What is Corporate Governance?
Corporate governance is the process of governing corporations and the firms in which they operate. It includes elements of corporate strategy, capital markets, and corporate law. Historically governance has been about firm management and control of equity for shareholders. The field has since grown to cover a wide range of topics as well as encompass public policy issues such as sustainable investing.
The term “corporate governance” was coined in the late 1980s as a way to describe a shareholder-dominated system of corporate control. Originally, this concept referred to relationships between boards, senior executives, and shareholders as noted by our corporate governance consultants. Today, however, the term “corporate governance” is used to capture a broad set of ideas that focuses on understanding how control is exercised in corporations. The field incorporates many perspectives such as the efficiency of market forces and accountability to stakeholders such as employees and local communities. Although there are some definitional debates among scholars and practitioners about what “good governance” means for a corporation or for society at large, one can generally say that the field has moved from a narrow focus on ownership relations to be more inclusive of directors and managers, and on shareholder interests to include a broader set of stakeholders.
Corporate governance is about governing corporations, whereas corporate management refers to managing corporations. Corporate governance emerged as a field in the 1980s when consultants and academics began to realize that corporate governance is not necessarily best carried out by the corporate board itself; rather, it can be carried out more efficiently by third parties such as mutual funds (Carcello et al., 1992). Corporate governance thus involves “oversight” while corporate management is concerned with “control”.
Corporate governance refers to the theory and practice of ensuring that a corporation’s management acts in the best interests of its shareholders and other stakeholders. In particular, corporate governance includes the creation and implementation of corporate policies, standards, and practices that relate to how a corporation is structured, how its power is distributed among management, shareholders (owners) and employees (stakeholders), particularly who has which decision-making roles. Governments play a major role in corporate governance via regulation. In most countries companies are required by law to create certain types of organizational structures for collective decision-making and responsibility for control rights. For instance, in the United States, a corporation is first required to have a board of directors that is elected by the shareholders.
Corporate governance has been described as “the study of how firms are controlled and managed (Watts 2009). In recent years corporate governance has also come to include how companies are directed and controlled in an ethical manner. The role of corporate governance in promoting sustainable development has become stronger since the end of the Cold War because of globalization.
One of the roles of a corporation’s board or board of directors is to oversee and govern the company. This means overseeing how it is run and reporting back to shareholders, who are also known as owners, on what goes on at the company. The board meets periodically with management and reports back to shareholders on corporate procedures such as financial controls, new contracts being signed, major supplier contracts being awarded etc. In some countries this role may also extend to overseeing other aspects of a company’s behaviour including its ethics and compliance with ethical standards. Boards often employ one or more auditors who scrutinize all aspects of governance before reporting back to shareholders at an annual general meeting (AGM). Auditors will usually also be present during other board meetings to report back on these matters.
One of the most important aspects of governance is making sure that proper procedures are followed at all times as well as being aware of current legislation and regulations that may apply to the company’s conduct in particular areas. For example, if a company wants to sign off on a contract with a foreign state and this involves it cooperating in intelligence or law enforcement agency activities then the board will have to ensure that it complies with national laws on espionage and privacy. Or if an international treaty is ratified by a country, then the board has to verify what steps are taken both within and outside of the country to implement this treaty.
Corporate governance is a relatively new concept to many companies which have been in business for over 50 years. This is primarily due to the fact that no formal guidelines have existed until recently. So this has required the creation of new and not always appropriate rules that can be subject to interpretation. In addition, some of these rules have been poorly drafted and so have led to many complications and disputes. Some corporations have developed elaborate and costly procedures to deal with individual issues but in many cases do not concentrate on the underlying issues that caused this particular issue being raised in the first place. This makes it difficult for some people to understand how these corporate governance issues relate to their company or company’s operations in general.
Corporate governance has been a growing issue in the business world in recent years. This is primarily due to the lack of action taken by corporations to deal with many of these issues and poor drafting of legislation that has led to many disputes about how certain businesses should be run. In many cases either business practices or legislation need to be adjusted that would help clear up this issue. In others, the problem is related to poor implementation or interpretation of corporate governance measures.
Some of the most important issues relating to corporate governance deals with ensuring that a company follows the law. This means following all local and international legal requirements as well as being aware of which laws apply to the company and how those laws should be applied. There is also a need for companies to be aware of the financial health of a particular country and how this will affect their business in that country.
Another key factor in corporate governance relates to ensuring that a board meets on time, reports back on its activities promptly, answers questions from shareholders and communicates clearly at all times with all levels of management. This also related to ensuring that adequate financial controls are in place, including internal procedures for auditing. This is dealt with by ensuring that proper and appropriate systems are in place and that these systems meet the standards required by all applicable legislation. For example, the USA has Sarbanes-Oxley Act which requires those who audit a company to have no conflict of interests and independent reporting of the audit to other parties affected by the results of the audit such as stockholders.
Implementing controls at all levels within a corporation so that employees remain unaware of any illegal business practices such as paying bribes or using insider information to make profits is also a key function of corporate governance. In some cases, it is also important to ensure that the board of directors are aware of the illegal practices going on within their company and report these to the relevant authorities. It is also important that directors provide accurate information to shareholders.