Corporate governance is "the system by which companies are directed and controlled" (Cadbury Committee, 1992).

[1] It involves regulatory and market mechanisms, and the roles and relationships between a company’s management, its board, its shareholders and other [Stakeholder (corporate)|stakeholder]]s, and the goals for which the corporation is governed.[2][3] In contemporary business corporations, the main external stakeholder groups are shareholders, debtholders, trade creditors, suppliers, customers and communities affected by the corporation's activities[4] . Internal stakeholders are the board of directors, executives, and other employees. Much of the contemporary interest in corporate governance is concerned with mitigation of the conflicts of interests between stakeholders. Ways of mitigating or preventing these conflicts of interests include the processes, customs, policies, laws, and institutions which have impact on the way a company is controlled.[5][6] An important theme of corporate governance is the nature and extent of accountability of people in the business, and mechanisms that try to decrease the principal–agent problem.[7][8] A related but separate thread of discussions focuses on the impact of a corporate governance system on economic efficiency, with a strong emphasis on shareholders' welfare; this aspect is particularly present in contemporary public debates and developments in regulatory policy[9](see regulation and policy regulation).[10] There has been renewed interest in the corporate governance practices of modern corporations, particularly in relation to accountability, since the high-profile collapses of a number of large corporations during 2001-2002, most of which involved accounting fraud[11]. Corporate scandals of various forms have maintained public and political interest in the regulation of corporate governance. In the U.S., these include Enron Corporation and MCI Inc. (formerly WorldCom). Their demise is associated with the U.S. federal government passing the Sarbanes-Oxley Act in 2002, intending to restore public confidence in corporate governance. Comparable failures in Australia (HIH, One.Tel) are associated with the eventual passage of the CLERP 9 reforms. Similar corporate failures in other countries stimulated increased regulatory interest (e.g., Parmalat in Italy).

Principles of corporate governance
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, 1998 and 2004), the Sarbanes-Oxley Act of 2002 (US, 2002). The Cadbury and OECD reports present general principals 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:[12][13][14] 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.

  Parties to corporate governance The most influential parties involved in corporate governance include government agencies and authorities. investors. shareholders and auditors). supervising and remunerating senior executives. Role and responsibilities of the board:[16][17] The board needs sufficient relevant skills and understanding to review and challenge management performance. The agency view of the corporation posits that the shareholder forgoes decision rights (control) and entrusts the manager to act in the shareholders' best (joint) interests. Directors. while returns to equity investors arise from dividend distributions or capital gains on their stock. while investors expect to receive financial returns. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. benefits and reputation. A board of directors is expected to play a key role in corporate governance. customers and the community at large. whether direct or indirect. and possible continued trading relationships. creditors. Partly as a result of this separation between the two investors and managers. the Chief Executive Officer or the equivalent. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear. workers and management receive salaries. corporate governance mechanisms include a system of controls intended to help align managers' incentives with those of shareholders. The board has the responsibility of endorsing the organization's strategy. Agency concerns (risk) are necessarily lower for a controlling shareholder. local communities. These parties provide value to the . it is specified interest payments. contractual. and ensuring accountability of the organization to its investors and authorities. customers. including employees. creditors. developing directional policy. stock exchanges. factual information. suppliers are concerned with compensation for their goods or services. Other influential stakeholders may include lenders. and market driven obligations to non-shareholder stakeholders. For lenders. All parties to corporate governance have an interest. It also needs adequate size and appropriate levels of independence and commitment Integrity and ethical behavior:[18][19] Integrity should be a fundamental requirement in choosing corporate officers and board members. employees. Customers are concerned with the certainty of the provision of goods and services of an appropriate quality. appointing. and policy makers. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. in the financial performance of the corporation. Disclosure and transparency:[20][21] Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. social. suppliers. other executives and line management.  Interests of other stakeholders:[15] Organizations should recognize that they have legal. suppliers. management (including the board of directors and its chair.

A key factor in a party's decision to participate in or engage with a corporation is their confidence that the corporation will deliver the party's expected outcomes. human and other forms of capital.we need better regulation which ensures businesses recognise the importance of corporate governance as an integral part of management. we recognised that it was not actually a new concept at all and that as long as there has been large-scale trade people have recognised the importance of corporate governance . as authors. When categories of parties (stakeholders) do not have sufficient confidence that a corporation is being controlled and directed in a manner consistent with their desired outcomes. so including knowledge of the princples and practice of corporate governance in mainstream director training is essential The Issue of Integrity Perception is in the eye of the beholder. the importance of corporate governance and internal regulation has been amplified as it becomes increasingly difficult to regulate externally. fairness. not a box ticking exercise The importance of corporate governance in Directors' training: prevention is better than a cure. With globalisation vastly increasing the scale of trade and the size and complexity of corporations and the bureaucracies constructed to attempt to control it. influence corporate governance. decency. they are less likely to engage with the corporation. the loss of confidence and participation in markets may affect many other stakeholders. There is substantial interest in how external systems and institutions. is known by the readers of the popular newspapers by names such as honesty. responsibility in the handling of money and the conduct of commercial activities. and increases the likelihood of political action. Similarly. physical. Here we will explore four issues which in our view are key to understanding the importance of corporate governance:     The issue of integrity: are the boards and management of companies carrying out their duties in an ethical way (we define business ethics here)? Topicality . When this becomes an endemic system feature. Even before the issue came to the forefront of business with the Cadbury Committee following the Maxwell pensions scandal. including markets. Many parties may also be concerned with corporate social performance. lawyers and the like.corporation in the form of financial. and corporate governance. The importance of Corporate Governance Why do we have to take corporate governance seriously? The creators of this website have spent many years espousing the importance of corporate governance.the bonus culture: could better corporate governance in financial institutions and their remuneration policies have prevented the credit crunch and resulting financial crisis? The regulatory framework: introducing more regulation has clearly failed . lecturers and consultants. We discuss the history of corporate governance and the definition of corporate governance in other areas of the website. while a technical term for accountants. what the professional would call questionable .that is.

etc.which underlines the importance of corporate governance. The Bonus Culture The current financial crisis has brought into sharp focus the system of bonuses and remuneration operated by financial institutions.in every way. And it is this integrity perceived and actual .to attract talent and people dedicated to improving performance. Directors' pay and the bonus culture are often seized upon by special interest groups and the media as a single issue.was. In a well run company. This is covered in our corporate governance and research section. not simply doing a job. but is based on independent market research. but actually of that of business in general. what led to the so called 'credit crunch'. in our minds. This is the spirit that gave support to the principle of setting up the Cadbury Committee. as it is the tool by which integrity can be encouraged. box ticking mechanisms. it misses the basic point that companies should be run well and responsibly . The OECD have published lessons from the financial crisis. is seen as possessed of integrity in the eyes of the general public. not in the context of business and society as a whole. some say. not simply a desire to lay down some rules on the financial aspects of corporate governance to prevent innocent fund managers being misled by greedy directors.practice in this arena is criticised by the general public using words such as rip-off. and is therefore blinkered to the underlying factors causing and affecting remuneration. Combined with the complex financial instruments that the mainstream institutions constructed to move the risk off their books. Sarbanes-Oxley. cheating and crooked. unquestionable. would have succeeded as it is not only places corporate governance and business ethics at the core of the organisation not as a separate issue. A better system of checks and balances (the core definition of corporate governance) would have picked up the warning signs that many people were sending that the level and criteria of lending was getting dangerous. good performance is rewarded and rightly so . What is certainly true is that there was excessive risk and irresponsible lending and this led to the downfall of some of the world's biggest lenders and in turn the insurers insuring that risk. this . measured and projected. The central issue today therefore in the field of corporate governance is not whether most listed companies comply with the various provisions of the Combined Code.highly simplistically stated . which is different to the conventional. It is argued that it encouraged excessive risk taking and irresponsible lending. The importance of corporate governance in this scenario is. King. The key point is whether the top management of large organisations especially. not simply in how they pay salaries and bonuses." We strongly believe that our approach. which also conclude that "the financial crisis can be to an important extent attributed to failures and weaknesses in corporate governance arrangements which did not serve their purpose to safeguard against excessive risk taking in a number of financial services companies. . While the latter is an obvious manifestation of good or bad governance (if only because it exposes the quality of stakeholder communication!).

the issue does highlight the importance of corporate governance and the need to assess the quality of the system of checks and balances in all sizes of company (bearing in mind many of the "toxic mortgages" were sold by small local brokers). while the board. Some of the knock-on effects of this are that products become more expensive.every crisis has different causes . the importance of corporate governance could be restated as the importance of good management. though. Put in that simple way it seems obvious.In its Principles of Corporate Governance. large providers will not take on certain sectors of society because they are not profitable. apart from being a huge public relations gaff is rewarding poor management and hence poor management itself. but we see instances daily of a lack of recognition that good governance is actually just good management and a failure of governance is a failure of management. the long term rewards are actually greater (not least because it should result in less regulation!) Just as punitive tax regimes encourage evasion. Restricting the range of products available to address the problem has major implications on innovation and consumer choice.better not more regulation As we argue elsewhere. Constructing new regulations to try to control circumstances that have yet to emerge ." Clearly.is a futile task. and niche providers providing those innovative products will cease to operate or be closed down by the regulators. But while reform is clearly needed. reports nearly 8. the vast majority including the word 'outrage'. The importance of corporate governance in the financial markets is particularly topical but the solution to bad governance is universal and any system of regulation needs to strike the right balance between encouraging innovation and customer choice and enforcing a minimum set of standards. but the implementation.and even the shareholders may feel that remuneration is fair. In the US this is perhaps more evident than in more reserved UK society if the internet searches are anything to go by . a knee-jerk reaction will always result in building a sledge hammer to miss a nut. it has been proven that the regulatory . the keyword research tool. avoidance or relocation.Wordtracker. So in spite of the bonus culture being hijacked at times to attack business generally. That clearly represents a significant backward step in the financial services market. it is clear that current corporate policy is not in line with public perception. So it is not the principle that should be debated here. The Regulatory Framework . As we said earlier. the OECD acknowledges that: "Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring. it is not in the best interests of the company for it to go out of business or be bailed out by governments. The regulators have openly admitted that they did not understand the complex financial instruments that ultimately folded in on themselves and led to the collapse of the financial system. Fundamentally. it should provide the incentives to go far beyond these minimum standards and try to demonstrate that. management . by changing the corporate culture. Awarding bank and insurance company bosses generous bonuses and pension packages after government bailouts of failing institutions.500 searches over the last year relating to the AIG bonus payouts alone.

instating its own customs. It is our sincerest hope that this trend continues and that the true importance of corporate governance is fully recognised and acted upon Why is Corporate Governance Important? Corporate governance is the way a corporation polices itself. has caused people to invent more and more complex systems to avoid detection. is a prime argument for the importance of solid corporate governance. and corporate governance is starting to filter down. The importance of corporate governance in directors' training A corollary to the focus on corporate behaviour and the behaviour of senior corporate employees is the attention increaseingly being paid to the qualification of these senior people to carry out their responsibilities. It is clear that it is the importance of corporate governance has been a major influence here and the IoD qualifications specifically mention corporate governance as a significant element . especially in Australia. we think it wrong. In the last ten years or so. reduce costs/charges and generally act in a fair manner.burden. There is. it should start much earlier in professional development. Corporate governance is intended to increase the accountability of your company and to avoid massive disasters before they occur. much excellent regulation which has indeed improved the consumers' lot by forcing companies to disclose information. while in many cases adding cost and confusion. of course. with some MBA courses. and there is an increasing number of organisations offering non-executive director training and selection services. offering it as part or all of the course content (though the latter has the potential to persist the notion of corporate governance being a separate issue.and benefit. the role of direction has finally begun to be seen as a profession or at least a discipline requiring specific training and development. such as the London Business School. and none to be a director . A company can also hold meetings with . it is a method of governing the company like a sovereign state. of course. In short. and its bankrupt employees and shareholders. In practice. To make a real difference long term. weeding out and eliminating problems with extreme prejudice. There has never been any formal qualification required to run an organisation. Well-executed corporate governance should be similar to a police department’s internal affairs unit. which as you will realise by now. include modules on ethics and Corporate Social Responsibility. We need to build on those good aspects and not simply impose more box ticking exercises. Failed energy giant Enron. policies and laws to its employees from the highest to the lowest levels. especially following the dot com boom and bust and the collapse of Enron and WorldCom. most large and well run organisations will look for suitable professional qualifications in their senior staff. Others.although in recent years organisations like the UK Institute of Directors has introduced qualifications such as the Chartered Director to address the issue.

fraud and the civil and criminal liability of the company.internal members. and will be dealt with accordingly. Good corporate governance seeks to make sure that all shareholders get a voice at general meetings and are allowed to participate. Principles of Corporate Governance      Shareholder recognition is key to maintaining a company’s stock price. Underpaying and abusing outsourced employees or skirting around lax environmental regulations can come back and bite the company hard if ignored. More often than not. bankrupting the company overnight. then corners will be cut. Falsified financial records can cause your company to become a Ponzi scheme. All board members must be on the same page and share a similar vision for the future of the company. to address the request and needs of the affected parties. Financial records. such as shareholders and debtholders – as well as suppliers. customers and community leaders. taking the time to address non-shareholder stakeholders can help your company establish a positive relationship with the community and the press. A corporation without a system of corporate governance is often regarded as a body without a soul or conscience. it can prevent corporate scandals. earnings reports and forward guidance should all be clearly stated without exaggeration or “creative” accounting. however. The end result is a fall that will occur when gravity – in the form of audited financial reports. Ethical behavior violations in favor of higher profits can cause massive civil and legal problems down the road. In particular. practices and culture of an organization and its employees. Corporate Governance as Risk Mitigation Corporate governance is of paramount importance to a company and is almost as important as its primary business plan. distrust and disgust. Corporate governance keeps a company honest and out of trouble. Stakeholder interests should also be recognized by corporate governance. If this shared philosophy breaks down. When executed effectively. It also enhances a company’s image in the public eye as a self-policing company that is responsible and worthy of shareholder and debtholder capital. Board responsibilities must be clearly outlined to majority shareholders. A code of conduct regarding ethical decisions should be established for all members of the board. criminal investigations and federal probes – finally catches up. . It dictates the shared philosophy. small shareholders with little impact on the stock price are brushed aside to make way for the interests of majority shareholders and the executive board. Business transparency is the key to promoting shareholder trust. products will be defective and management will grow complacent and corrupt. Dishonest and unethical dealings can cause shareholders to flee out of fear.

rendering their assets vulnerable to a variety of potential abuses. the corporation's assets are controlled by the board of directors and the officers. Because access to confidential corporate information can be widely dispersed. Illegal Insider Trading The term "corporate insiders" refers to corporate officers. a government regulator or a relative of a corporate insider. Misleading Financial Statements There are many ways to present factually accurate information on a financial statement in a manner that is misleading to investors -. It is also possible to present factually incorrect information that is difficult to detect by establishing complex networks of subsidiaries and cross-shareholdings. The separation of ownership and management can lead to a conflict of interest between management's duty to maximize shareholder value and its interest in maximizing its own income. such as an outside auditor. A CEO. Illegal insider trading can also be committed by a shareholder not directly affiliated with the corporation. For example. Compliance with these laws can be burdensome and expensive for corporations. for example.by. sells shares to a buyer without access to this information. non-public information about the corporation that might affect the value of its shares. for example.The Disadvantages of Corporate Governance Corporate governance is one of the law's most intensely regulated fields. selling property from a parent company to a subsidiary to maximize parent company revenues. Ownership-Management Separation The officers and directors who run the day-to-day affairs of a corporation and make most of its policy decisions are not necessarily shareholders. directors and employees because they may have access to confidential. might be paid a large bonus even as the corporation approaches bankruptcy. although the federal government has also enacted legislation to curb abuses. If no shareholder holds a controlling interest in the corporation. Corporate governance is generally governed by state law. laws against insider trading can be difficult to enforce. publicly traded corporations. This is because corporations are privately owned but are treated as independent legal entities. while in possession of confidential information relevant to the future value of his shares. Corporate insiders are not strictly prohibited from trading corporate shares but must report these trades to the Securities and Exchange Commission. the Securities and Exchange Act of . Illegal insider trading occurs when a shareholder. This can become a problem in large. Costs of Regulation The abuse of corporate governance has triggered the enactment of a large body of state and federal laws designed to prevent such abuses from recurring. and most shareholders vote by proxy.

More recently. they are more or less shared by other parties: customers. . Collectivism is a problem in corporations just as it is in Socialism. So you could say incentives are different. and others who deal with a corporation. the Sarbanes-Oxley Act of 2002 requires corporations to establish extensive systems of internal controls to ensure that their financial statements are both factually accurate and non-misleading. Disadvantage stems from that same idea of risk. So directors of a corporation often make collective decisions that may negatively affect the rest of society. There is also a legal notion that corporation is a person. creditors.1933 requires companies seeking to list on a stock exchange to make such extensive disclosures to potential investors that compliance can cost hundreds of thousands of dollars. in order to make profit for shareholders. And can be sued. Risks that corporation takes do not go away. Individually directors and other officers would not make decisions they otherwise make in a corporation.

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