Corporate Governance

Nobody knows what corporate governance means. Every book and article on corporate governance gives a different definition of corporate governance. Generally, it concerns the relationship between the directors and shareholders and the question of who should control and own the company. Auditors and accountants use it to denote the control that they exercise through financial reporting and some people use it to identify the controls over company decision making. 

Further it concerns issues about the best way to run one company. Is the set of policies, laws, processes and institutions affecting the way a company is administered, controlled and directed. The regulatory body of corporate governance are the Board of Directors, the shareholders, the management, the Chief Executive Officer and the Auditors. Other stakeholders are the employees, creditors, suppliers, regulators and customers.

 A separation has been developed between those who manage the company who are the directors and those who own the company who are the shareholders. The shareholder delegates decision rights to the manager to act in a good faith and in the best interest of the company. This happened because the number of shareholders in a company increases and is not possible for all to control and manage the company’s affairs. 


Unfortunately, this separation of ownership and control has as a result a loss of effective control by the shareholders over managerial decisions. As a result of this separation between the two parties, a system of corporate governance is implemented to assist the incentive of managers with those of shareholders. The key aims of a good corporate governance is to minimize the principal agent problem and to ensure the accountability, honesty, trust, responsibility, respect, commitment  of certain individuals in a corporation. 


Corporate governance deals with the ways by which shareholders assure themselves of getting a return on their investment. But how to they make sure that they do not invest their capital in bad projects and even more how to they make sure that the managers do not steal the capital which they have supplied? All parties to corporate governance have an interest in the effective performance of the organization. Management, workers, directors receive reputation, benefits and salaries. Customers receive services and goods. Shareholders receive capital and suppliers receive compensation for their services. Most of the advanced market economies have solved the problem of corporate governance but this does not mean that they have solved the corporate governance problem perfectly nor that the corporate governance mechanisms cannot be improved. 

The aim problem is the separation of ownership and control between the shareholders and the managers. Basically, the problem are that the power and control have been derived in the hands of one person, the scandals ,the lack of supersvision and abuses by the directors.[1] Corporate governance structures such as the Combined Code try to prevent such problems.

for further reading:

• Ige Omotayo Bolodeoku, "Economic theories of the corporation and corporate governance: a critique" [2002] Journal of Business Law 411
• Gavin J. Nicholson and Geoffrey C. Kiel,"Can directors impact performance? A case-based test of three theories ofcorporate governance." Corporate Governance 2007, 15(4), 585-608.
• Andrei Shleifer and Rober W.Vishny, “ A survey of corporate governance”
• Brenda Hanningan, Company law,(2^nd edn OUP 2009) 
• http://dictionary.bnet.com/definition/Corporate+Governance.html
   http://www.frc.org.uk/corporate/combinedcode.cfm
   http://www.frc.org.uk/documents/pagemanager/frc/Combined_Code_June_2008/Combined%20Code%20Web%20Optimized%20June%202008(2).pdf
   http://www.fsa.gov.uk/Pubs/ukla/lr_comcode.pdf

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[1] Enron and Maxwell cases give a good illustration of these problems.