Corporate governance

Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders, such as 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.

History

Corporate governance practices have evolved in response to economic crises, scandals, and the need for companies to be more transparent and accountable. The term gained prominence in the early 1990s, particularly after the high-profile collapses of large corporations, which led to increased regulatory and public attention.

Principles

Key principles of corporate governance include:

• Transparency: Ensuring that all material information about the corporation is disclosed in a timely and accurate manner.
• Accountability: Individuals and groups within the organization, particularly those in managerial roles, are accountable for their actions and must report their activities transparently.
• Fairness: Treating all stakeholders equitably and recognizing their rights.
• Responsibility: Management should responsibly handle the management of the company with a focus on long-term value creation.

Models of Corporate Governance

Different countries have different models of corporate governance, influenced by their unique economic, legal, and cultural environments:

• Anglo-American Model: Characterized by a dispersed ownership among many investors and a significant role for the stock market.
• Continental European Model: Often features concentrated ownership with dominant shareholders such as families, the state, or banks.
• Asian Model: May involve a significant role for family conglomerates or government influence in corporate affairs.

Regulation

Corporate governance is regulated by laws, regulations, and listing standards. In the United States, the Sarbanes-Oxley Act of 2002 was a significant regulatory response to corporate scandals. Similarly, the UK established the Cadbury Report and subsequent combined codes to enhance corporate governance standards.

Challenges and Trends

Corporate governance faces challenges such as managing the interests of diverse stakeholder groups, the rise of sustainability and corporate social responsibility (CSR) concerns, and adapting to technological changes. The trend towards greater transparency and accountability is driven by both regulatory changes and a greater emphasis on corporate ethics.

See Also

• Business ethics
• Corporate social responsibility
• Stakeholder theory
• Agency theory