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Corporate governance refers to the manner in which a corporation is directed, and laws and customs affecting that direction. It includes the laws governing the formation of firms, the bylaws established by the firm itself, and the structure of the firm. The corporate governance structure specifies the relations, and the distribution of rights and responsibilities, among primarily three groups of participants – the board of directors, managers, and shareholders. This system spells out the rules and procedures for making decisions on corporate affairs, it also provides the structure through which the company objectives are set, as well as the means of attaining and monitoring the performance of those objectives. The fundamental concern of corporate governance is to ensure the conditions whereby a firm’s directors and managers act in the interests of the firm and its shareholders, and to ensure the means by which managers are held accountable to capital providers for the use of assets. Issues of fiduciary duty and accountability are often discussed within the framework of corporate governance.
In the United States, a corporation is governed by a board of directors, which has the power to choose an executive officer, usually known as the chief executive officer. The CEO has broad power to manage the corporation on a daily basis, but needs to get board approval for certain major actions, such as hiring his/her immediate subordinates, raising money, acquiring another company, major capital expansions, or other expensive projects. Other duties of the board may include policy setting, decision making, monitoring management's performance, or corporate control.
The board of directors is nominally selected by and responsible to the shareholders, but perverse incentives have pervaded many corporate boards in the developed world, with board members beholden to the chief executive whose actions they are intended to oversee. Most often members of the boards of directors are CEO's of other corporations, which some see as a conflict of interest (see http://theyrule.net (http://theyrule.net)).
Corporations are chartered institutions, and have a long history in Europe and the United States. In the nineteenth century, state corporation law enhanced the rights of corporate boards to govern without unanimous consent of shareholders in exchange for statutory benefits like appraisal rights, in order to make corporate governance more efficient. Since that time, and because most corporations in America are incorporated under corporate administration friendly Delaware law, and because America's wealth has been increasingly securitized into corporate entities, the rights of owners and shareholders have become derived and dissipated. The concerns of shareholders over administration pay and stock losses periodically has led to more frequent calls for Corporate Governance reforms.
Corporate governance principles and codes have been developed in different countries and issued from stock exchanges, corporations, institutional investors, or associations (institutes) of directors and managers with the support of governments and international organizations. As a rule, compliance with these governance recommendations is not mandated by law, although the codes linked to stock exchange listing requirements may have a coercive effect. For example, companies quoted on the London and Toronto Stock Exchanges formally need not follow the recommendations of their respective national codes. However, they must disclose whether they follow the recommendations in those documents and, where not, they should provide explanations concerning divergent practices. Such disclosure requirements exert a significant pressure on listed companies for compliance.
In contrast, the guidelines issued by associations of directors, corporate managers and individual companies tend to be wholly voluntary. For example, The GM Board Guidelines reflect the company’s efforts to improve its own governance capacity. Such documents, however, may have a wider multiplying effect prompting other companies to adopt similar documents and standards of best practice.
Corporate governance issues are receiving greater attention in both developed and developing countries as a result of the increasing recognition that a firm’s corporate governance affects both its economic performance and its ability to access long-term, low-cost investment capital.
Corporate Governance concerns have been widely studied. For the United States, an analysis of these concerns has been published by the New York Society of Securities Analysts in their 2003 Corporate Governance Handbook. For an international survey of the scientific literature see Becht, Bolton and Roell 2002 (http://ssrn.com/abstract=343461).
See also:
External sources
Selected References
- Becht, Marco, Bolton, Patrick and Roell, Ailsa A., "Corporate Governance and Control" (October 2002). ECGI - Finance Working Paper No. 02/2002. SSRN 343461 (http://ssrn.com/abstract=343461)
- James A. Brickley, William S. Klug and Jerold L. Zimmerman, Managerial Economics & Organizational Architecture, ISBN 0072828099
- Frank H. Easterbrook and Daniel R. Fischel, The Economic Structure of Corporate Law, ISBN 0674235398
- Corporate Governance Handbook, New York Society of Securities Analysts, 2003 [1] (http://www.nyssa.org/Template.cfm?Section=corp_gov_com&Template=/TaggedPage/TaggedPageDisplay.cfm&TPLID=3&ContentID=499)
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