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Definition of 'Corporate Governance'
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The system
of rules, practices and processes by which a company is directed and
controlled. Corporate governance essentially involves balancing the interests
of the many stakeholders in a company - these include its shareholders,
management, customers, suppliers, financiers, government and the community.
Since corporate governance also provides the framework for attaining a
company's objectives, it encompasses practically every sphere of management,
from action plans and internal controls to performance measurement and
corporate disclosure.
What is Corporate Governance?Corporate Governance refers to the way a corporation is governed. It is the technique by which companies are directed and managed. It means carrying the business as per the stakeholders’ desires. It is actually conducted by the board of Directors and the concerned committees for the company’s stakeholder’s benefit. It is all about balancing individual and societal goals, as well as, economic and social goals.Corporate Governance is the interaction between various participants (shareholders, board of directors, and company’s management) in shaping corporation’s performance and the way it is proceeding towards. The relationship between the owners and the managers in an organization must be healthy and there should be no conflict between the two. The owners must see that individual’s actual performance is according to the standard performance. These dimensions of corporate governance should not be overlooked. |
Corporate Governance deals with determining ways to take effective strategic decisions. It gives ultimate authority and complete responsibility to the Board of Directors. In today’s market- oriented economy, the need for corporate governance arises. Also, efficiency as well as globalization are significant factors urging corporate governance. Corporate Governance is essential to develop added value to the stakeholders.
Corporate Governance ensures transparency which ensures strong and balanced economic development. This also ensures that the interests of all shareholders (majority as well as minority shareholders) are safeguarded. It ensures that all shareholders fully exercise their rights and that the organization fully recognizes their rights.
Corporate Governance has a broad scope. It includes both social and institutional aspects. Corporate Governance encourages a trustworthy, moral, as well as ethical environment.
Benefits of Corporate Governance
- Good corporate governance ensures corporate success and economic growth.
- Strong corporate governance maintains investors’ confidence, as a result of which, company can raise capital efficiently and effectively.
- It lowers the capital cost.
- There is a positive impact on the share price.
- It provides proper inducement to the owners as well as managers to achieve objectives that are in interests of the shareholders and the organization.
- Good corporate governance also minimizes wastages, corruption, risks and mismanagement.
- It helps in brand formation and development.
- It ensures organization in managed in a manner that fits the best interests of all.
Definition of Corporate Governance
The definition of corporate governance most widely used is "the system by which companies are directed and controlled" (Cadbury Committee, 1992). More specifically it is the framework by which the various stakeholder interests are balanced, or, as the IFC states, "the relationships among the management, Board of Directors, controlling shareholders, minority shareholders and other stakeholders".
The OECD Principles of Corporate Governance states:
"Corporate governance involves a set of relationships between
a company’s management, its board, its shareholders and other stakeholders.
Corporate governance also provides the structure through which the objectives
of the company are set, and the means of attaining those objectives and
monitoring performance are determined."
While the conventional definition of corporate governance and
acknowledges the existence and importance of 'other stakeholders' they still
focus on the traditional debate on the relationship between disconnected owners
(shareholders) and often self-serving managers. Indeed it has been said, rather
ponderously, that corporate governance consists of two elements:
1.
The long term relationship which has to deal with checks and balances, incentives for
manager and communications between management and investors;
2.
The transactional relationship which involves dealing with disclosure and authority.
This implies an adversarial relationship between management and
investors, and an attitude of mutual suspicion. This was the basis for much of
the rationale of the Cadbury Report, and is one of the reasons why it
prescribed in some detail the way in which the board should conduct itself:
consistency and transparency towards shareholders are its watchwords.
As fundamentally important as these traits are, we prefer to take
a rather broader view, which places the Cadbury Code and other codes developed
since (Combined Code, Sarbanes-Oxley, King, etc) in a wider context and shows
its recommendations emerging naturally in the course of a company’s evolution.
In an early book on corporate governance, also published in 1992, one of the
creators of this website developed a definition of corporate governance as
consisting of five elements which the board must consider:
- long term strategic goals
- employees: past, present and future
- environment/community
- customers/suppliers
- compliance (legal/regulatory)
Separation of Ownership and Control
The corporation, in contrast, for example, to a partnership, separates ownership from operational control - this concept is, of course, fundamental to any definition of corporate governance and is commonly referred to as the agency issue, or Agency Theory. It is this separation which creates the need for systems of independent monitoring and control. Historically, it was the freedom that this separation created to take much bigger risks in order to expand that prevented for so long the permission of such organisations to exist, with the potential dangers it implied. And it is this freedom which has required mechanisms to be constructed to try and prevent it being abused.
The corporation, in contrast, for example, to a partnership, separates ownership from operational control - this concept is, of course, fundamental to any definition of corporate governance and is commonly referred to as the agency issue, or Agency Theory. It is this separation which creates the need for systems of independent monitoring and control. Historically, it was the freedom that this separation created to take much bigger risks in order to expand that prevented for so long the permission of such organisations to exist, with the potential dangers it implied. And it is this freedom which has required mechanisms to be constructed to try and prevent it being abused.
Different Countries, Different Models
This has led to different systems in different countries, depending on which constituent or interested party in the company’s operations has been given the most importance. In the Anglo-Saxon world, for example, there has always been a single board of directors consisting of executive and non-executive, or independent directors. Elsewhere, a two tier structure exists to balance the executive board with representatives from other stakeholder groups like employees and bankers (like the Aufsichtsrat or Supervisory Board in Germany).
This has led to different systems in different countries, depending on which constituent or interested party in the company’s operations has been given the most importance. In the Anglo-Saxon world, for example, there has always been a single board of directors consisting of executive and non-executive, or independent directors. Elsewhere, a two tier structure exists to balance the executive board with representatives from other stakeholder groups like employees and bankers (like the Aufsichtsrat or Supervisory Board in Germany).
The Emperor has no clothes
Corporate Governance, is not - or should not be - about debate and
discussion on executive compensation, shareholder protection, legislation and
so on. In recent times, the issue has become not only a subject of fierce
debate and public outcry, but also, as a result of this and arising legislation,
a subject which wearies many company directors. Put in other words, therefore,
the phrase coined above means that there is very little substance to modern
corporate governance, in the view of the authors. What is behind all the fracas
is to a great extent common sense, like many principles in business. Directors,
for example, should naturally be responsible in their role as fiduciaries of
other people’s money. This is rarely mentioned in the conventional,
reporting-based definition of corporate governance.
To use another metaphor, there is so much smoke, that we have lost
sight of the fire. This fire is the real message and definition of corporate
governance, which is undoubtedly beneficial to all, that we should be good directors. The
early Cadbury and Greenbury codes did not arise simply to produce legislation,
but to encourage self-regulation, with the ultimate goal that in applying the
recommendations, the company will become more efficient, gain shareholder
value, and hopefully increase market value as a result.
This is the bottom line. We all want to increase our value, and
‘Corporate Governance’ is often seen as cost ineffective, bringing little or no
benefits - the smoke gets in our eyes, as it were. What we need to do is to
apply the principles of good governance to the whole corporation.
This could be described as: "looking at Management through
Corporate Governance-tinted glasses"
i.e. taking a fresh look at management structure taking into
account all interested parties and ensuring all the necessary monitoring and
controls are in place to ensure that shareholder value is always at the
forefront.
Compare this with the definition of corporate governance in
Director’s Monthly: "Effective corporate governance ensures that long-term
strategic objectives and plans are established, and that the proper management
and management structure are in place to achieve those objectives, while at the
same time making sure that the structure functions to maintain the corporation’s
integrity, reputation, and accountability to its relevant constituencies."
Our definition of corporate governance
The discussion so far has illustrated that a proper definition of
corporate governance should not just describe directors’ obligations towards
shareholders. And we have mentioned that different countries have different
ideas as to what constitutes good corporate governance. Therefore any
satisfactory definition, to be applicable to a modern, global company, must
synthesise best practice from the biggest economic powers into something which
can be applied across all major countries. In essence we believe that good
corporate governance consists of a system of structuring, operating and
controlling a company such as to achieve the following:
- a culture based on a foundation of sound business ethics
- fulfilling the long-term strategic goal of the owners while taking into account the expectations of all the key stakeholders, and in particular:
- consider and care for the interests of employees, past, present and future
- work to maintain excellent relations with both customers and suppliers
- take account of the needs of the environment and the local community
- maintaining proper compliance with all the applicable legal and regulatory requirements under which the company is carrying out its activities.
We believe that a well-run organisation must be structured in such
a way that all the above requirements are catered for and can be seen to be
operating effectively by all the interest groups concerned. We develop this
further in our section on best corporate
governance practice. Here we have set out our assessment of how corporate governance
is usually discussed and introduced our own, which we hope you have found useful.
This page serves as a hub to link to a range of issues related to the
definition of corporate governance. For example we define business ethics and
Corporate Social Responsibility, different country models and Codes of Conduct.
- Rights and equitable treatment of shareholders:[13][14][15] 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:[16] 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:[17][18] 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 behaviour:[19][20] 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:[21][22] 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.
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The framework of rules and practices by which a board of
directors ensures accountability, fairness, and transparency in a company's relationship with its all stakeholders (financiers, customers, management, employees, government, and the community).
·
The corporate
governance framework
consists of (1) explicit and implicit
contracts between the
company and the stakeholders for distribution of responsibilities, rights, and rewards, (2) procedures for reconciling the sometimes
conflicting interests of stakeholders in accordance with their duties, privileges, and roles, and (3) procedures for proper
supervision, control, and information-flows to serve as a system of checks-and-balances. Also called corporation governance. See also Cadbury
rules and governance.
·
The framework of rules and practices by which a board of
directors ensures accountability, fairness, and transparency in a company's relationship with its all stakeholders (financiers, customers, management, employees, government, and the community).
·
The corporate
governance framework
consists of (1) explicit and implicit
contracts between the
company and the stakeholders for distribution of responsibilities, rights, and rewards, (2) procedures for reconciling the sometimes
conflicting interests of stakeholders in accordance with their duties, privileges, and roles, and (3) procedures for proper
supervision, control, and information-flows to serve as a system of checks-and-balances. Also called corporation governance. See also Cadbury
rules and governance.
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