with Continental Europe and Japan also
recognizes the interests of workers, managers, suppliers, customers, and the community. A related
distinction is between market-oriented and network-oriented models of corporate governance.[43]

Continental Europe (Two-tier board system)[edit]

Main article: Aktiengesellschaft
Some continental European countries, including Germany, Austria, and the Netherlands, require a
two-tiered board of directors as a means of improving corporate governance.[44] In the two-tiered
board, the executive board, made up of company executives, generally runs day-to-day operations
while the supervisory board, made up entirely of non-executive directors who represent shareholders
and employees, hires and fires the members of the executive board, determines their compensation,
and reviews major business decisions.[45]
Germany, in particular, is known for its practice of co-determination, founded on the German
Codetermination Act of 1976, in which workers are granted seats on the board as stakeholders,
separate from the seats accruing to shareholder equity.

India[edit]
The Securities and Exchange Board of India Committee 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. It is about
commitment to values, about ethical business conduct and about making a distinction between
personal & corporate funds in the management of a company."[46][47] India is a growing economy and it
is quite important to safeguard the interests of investors and also ensure that the responsibility of
management is fixed. The Satyam scandal, also known as India's Enron, wiped off billions of
shareholders' wealth and threatened foreign investment in India. This is the reason that corporate
governance in India has taken the centre stage.[48]

United States, United Kingdom[edit]

The so-called "Anglo-American model" of corporate governance emphasizes the interests of
shareholders. It relies on a single-tiered board of directors that is normally dominated by non-
executive directors elected by shareholders. Because of this, it is also known as "the unitary
system".[49][50] Within this system, many boards include some executives from the company (who
are ex officio members of the board). Non-executive directors are expected to outnumber executive
directors and hold key posts, including audit and compensation committees. In the United Kingdom,
the CEO generally does not also serve as Chairman of the Board, whereas in the US having the
dual role has been the norm, despite major misgivings regarding the effect on corporate governance.
[51]
 The number of US firms combining both roles is declining, however.[52]
In the United States, corporations are directly governed by state laws, while the exchange (offering
and trading) of securities in corporations (including shares) is governed by federal legislation. Many
US states have adopted the Model Business Corporation Act, but the dominant state law for publicly
traded corporations is Delaware General Corporation Law, which continues to be the place of
incorporation for the majority of publicly traded corporations.[53] Individual rules for corporations are
based upon the corporate charter and, less authoritatively, the corporate bylaws.[53] Shareholders
cannot initiate changes in the corporate charter although they can initiate changes to the corporate
bylaws.[53]
It is sometimes colloquially stated that in the US and the UK "the shareh