corporate governance

Topics: Corporate governance, Board of directors, Combined Code Pages: 7 (1606 words) Published: November 13, 2013
Definition of Corporate Governance

“The process and structure used to direct and manage the affairs of the business towards enhancing business prosperity and corporate accountability with the ultimate objective of realizing long-term shareholder value, whilst taking into account the interests of other stakeholders”.

Prior to the establishment of this definition, there were 4 others namely by;

The Cadbury Report (1992) defined corporate governance as „a whole system of controls by which a company is directed and controlled‰. Accordingly, the focus of corporate governance is on the roles of the board of directors and the roles of shareholders as owners of the company in providing appropriate governance of the company. The board of directors is considered one of the corporate governance mechanisms. Other governance mechanisms include markets for control, auditors, law and regulations.

The Organization for Economic Co-operation and Development (OECD, 1999) has a broader definition of principals which includes other stakeholders. It is defined as „...a set of relationships between a company’s board, its shareholders and other stakeholders. It also provides the structures through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.

Sheilfer and Vishny (1997) focused on the scope of corporate governance to specific stakeholders who are the suppliers of finance. Corporate governance is defined as „...the ways in which suppliers of finance assure themselves of getting a return on their investment. The Higgs Report (2003) relates corporate governance to corporate accountability which considers both board structures and processes to manage shareholders interests.

In Western countries, companies are characterized as having diffused ownership where shares are held by many shareholders in small quantities. However, in emerging Asian countries, companies are characterized as having concentrated ownership where shares are held by a small number of shareholders in large quantities. In a family business firm, the controlling shareholders may also be the managers. There is a difference between corporate governance in concentrated ownerships and that of diffused ownerships. In concentrated ownerships, the concern is potential conflicts of interest between controlling and minority shareholders. The decisions made may be in favor of controlling shareholders. In this situation, corporate governance is used to protect minority shareholders from expropriation by controlling shareholders. The definition of corporate governance by La Porta et al. (2000) is more relevant here, which is, „a set of mechanisms through which outside investors protect themselves against expropriation by the insiders (managers and controlling shareholders).

It is observed that the definitions of corporate governance mainly have to do with concerns about the interaction between various groups which can be categorized into internal group and external group board members in directing a firm for value creation.

Corporate Governance Codes.
The development of Corporate Governance Codes applied in the United Kingdom, OECD and Commonwealth countries and the United States. In general, the codes outline recommendation on corporate governance for companies. It is assumed that by following the recommended codes, the companies would have good governance practices in place as a monitoring mechanism. As a result, shareholders wealth can be maximized.

Corporate Governance in the United Kingdom.
Corporate governance in the UK started in the early 1990s. The corporate collapses of the BCCI bank and the Robert Maxwell pension fund turned the attention of many towards corporate governance issues. Since then, many initiatives, including the introduction of the code of corporate governance, have been taken to ensure proper governance of...
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