Corporate Governance: Theories, Definition, Examples

Corporate governance is important to maintain the stability and integrity of companies as it promotes trust in the business environment. Studies suggest that there is a positive relationship between Corporate Governance and shareholders value.

Investing is risky but information and warning signals need to be given with integrity, which was missing in the past financial scandals e.g. Maxwell, BCCI, Enron.

Corporate governance is getting increased attention from all quarters, and several countries have passed legislations for regulating corporate governance.

For example, America has passed Sarbanes-Oxley Act for regulating corporate governance due to governance failure. There are laws in various countries that require quota for female directors.

Corporate governance is the set of practices and rules by which a company is directed and controlled.

The primary objectives are to ensure transparency, accountability, and responsibility so that the interests of various stakeholders such as shareholders, management, customers, suppliers, financiers, government, and the community, are balanced.

The concept of transparency means accountability and explanation to outsiders of the workings of a firm (W. Scarff’s definition).

Read: More Business ethics and Responsibility Topics

Developments in corporate governance:

• Cadbury 1992: Increased use of non executive directors to counter internal untrustworthiness
• Greenbury 1995: Examination of director pay; not linked to share price; stock options used as part of pay package
• Hampel and combined code 1998: Board has responsibility for relations to stakeholders but director responsibility is to shareholders
• Turnbull 1999: Audit controls
• OECD principles 1999 – like combined codes: Combined code via London Stock Exchange: corporate governance practices for listings
• Myners 2001: Role of institutional investors – activism against directors needed, but little change

• Sarbanes-Oxley Act of 2002 (USA):

  Comply or explain – requirements on chief executives for personal signing off of accounts
  Andersen’s, Enron’s auditors made as much non-audit income from Enron as from audit – loss of independence?

• Smith & Higgs and combined code 2003: Higgs – roles of non executive directors. Smith – role of audit committees

• Issues with Enron:

  Where were the (NEDs) non executive directors?
  NEDs occasional attendance
  NEDs are also executive directors of their own companies. Are they thus really trustworthy?

However, the ground reality is that there’s little change but many reports.

Fisher and Lovell (2006, p.307) offers an expanded definition of corporate governance.

King 2002 – companies should no longer act independently of the societies and environment in which they operate:

Spiritual collectiveness, Humility and helpfulness, Fairness to all human beings, High standards of morality based on close kinship clans etc., Corporate governance is about leadership.