Corporate Governance

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The system of rules, practices and processes by which a company is directed and controlled, designed to ensure management acts in the best interests of its shareholders. Corporate governance covers a wide scope from reviewing board independence, remuneration and risk practices, to capital allocation and accounting practices. The framework of rules and practices in a corporation that determine corporate direction and performance. Typically, the board of directors’ relationship with other primary participants, including shareholders and management, is critical. (LW, Schroders)

The need for Corporate governance rests on the idea that when separation exists between the ownership of a company and its management, self-interested executives have the opportunity to take actions that benefit themselves, with shareholders and stakeholders bearing the cost of these actions. This scenario is typically referred to as the “agency problem,” with the costs resulting from this problem described as “agency costs.” Executives make investment, financing, and operating decisions that better themselves at the expense of other parties related to the firm. To lessen agency costs, some type of control or monitoring system is put in place in the organization. That system of checks and balances is called “corporate governance.” At a minimum, a governance system consists of a board of directors to oversee management and an external auditor to express an opinion on the reliability of financial statements. In most cases, however, governance systems are influenced by a much broader group of constituents, including owners of the firm, creditors, labour unions, customers, suppliers, investment analysts, the media, and regulators who all influence managerial behaviour. (Stanford)

 

See also: Corporate Governance Ratings

Links

The Chartered Governance Institute UK & Ireland website