Corporate governance is the system by which companies are
directed and controlled.
It involves regulatory and market mechanisms, and the roles and relationships
between a company’s management, its board, its shareholders and other stakeholders, and the goals for which the
corporation is governed.
Lately, corporate governance has been comprehensively defined as a system
of law and sound approaches by which corporations are directed and controlled
focusing on the internal and external corporate structures with the intention
of monitoring the actions of management and directors and thereby mitigating
agency risks stemming from the devious deeds of these corporate officers
In contemporary business corporations, the main external stakeholder groups
are shareholders, debtholders, trade creditors,
suppliers, customers and communities affected by the corporation's activities.Internal stakeholders are the board of directors, executives, and other employees.
Much of the contemporary interest in corporate governance is concerned with
mitigation of the conflicts of interests between stakeholders. Ways of
mitigating or preventing these conflicts of interests include the processes,
customs, policies, laws, and institutions which have an impact on the way a
company is controlled.
An important theme of corporate governance is the nature and extent of accountability
of people in the business.
A related but separate thread of discussions focuses on the impact of a
corporate governance system on economic efficiency, with a strong emphasis on
shareholders' welfare.large firms where there is a separation of ownership and management and no
controlling shareholder, the principal–agent issue arises between
upper-management (the "agent") which may have very different
interests, and by definition considerably more information, than shareholders
(the "principals"). The danger arises that rather than overseeing
management on behalf of shareholders, the board of directors may become
insulated from shareholders and beholden to management.This aspect is particularly present in contemporary public debates and developments
in regulatory policy.
Economic analysis has resulted in a literature on the subject.One source defines corporate governance as "the set of conditions that
shapes the ex
post bargaining over the quasi-rents generated by a firm.
The firm itself is modelled as a governance structure acting through the
mechanisms of contract.
There has been renewed interest in the corporate governance practices of
modern corporations, particularly in relation to accountability, since the
high-profile collapses of a number of large corporations during 2001-2002, most
of which involved accounting fraud.
Corporate scandals of various forms have
maintained public and political interest in the regulation of corporate
governance. In the U.S., these include Enron
Corporation and MCI Inc. (formerly WorldCom). Their demise is associated
with the U.S. federal government passing the Sarbanes-Oxley Act in 2002, intending to restore
public confidence in corporate governance. Comparable failures in Australia are
associated with the eventual passage of the CLERP 9
reforms. Similar corporate failures in other countries stimulated increased
regulatory interest in Italy.
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