Corporate governance is the set of processes, customs, policies, laws and institutions affecting the way in which a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many players involved (the stakeholders) and the goals for which the corporation is governed. The principal players are the shareholders, management and the board of directors. Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large. Corporate governance is a multi-faceted subject. An important theme of corporate governance deals with issues of accountability and fiduciary duty, essentially advocating the implementation of policies and mechanisms to ensure good behavior and protect shareholders. Another key focus is the economic efficiency view, through which the corporate governance system should aim to optimize economic results, with a strong emphasis on shareholders welfare. Board members and those with a responsibility for corporate governance are increasingly using the services of external providers to conduct anti-corruption, auditing, due diligence and training. corporate governance means two things
The processes by which all companies are directed and controlled.
A field in economics, which studies the many issues arising from the separation of ownership and control. The corporate governance structure specifies 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. Corporate governance is used to monitor whether outcomes are in accordance with plans and to motivate the organization to be more fully informed in order to maintain or alter organizational activity. Corporate governance is the mechanism by which individuals are motivated to align their actual behaviors with the overall participants. Good corporate governance means well defined shareholders rights, a solid control environment, high levels of transparency and disclosure and an empowered board of directors-it makes companies both more attractive to investors and lenders and more profitable. It pays to promote good corporate governance. Good corporate governance won’t just keep companies out of trouble. Well governed companies often draw huge investment premiums, get access to cheaper debt, and outperform their peers. Better corporate governance standards make banks and rating agencies see companies in a better light. This means lower borrowing costs for well governed firms. Good corporate governance is needed for following reasons.
It lays down the framework for creating long-term trust between companies and the external providers of capital
It improves strategic thinking at the top by inducting independent directors who bring a wealth of experience, and a host of new ideas
It rationalizes the management and monitoring of risk that a firm faces globally
It limits the liability of top management and directors, by carefully articulating the decision making process
It has long term reputation effects among key stakeholders, both internally (employees) and externally (clients, communities, political/regulatory agents)
Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse selection. For example, to monitor managers' behavior, an independent third party (the auditor) attests the accuracy of information provided by management to investors. An ideal control system should regulate both motivation and ability.
Internal corporate governance controls