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What is Corporate Governance?

By Edited Sep 4, 2016 0 0

What is Corporate Governance?
The meaning of corporate governance varies among different organizations. There are businesses that tend to focus more on social responsibility and how the business is set up to meet all of it including obligations to employees, other stakeholders, and society in general. There are other businesses that views corporate governance as a guideline on how each stakeholder may contribute to the profitability of the company.

More often, it is classified into two categories.  The first deals with the collective social behaviour of employees within an organization. This includes all facets of company culture that affects the general profitability and production of the company. The second category is all about policies by which an organization is operating. This includes external and internal policies such us federal law, judicial system, and even the stock market.

The first definition is what is more commonly used when there are studies or analysis concerning corporate governance. It is more reflective of the roles that the board of directors play on how the business operates and how business decisions are made. The first definition also more clearly define how external policies such as labor laws affect the roles that each stake holder plays. However, when the intention is to study different companies, the second definition offers more basis by which to compare different organization. It determines how the differenceswithin the normative framework create certain behavioral pattern of firms, investors and other involved parties. 

If the need is a financial review, the effort would be in identifying how external shareholder or investors isolate themselves so that they are not exposed to the expropriation attempts by those coming from the inside of the company. It could also focus require a review on the policies or principles of the capital markets regulating equity investments in open listed firms.  Other financial deals will also be reviewed including arrangements of deals, disclosure and auditing policies, and the protection of marginal shareholder rights.  Some issues like the rights of the executive directors, their composition and their capability to represent in a class lawsuit will also be looked into. 

This approach of corporate governance is described closely to the seminar 1997 review of Andrei Shleifer and Robert Vishny:  “Corporate governance concerns with the approaches in which providers of finance to corporations guarantee themselves of having a return on their investment” (1997, p. 737). This definition is highly financed focused. It further explains that corporate governance is a guideline on how issues are distributed among investors and the reconcilement of the disagreements between the different stakeholders are supposed to be processed.

There are other broader definitions, one that encompasses even the relationship of ethics and operational procedures such as the one used by UK’s Sir Adrian Cadbury, the lead of the Financial Aspects of Corporate Governance states that corporate governance is the structure by which organizations are absorbed and measured (Cadbury Committee, 1992).

Zingles (1988, p.499), on the other hand, offers a more complex perspective. It focuses its definition on possible deterrents that companies encounter everyday that stunts their growth and how the company is set up to deal with the deterrent with specific guidelines on who are involved and the responsibilities of each stakeholder. In this context, corporate governance look at stakeholders ad problem solvers and protector. Using policies and procedures, it prevents the company from encountering problems that could cause the company to shut down. The policies also lay out the process on how company will deal with each challenge.

The Popularity of Corporate Governance

One of the most often cited reason for the increasing popularity of corporate governance is the recent economic crash. It highlighted the risks that companies are to face and made it clear that even the biggest businesses can suffer financial and broader economic predicaments. The economic crash magnified all the reasons why a company should enact a corporate governance guideline.

Many companies who went private were the first ones to realize the value of corporate governance too. As companies went public, financial issues between stakeholders became clear. This prompted everyone to realize that such a situation should have been anticipated through a corporate governance guideline.

Secondly, because of the technology, liberalization and acceptance of the financial industries, investment liberalization and other reforms, it can be noted that the price deregulation and removal of limitations for the ownership and products, the share of capital among countries and the use of capital monitoring has become more complex advanced. That makes good governance more essential though much tougher.

The third reason involves the growth of the company. As the company grows, the founder finds himself more removed from the capital. The functions of investors grow in different regions.  The delegation increases needing good corporate governance.  Long-standing good governance is being replaced with new institutional plans.  In one end, this produces inconsistencies and miscommunications.

Fifth, worldwide financial implementation has grown while trading and investing increased.  This resulted to the cross-border concerns on corporate governance. Sample of this is the result of meetings in corporate governance traditions which is sometimes apprehensive.

Corporate Governance Structure

Corporate governance includes the partnership between the shareholders, lenders and corporations; between institutions, corporations, financial markets; and the employees and corporations. Corporate governance also embodies the concern of the organization to the community; that includes the features the dealings of the organization with respect to the way of life and setting of the community.

However, corporate governance also provides the company a position in the society in which it operates which means considering the laws that affect it, policies and other external factors. There are two views to consider.  One is the structure that is dependent with the policies and relating to the industry and the outsiders.  This includes other organizations that the business might develop a relationship with. The relationships that companies develop often lead to perplexity. It is natural for companies to evolve their policies to make itself relevant and strengthen market opportunities. It is this evolution that eventually affects the space where they operate on.

Laws and rules are also amended, developed, and dissolved as the government sees it appropriate.  Each change affects the business process and the profitability. This forces the company to re-examine its structure. Structure review is what usually challenges stakeholders. 

Shleifer and Vishny (1997, p. 738) holds that political changes have the greatest impact on business structure. They stated that it is the primary reason businesses need corporate governance mechanics. Corporate governance mechanisms are financial and official organizations that can be changed by political operation. 


Bonnie and Merton (1995) offer an easier way to understand what corporate governance is and that is through functions.  They believe that when the services are unbundled, most of the key functions are the same.  They identified six types of functions:  combining assets and subdividing shares; transferring of assets across each period and space; controlling risks; developing and supplying enough information; handling the motivational problems; and eliminating contending promises on the income generated by the institution. All these functions are what make up corporate governance.



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