The Importance Of Corporate Governance
Corporate governance refers to the rules, procedures, and administration of the firm’s contracts with its shareholders, creditors, employees, suppliers, customers, and sovereign governments. Governance is legally vested in a board of directors who have a fiduciary duty to serve the interests of the corporation rather than their own interests or those of the firm’s management.
With this simple definition, we assume that directors and managers are motivated to serve the interests of the corporation by incentive pay, by their own shareholdings and reputational concerns, and by the threat of takeover.
The operation of the board and the remuneration of the Executive Directors are vital in maintaining and protecting the interests of the different stakeholder groups. If we accept that the shareholders collectively own the business and they have invested in it to maximise their wealth, then their main aim is to grow the overall value of their share capital and maximise returns in the form of dividends.
However, there are potential conflicts of interest between this ambition and the managers/employees of the group who are looking to maximise their own wealth. Managers are appointed as agents on behalf of the shareholders of the company who have delegated this responsibility to them.
In the UK and the US, corporate governance mechanisms emphasise the relationship between shareholder and management. In countries such as France, Germany and the Netherland, the corporate governance mechanisms take a stakeholders’ approach to governance, aiming to balance the interests of owners, managers, major creditors and employees.
The main mechanisms for understanding corporate governance are the following:
1. The market for corporate control (i.e. a hostile takeover market and the market for partial control).
With this simple definition, we assume that directors and managers are motivated to serve the interests of the corporation by incentive pay, by their own shareholdings and reputational concerns, and by the threat of takeover.
The operation of the board and the remuneration of the Executive Directors are vital in maintaining and protecting the interests of the different stakeholder groups. If we accept that the shareholders collectively own the business and they have invested in it to maximise their wealth, then their main aim is to grow the overall value of their share capital and maximise returns in the form of dividends.
However, there are potential conflicts of interest between this ambition and the managers/employees of the group who are looking to maximise their own wealth. Managers are appointed as agents on behalf of the shareholders of the company who have delegated this responsibility to them.
In the UK and the US, corporate governance mechanisms emphasise the relationship between shareholder and management. In countries such as France, Germany and the Netherland, the corporate governance mechanisms take a stakeholders’ approach to governance, aiming to balance the interests of owners, managers, major creditors and employees.
The main mechanisms for understanding corporate governance are the following:
1. The market for corporate control (i.e. a hostile takeover market and the market for partial control).
March 14 2011 | Corporate Governance | Comments Off