Corporate governance Corporate governance refers to the system by which corporations are directed and controlled.

The governance structure specifies the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and specifies the rules and procedures for making decisions in corporate affairs. Governance provides the structure through which corporations set and pursue their objectives, while reflecting the context of the social, regulatory and market environment. Governance is a mechanism for monitoring the actions, policies and decisions of corporations. Governance involves the alignment of interests among the stakeholders.[1][2][3] There has been renewed interest in the corporate governance practices of modern corporations, particularly in relation to accountability, since the high-profile collapses of a number of large corporations during 20012002, most of which involved accounting fraud. Corporate scandals of various forms have maintained public and political interest in the regulation of corporate governance. In the U.S., these include Enron Corporation and MCI Inc. (formerly WorldCom). Their demise is associated with the U.S. federal government passing the Sarbanes-Oxley Act in 2002, intending to restore public confidence in corporate governance. Comparable failures in Australia (HIH, One.Tel) are associated with the eventual passage of the CLERP 9 reforms. Similar corporate failures in other countries stimulated increased regulatory interest (e.g., Parmalatin Italy). Stakeholder theory Stakeholder theory is a theory of organizational management and business ethics that addresses morals and values in managing an organization. It was originally detailed by R. Edward Freeman in the book Strategic Management: A Stakeholder Approach, and identifies and models the groups which are stakeholders of a corporation, and both describes and recommends methods by which management can give due regard to the interests of those groups. In short, it attempts to address the "Principle of Who or What Really Counts."[1] In the traditional view of the firm, the shareholder view, the shareholders or stockholders are the owners of the company, and the firm has a binding fiduciary duty to put their needs first, to increase value for them. Stakeholder theory argues that there are other parties involved, including employees, customers, suppliers, financiers, communities, governmental bodies, political groups, trade associations, and trade unions. Even competitors are sometimes counted as stakeholders their status being derived from their capacity to affect the firm and its stakeholders. The nature of what is a stakeholder is highly contested (Miles, 2012),[2] with hundreds of definitions existing in the academic literature (Miles, 2011).[3] The stakeholder view of strategy integrates both a resource-based view and a market-based view, and adding a socio-political level. This view of the firm is used to define the specific stakeholders of a corporation (the normative theory (Donaldson) of stakeholder identification) as well as examine the conditions under which these parties should be treated as stakeholders (the descriptive theory of stakeholder salience).[citation needed] Corporate Governance Theories- Stewardship theory Unlike agency theory, stewardship theory assumes that managers are stewards whose behaviors are aligned with the objectives of their principals. The theory argues and looks at a different form of motivation for managers drawn from organizational theory. Managers are viewed as loyal to the company and interested in achieving high performance. The dominant motive, which directs managers to accomplish their job, is their desire to perform excellently. Specifically, managers are conceived as being motivated by a need to achieve, to gain intrinsic satisfaction through successfully performing inherently challenging work, to exercise responsibility and authority, and thereby to gain recognition from peers and

bosses. Therefore, there are non-financial motivators for managers.

The theory also argues that an organization requires a structure that allows harmonization to be achieved most efficiently between managers and owners. In the context of firms leadership, this situation is attained more readily if the CEO is also the chairman of the board. This leadership structure will assist them to attain superior performance to the extent that the CEO exercises complete authority over the corporation and that their role is unambiguous and unchallenged. In this situation, power and authority are concentrated in a single person. Hence, the expectations about corporate leadership will be clearer and more consistent both for subordinate managers and for other members of the corporate board. Thus, there is no room for uncertainty as to who has authority or responsibility over a particular matter. The organization will enjoy the benefits of unity of direction and of strong command and control. Stewardship theory From Wikipedia, the free encyclopedia Stewardship theory is a theory that managers, left on their own, will indeed act as responsible stewards of the assets they control. This theory is an alternative view of agency theory, in which managers are assumed to act in their own self interests at the expense of shareholders.[1] It specifies certain mechanisms which reduces agency loss including tie executive compensation, levels of benefits and also managers incentive schemes by rewarding them financially or offering shares that aligns financial interest of executives to motivate them for better performance.[2] In American politics, an example of the stewardship theory is where a president practices a governing style based on belief they have the duty to do whatever is necessary in national interest, unless prohibited by the Constitution.[3] Agency Theory The debate about corporate governance is typically traced way back to the early 1930s and the publication of Berle and Means' "The Modern Corporation and Private Property". Adolf Berle and Gardiner Means noted that with the separation of ownership and control, and the wide dispersion of ownership, there was effectively no check upon the executive autonomy of corporate managers. In the 1970s these ideas were further refined in what has come to be known as Agency Theory. In a series of now classic articles writers such as Jenesen and Meckling, Fama, and Alchian and Demsetz offered a variety of explanations of the dilemmas faced by the 'principal' who employs an 'agent' to act on his or her behalf. As applied to corporate governance the theory suggests a fundamental problem for absent or distant owners/shareholders who employ professional executives to act on their behalf. In line with neo-classical economics, the root assumption informing this theory is that the agent is likely to be self-interested and opportunistic. (The assumption of owner/shareholder property rights obviates any need to think about the principal's motives.) This raises the prospect that the executive, as agent, will serve their own interests rather than those of the owner principal. To counter such problems the principal will have to incur 'agency costs'; costs that arise from the necessity of creating incentives that align the interests of the executive with those of the shareholder, and costs incurred by the necessity of monitoring executive conduct to prevent the abuse of owner interests.

It is important to note that agency theory is deductive in its methodology. Its assumptions have been the subject of extensive empirical research but this has typically relied on the testing of various propositions in relation to large data sets. Agency theorists take self-interested opportunism as a given. They feel no need to explore, as we have done in this research, the attitudes, conduct and relationships that actually create board effectiveness. Instead they have busied themselves with exploring the effectiveness of the various mechanisms designed to make executive self-interest serve shareholder interests. To date such studies have proved entirely equivocal in terms of the relationship between good governance and firm performance. Agency theory assumptions have nevertheless been highly influential is shaping the reform of corporate governance systems. Here it is essential to distinguish between external, market-based governance mechanisms and board-based mechanisms. In relation to market governance then clearly the openness and integrity of financial disclosures is vital to the operation of the stock market in determining a company's share-price and its underlying market valuation. Market governance relies for its effectiveness on the remote visibility such financial information creates, and, as importantly, on the effects on the executive mind of the knowledge of such visibility. Agency theorists point to the important disciplinary effects of two further market mechanisms. The first is the 'market for corporate control', the potential for takeovers to discipline executives by providing a mechanism whereby ineffective executive teams can be displaced by more effective executive teams. The second - 'the managerial labour market' - operates at an individual level; poor executive performance will threaten an individual's future employment potential whilst good performance will have positive reputational and hence career-enhancing effects. To these external 'market' mechanisms must be added the disciplinary effects on company and executive performance of external monitoring, both direct and indirect. Formally, it is the Annual General Meeting provides an opportunity for directors to report face-to-face to their shareholders. In practice, however, the formal accountability of the AGM has been augmented and diverted by a variety of other mechanisms. At the time of results announcements, companies will typically conduct presentations for sell-side analysts who then serve as key intermediaries between companies and their investors. These general briefings are then supplemented by a large number of (typically annual) private face-to-face meetings between executives and their key investors. In addition to these external market and monitoring mechanisms, agency theory has also informed the internal reform of boards of directors. One of its most significant direct contributions came in the form of the widespread adoption of executive share-option schemes, which have only very recently fallen into disrepute in the UK. Such schemes follow directly from the agency assumption that the exercise of executive self-interest must be aligned with the interests of shareholders. Less directly, the influence of agency theory assumptions can be seen in the seminal reforms promoted by the Cadbury Committee 'Code of Best Practice', and its subsequent elaboration by Greenbury, Hampel, Turnbull and most recently Derek Higgs. With the possible exception of Turnbull, the work of these different committees was occasioned by visible corporate failures or perceived executive abuses of power, and has resulted in a progressive elaboration of the 'control' role of the board. The 'independence' of the non-executives directors who must now constitute 50 per cent of the board, their lead role on audit, nominations and remuneration committees where conflicts of interest between executive and shareholder are potentially most acute, along with progressively more stringent provisions around the separation of the roles of chairman and chief executive, are all consonant with agency theory's assumption that the interests of the owner/ shareholder are potentially at risk from executive self-interest, in the absence of close monitoring by independent non-executives.

Separation of ownership and control

The investing public is a major source of funds for new or expanding operations. As companies have grown, their need for funds has grown, with the consequence that legal ownership of companies has become widely dispersed. For example, in large American corporations, shareholders may run into the hundreds of thousands and even more. Although large blocks of shares may be held by wealthy individuals or institutions, the total amount of stock in these companies is so large that even a very wealthy person is not likely to own more than a small fraction of it.

The Anglo- American Model of Corporate Governance- Basic Overview

This post seeks to present an overview and a brief introduction to the Anglo- American Model of Corporate Governance. Essentially, in a nutshell, the Anglo-American Model of Corporate Governance is a liberal model of governance in a body corporate. Adapted from and influenced by the systems of governance followed in the USA and the UK, this system of governance accords primary importance to shareholder interest and as a result, the role played by banking and financial institutions in the governance of an enterprise is drastically reduced. The shift from other models of governing a body corporate to the current worldwide trend of the Anglo-American Model began as a result of the constant increase in the demand and need for capital by a body corporate. A brief look at companies around the world would present a picture of a financial crisis at some point of time or the other. One such manifestation of the unhealthy financial situation would be the inability to repay the existing liability of banks and financial institutions. As a result, a restructuring of the loans was in order, and the financial institutions demanded drastic changes in the system of corporate governance of these companies. Being the chief and indispensable source of funds, body corporates were in effect forced to comply with the changes in the set-up of corporate governance. However, as capital requirements grew, companies turned elsewhere in an attempt to finance their operations, and the next logical option was equity financing, or in other words, selling shares of the company to raise capital. This added a third wheel to the system of corporate governance that prevailed in the body corporates, that of the shareholders- their rights and interests. These shareholders elected the members of the Board of Directors directly, and the Board in turn went on to elect the CEO, giving rise to a single- tiered system of electing the BOD of a company, and banks and financial institutions playing a bare minimum role. The protection of shareholder interest is the chief characteristic of the Anglo-American Model of Corporate governance and the fundamental principle behind its existence and global acceptance as the most favourable Model of governance in a body corporate.