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Corporate Governance


What is Corporate Governance?

Good corporate governance is not just a matter of prescribing particular corporate structure and complying with a number of hard and fast rules. There is a need for broader principles. All concerned should then apply these flexibly and with common sense to the vary circumstances of individual companies.



Definition

Corporate Governance is the system by which companies are directed and controlled. In its narrow sense, it is a source of shareholder value good Corporate Governance leads to better company performance, higher profitability and efficiency levels. In its wider sense, the definition takes into account all the company’s stakeholders and corporate social responsibility.

Corporate Governance is important because it is part of the institutional infrastructure (laws, regulations, institutions and enforcement mechanisms) underlying sound economic performance.

Corporate governance is the set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed.

The principal stakeholders are the shareholders, management and the board of directors. Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large.



Corporate governance is a multi-faceted subject. An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem.



A related but separate thread of discussions focus on the impact of a corporate governance system in economic efficiency, with a strong emphasis on shareholders welfare. There are yet other aspects to the corporate governance subject, such as the stakeholder view and the corporate governance models around the world Corporate governance ensures that constituencies (stakeholders) with relevant interest in the company’s business are fully taken in to account.



The importance of corporate governance lies in its contribution both to business prosperity and accountability.

Good corporate governance stimulates performance, generating higher returns and profitability of companies, leads to higher total factor productivity growth, a major source of economic growth.



Similarly, limiting the abuse of corporate insiders, enhances leadership, demonstrates transparency and social accountability and creates an efficient mechanism for transferring wealth between generations.

By monitoring managers of companies in both the financial and real sectors and making them accountable for their actions, good corporate governance implies protection of investors' interests; in turn, this encourages both domestic and foreign direct as well as portfolio investment.



Good corporate governance can make significant contribution to the prevention of malpractice and fraud, although it cannot prevent them absolutely.

Parties involved in corporate governance include the regulatory body (e.g. the Chief Executive Officer, the board of directors, management and shareholders).



Other stakeholders who take part include suppliers, employees, creditors, customers and the community at large.
In corporations, the shareholder delegates decision rights to the manager to act in the principal's best interests.
This separation of ownership from control implies a loss of effective control by shareholders over managerial decisions. Partly as a result of this separation between the two parties, a system of corporate governance controls is implemented to assist in aligning the incentives of managers with those of shareholders.
With the significant increase in equity holdings of investors, there has been an opportunity for a reversal of the separation of ownership and control problems because ownership is not so diffuse.
A board of directors often plays a key role in corporate governance. It is their responsibility to endorse the organisation's strategy, develop directional policy, appoint, supervise and remunerate senior executives and to ensure accountability of the organisation to its owners and authorities.
Better Corporate Governance is highly correlated with better operating performance and market valuation of companies.
Preserving and protecting property rights encourages innovation and long-term investment in human and physical capital, foreign direct investment, as well as the creation of intellectual property.