Corporate Governance

Corporate governance refers to the broad range of policy and practices that stockholders, executive managers, and boards of directors use to manage the operations of corporate entities towards fulfilling their responsibilities to the investors and other stakeholders in the society.

Over the past decade, corporate governance has become the subject of increasing concern to the stakeholders, which has prompted their close attention and scrutiny of the corporate activities. Hence, these concerns have given rise to a powerful shareholder movement with a view to extract compliance from the operators of corporate organisations. Shareholder activists, composed primarily of large multi-billionaire pension funds, religious groups, socially responsible investment groups, and other institution investors, are now using a variety of vehicle to influence board behaviour, including creating corporate governance standard of excellence and filling shareholders resolution. Theses investors are concerned with such topics as board diversity, independence, compensation, and accountability, as well as broad range of social issue, e.g. employment, ethnic practices, environmental policies, and community involvement.

Role of Corporate governance

Corporate governance can also be defined as a set of mechanisms, through which "outside" investors are protected from expropriations by insiders of their companies. Insiders include managers, major shareholders (individuals, corporate investors, family interest and/or governance) as well as large creditors (e.g. banks). Outsider includes equity investors, provider of debt and minority shareholders. Expropriation of outsiders takes the forms of outright theft of assets, transfers pricing, excessive executive compensation, entrenchment of inexpert management teams, diversion of funds to unsuitable projects that benefit one group of insiders etc. The role of corporate governance is therefore to prevent the expropriation of investors by managers, smaller investors by larger ones and debt provided by equity investors or vise versa. In practice, protection mechanisms are limited as a legal protection depends on enforcement and quality of law in the country where the business is located while ownership concentrations leave the minority exposed to expropriation by larger shareholders.

Most corporate governance systems therefore rely on a combination of legal enforcement and ownership concentration and, sometime the threat of hostile takeover through an active market, for corporate control. The key issues in evaluating a corporate governance system are trust worthy accounting and disclosure system which provide a mean for investors to monitor their investment by accessing information, legal protection for investor's right, effective board and an active market for corporate control.

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