Good corporate governance
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 ...view middle of the document...
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
Internal corporate governance controls monitor activities and then take corrective action to accomplish organizational goals. Examples include:
• Monitoring by the board of directors: The board of directors, with its legal authority to hire, fire and compensate top management, safeguards invested capital. Regular board meetings allow potential problems to be identified, discussed and avoided. Whilst non-executive directors are thought to be more independent, they may not always result in more effective corporate governance and may not increase performance. Different board structures are optimal for different firms. Moreover, the ability of the board to monitor the firm's executives is a function of its access to information. Executive directors possess superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes, ex ante. It could be argued, therefore, that executive directors look beyond the financial criteria.