Corporate governance

Corporate governanceis the mechanisms, processes and relations by which corporations are controlled and directed.[1] Governance
structures and principles identify 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 includes the rules and
procedures for making decisions in corporate affairs.[2] Corporate governance includes the processes through which corporations'
objectives are set and pursued in the context of the social, regulatory and market environment. Governance mechanisms include
monitoring the actions, policies, practices, and decisions of corporations, their agents, and affected stakeholders. Corporate
governance practices are affected by attempts to align the interests of stakeholders.[3][4] Interest in the corporate governance practices
of modern corporations, particularly in relation to accountability, increased following the high-profile collapses of a number of large
corporations during 2001–2002, most of which involved accounting fraud; and then again after the recent
financial crisis in 2008.

Corporate scandals of various forms have maintained public and political interest in the regulation of corporate governance. In the
U.S., these include Enron and MCI Inc. (formerly WorldCom). Their demise led to the enactment of the Sarbanes-Oxley Act in 2002,
a U.S. federal law intended to restore public confidence in corporate governance. Comparable failures in AustraliaHIH,
( One.Tel) are
associated with the eventual passage of the CLERP 9 reforms.[5] Similar corporate failures in other countries stimulated increased
regulatory interest (e.g.,Parmalat in Italy).

Contents
Stakeholder interests
Other definitions
Principles
Models
Continental Europe (Two-tier board system)
India
United States, United Kingdom
Founder Centrism
Regulation
Sarbanes-Oxley Act
Codes and guidelines
Organisation for Economic Co-operation and Development principles
Stock exchange listing standards
Other guidelines
History
Early history
United States of America
East Asia
Saudi Arabia
List of countries by corporate governance
Stakeholders
Responsibilities of the board of directors
Stakeholder interests
’Absentee landlords’ vs. capital stewards
United Kingdom
Control and ownership structures
Family control
Diffuse shareholders
 Mechanisms and controls
Internal corporate governance controls
External corporate governance controls
Financial reporting and the independent auditor
Systemic problems
Issues
Executive pay
Separation of Chief Executive Officer and Chairman of the Board roles
See also
References
Further reading
External links

Stakeholder interests
In contemporary business corporations, the main external stakeholder groups are shareholders, debtholders, trade creditors and
suppliers, customers, and communities affected by the corporation's activities. Internal stakeholders are the board of directors,
executives, and other employees.

Much of the contemporary interest in corporate governance is concerned with mitigation of the conflicts of interests between
stakeholders.[6] In large firms where there is a separation of ownership and management and no controlling shareholder, the
principal–agent issue arises between upper-management (the "agent") which may have very different interests, and by definition
considerably more information, than shareholders (the "principals"). The danger arises that, rather than overseeing management on
[7] This aspect is
behalf of shareholders, the board of directors may become insulated from shareholders and beholden to management.
particularly present in contemporary public debates and developments in regulatory policy.[3] More explicitly, the danger is that
executives paid by stock option have incentive to divert the retained earnings of the firm into buying shares of own company stock,
which will then cause the share price to rise. However, retained earnings will then not be used to purchase the latest equipment or to
hire quality people. Over the thirty or forty years that the model has been in place, the diversion of retained earnings to stock price
manipulation has gradually eroded the competitiveness of the US industrial base. While the public blames low wages in China for
eliminating US jobs, the reality is that many US firms compete with high wage nations such as Canada, Germany, or Japan. It is
failure of large publicly-held corporations to invest in new equipment and people that holds the US back and erodes the middle class
[8]
(fewer engineers, chemists, CNC machinists, accountants are needed as plants are left to age out).

Ways of mitigating or preventing these conflicts of interests include the processes, customs, policies, laws, and institutions which
affect the way a company is controlled.[9][10] An important theme of governance is the nature and extent of corporate accountability.
A related discussion at the macro level focuses on the effect of a corporate governance system on economic efficiency, with a strong
emphasis on shareholders' welfare.[11] This has resulted in a literature focussed on economic analysis.
[12][13][14]

Other definitions
Corporate governance has also been more narrowly defined as "a system of law and sound approaches by which corporations are
directed and controlled focusing on the internal and external corporate structures with the intention of monitoring the actions of
ficers."[15]
management and directors and thereby, mitigating agency risks which may stem from the misdeeds of corporate of

Corporate governance has also been defined as "Is the act of externally directing, controlling and evaluating a corporation"[16] and
related to the definition of Governance as "The act of externally directing, controlling and evaluating an entity, process or
resource".[17] In this sense, Governance and Corporate Governance are different from management because governance must be
EXTERNAL to the object being governed. Governing agents do not have personal control over, and are not part of the object that
they govern. For example, it is not possible for a CIO to govern the IT function. They are personally accountable for the strategy and
management of the function. As such, they “manage” the IT function; they do not “govern” it. At the same time, there may be a
number of policies, authorized by the board, that the CIO follows. When the CIO is following these policies, they are performing
“governance” activities because the primary intention of the policy is to serve a governance purpose. The board is ultimately
“governing” the IT function because they stand outside of the function and are only able to externally direct, control and evaluate the
IT function by virtue of established policies, procedures and indicators. Without these policies, procedures and indicators, the board
has no way of governing, let alone affecting the IT function in any way.

One source defines corporate governance as "the set of conditions that shapes the ex post bargaining over the quasi-rents generated
by a firm."[18] The firm itself is modelled as a governance structure acting through the mechanisms of contract.
[19][11] Here corporate

governance may include its relation tocorporate finance.[20]

Principles
Contemporary discussions of corporate governance tend to refer to principles raised in three documents released since 1990: The
Cadbury Report (UK, 1992), the Principles of Corporate Governance (OECD, 1999, 2004 and 2015), the Sarbanes-Oxley Act of
2002 (US, 2002). The Cadbury and Organisation for Economic Co-operation and Development (OECD) reports present general
principles around which businesses are expected to operate to assure proper governance. The Sarbanes-Oxley Act, informally
referred to as Sarbox or Sox, is an attempt by the federal government in the United States to legislate several of the principles
recommended in the Cadbury and OECD reports.

Rights and equitable treatment of shareholders :[21][22][23] Organizations should respect the rights of
shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by
openly and effectively communicating information and by encouraging shareholders to participate in general
meetings.
Interests of other stakeholders:[24] Organizations should recognize that they have legal, contractual, social, and
market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local
communities, customers, and policy makers.
Role and responsibilities of the board:[25][26] The board needs sufficient relevant skills and understanding to
review and challenge management performance. It also needs adequate size and appropriate levels of
independence and commitment.
Integrity and ethical behavior:[27][28] Integrity should be a fundamental requirement in choosing corporate of
ficers
and board members. Organizations should develop a code of conduct for their directors and executives that
promotes ethical and responsible decision making.
Disclosure and transparency:[29][30] Organizations should clarify and make publicly known the roles and
responsibilities of board and management to provide stakeholders with a level of accountability
. They should also
implement procedures to independently verify and safeguard the integrity of the company's financial reporting.
Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors
have access to clear, factual information.

Models
Different models of corporate governance differ according to the variety of capitalism in which they are embedded. The Anglo-
American "model" tends to emphasize the interests of shareholders. The coordinated or [Multistakeholder Model] associated with
Continental Europe and Japan also recognizes the interests of workers, managers, suppliers, customers, and the community. A related
[31]
distinction is between market-orientated and network-orientated models of corporate governance.

Continental Europe (Two-tier board system)

Some continental European countries, including Germany, Austria, and the Netherlands, require a two-tiered Board of Directors as a
means of improving corporate governance.[32] In the two-tiered board, the Executive Board, made up of company executives,
generally runs day-to-day operations while the supervisory board, made up entirely of non-executive directors who represent
shareholders and employees, hires and fires the members of the executive board, determines their compensation, and reviews major
business decisions.[33]
India
The Securities and Exchange Board of India Committee on Corporate Governance defines corporate governance as the "acceptance
by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on
behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between
."[34][35]
personal & corporate funds in the management of a company

United States, United Kingdom

The so-called "Anglo-American model" of corporate governance emphasizes the interests of shareholders. It relies on a single-tiered
Board of Directors that is normally dominated by non-executive directors elected by shareholders. Because of this, it is also known as
"the unitary system".[36][37] Within this system, many boards include some executives from the company (who are ex officio
members of the board). Non-executive directors are expected to outnumber executive directors and hold key posts, including audit
and compensation committees. In the United Kingdom, the CEO generally does not also serve as Chairman of the Board, whereas in
the US having the dual role has been the norm, despite major misgivings regarding the effect on corporate governance.[38] The
.[39]
number of US firms combining both roles is declining, however

In the United States, corporations are directly governed by state laws, while the exchange (offering and trading) of securities in
corporations (including shares) is governed by federal legislation. Many US states have adopted the
Model Business Corporation Act,
but the dominant state law for publicly traded corporations is Delaware General Corporation Law, which continues to be the place of
incorporation for the majority of publicly traded corporations.[40] Individual rules for corporations are based upon the corporate
charter and, less authoritatively, the corporate bylaws.[40] Shareholders cannot initiate changes in the corporate charter although they
can initiate changes to the corporate bylaws.[40]

It is sometimes colloquially stated that in the USA and the UK 'the shareholders own the company'. This is, however, a
misconception as argued by Eccles & Youmans (2015) and Kay (2015).[41]

Founder Centrism
Recent scholarship from the University of Oxford outlines a new theory of corporate governance, founder centrism, which is
premised upon a narrowing in the separation between ownership and control. Through the lens of concentrated equity ownership
theory, a new theory of the firm, the traditional checklist of best practices are inapplicable, as evidenced by the significant
outperformance of technology companies with dual-class share structures and integrated CEO/Chairman positions:

“ "Founder-run companies, such as Facebook, Netflix and Google are at the forefront of a new wave of
organizational structure better suited to long-term value creation. Founder centrism, an inclusive
concept within CEO theory, integrates the capacity of founder and non-founder senior leadership to
adopt an owner’s mindset in traditionally structured corporations, such as Thomas J. Watson Sr. and
Thomas Watson Jr. with IBM, Steve Jobs and Tim Cook with Apple, Jamie Dimon with JPMorgan
Chase, Lloyd Blankfein with Goldman Sachs, Rick George with Suncor Energy, and many others. In
substance, all fall within the ambit of founder centrism – leaders with a founder’s mindset, an ethical
disposition towards the shareholder collective, and an intense focus on exponential value creation
without enslavement to a quarter-by-quarter upward growth trajectory. In traditionally structured firms,
high performing executives gain deference, become highly influential, and take on the qualities of
concentrated equity owners. To the extent these leaders embrace founder centrism, their companies
will experience efficiency advantages relative to competitors operating within traditional parameters."[42]
”
Regulation
Corporations are created as legal persons by the laws and regulations of a particular jurisdiction. These may vary in many respects
between countries, but a corporation's legal person status is fundamental to all jurisdictions and is conferred by statute. This allows
the entity to hold property in its own right without reference to any particular real person. It also results in the perpetual existence that
characterizes the modern corporation. The statutory granting of corporate existence may arise from general purpose legislation
(which is the general case) or from a statute to create a specific corporation, which was the only method prior to the 19th century
.

In addition to the statutory laws of the relevant jurisdiction, corporations are subject to common law in some countries, and various
laws and regulations affecting business practices. In most jurisdictions, corporations also have a constitution that provides individual
rules that govern the corporation and authorize or constrain its decision-makers. This constitution is identified by a variety of terms;
in English-speaking jurisdictions, it is usually known as the Corporate Charter or the [Memorandum] and Articles of Association.
The capacity of shareholders to modify the constitution of their corporation can vary substantially
.

The U.S. passed the Foreign Corrupt Practices Act (FCPA) in 1977, with subsequent modifications. This law made it illegal to bribe
government officials and required corporations to maintain adequate accounting controls. It is enforced by the U.S. Department of
Justice and the Securities and Exchange Commission (SEC). Substantial civil and criminal penalties have been levied on corporations
and executives convicted of bribery.[43]

The UK passed the Bribery Act in 2010. This law made it illegal to bribe either government or private citizens or make facilitating
payments (i.e., payment to a government official to perform their routine duties more quickly). It also required corporations to
establish controls to prevent bribery.

Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002 was enacted in the wake of a series of high-profile corporate scandals. It established a series of
requirements that affect corporate governance in the U.S. and influenced similar laws in many other countries. The law required,
along with many other elements, that:

The Public Company Accounting Oversight Board(PCAOB) be established to regulate the auditing profession, which
had been self-regulated prior to the law. Auditors are responsible for reviewing the financial statements of
corporations and issuing an opinion as to their reliability.
The Chief Executive Officer (CEO) and Chief Financial Officer (CFO) attest to the financial statements. Prior to the
law, CEO's had claimed in court they hadn't eviewed
r the information as part of their defense.
Board audit committees have members that are independent and disclose whether or not at least one is a financial
expert, or reasons why no such expert is on the audit committee.
External audit firms cannot provide certain types of consulting services and must rotate their lead partner every 5
years. Further, an audit firm cannot audit a company if those in specified senior management roles worked for the
auditor in the past year. Prior to the law, there was the real or perceived conflict of interestbetween providing an
independent opinion on the accuracy and reliability of financial statements when the same firm was also providing
lucrative consulting services.[44]

Codes and guidelines

Corporate governance principles and codes have been developed in different countries and issued from stock exchanges,
corporations, institutional investors, or associations (institutes) of directors and managers with the support of governments and
international organizations. As a rule, compliance with these governance recommendations is not mandated by law, although the
codes linked to stock exchangelisting requirements may have a coercive effect.

Organisation for Economic Co-operation and Development principles

One of the most influential guidelines on corporate governance are the G20/OECD Principles of Corporate Governance, first
published as the OECD Principles in 1999, revised in 2004 and revised again and endorsed by the G20 in 2015.[3] The Principles
often referenced by countries developing local codes or guidelines. Building on the work of the OECD, other international
organizations, private sector associations and more than 20 national corporate governance codes formed the United Nations
Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) to produce their
Guidance on Good Practices in Corporate Governance Disclosure.[45] This internationally agreed[46] benchmark consists of more
[47]
than fifty distinct disclosure items across five broad categories:

Auditing
Board and management structure and process
Corporate responsibility and compliance in organization
Financial transparency and information disclosure
Ownership structure and exercise of control rights
The OECD Guidelines on Corporate Governance of State-Owned Enterprises are complementary to the G20/OECD Principles of
Corporate Governance, providing guidance tailored to the corporate governance challenges unique to
state-owned enterprises.

Stock exchange listing standards

Companies listed on the New York Stock Exchange (NYSE) and other stock exchanges are required to meet certain governance
standards. For example, the NYSE Listed Company Manual requires, among many other elements:

Independent directors: "Listed companies must have a majority of independent directors...Ef fective boards of
directors exercise independent judgment in carrying out their responsibilities. Requiring a majority of independent
directors will increase the quality of board oversight and lessen the possibility of damaging conflicts of interest."
(Section 303A.01) An independent director is not part of management and has no "material financial relationship"
with the company.
Board meetings that exclude management: "T o empower non-management directors to serve as a more ef fective
check on management, the non-management directors of each listed company must meet at regularly scheduled
executive sessions without management." (Section 303A.03)
Boards organize their members into committees with specific responsibilities per defined charters. "Listed companies
must have a nominating/corporate governance committee composed entirely of independent directors." This
committee is responsible for nominating new members for the board of directors. Compensation and Audit
Committees are also specified, with the latter subject to a variety of listing standards as well as outside regulations.

Other guidelines
The investor-led organisation International Corporate Governance Network (ICGN) was set up by individuals centered around the ten
largest pension funds in the world 1995. The aim is to promote global corporate governance standards. The network is led by
investors that manage 18 trillion dollars and members are located in fifty different countries. ICGN has developed a suite of global
guidelines ranging from shareholder rights to business ethics.

The World Business Council for Sustainable Development (WBCSD) has done work on corporate governance, particularly on
Accounting and Reporting, and in 2004 released Issue Management Tool: Strategic challenges for business in the use of corporate
responsibility codes, standards, and frameworks. This document offers general information and a perspective from a business
association/think-tank on a few key codes, standards and frameworks relevant to the sustainability agenda.

In 2009, the International Finance Corporation and the UN Global Compact released a report, Corporate Governance - the
Foundation for Corporate Citizenship and Sustainable Business, linking the environmental, social and governance responsibilities of
a company to its financial performance and long-term sustainability
.

Most codes are largely voluntary. An issue raised in the U.S. since the 2005 Disney decision[48] is the degree to which companies
manage their governance responsibilities; in other words, do they merely try to supersede the legal threshold, or should they create
governance guidelines that ascend to the level of best practice. For example, the guidelines issued by associations of directors,
corporate managers and individual companies tend to be wholly voluntary but such documents may have a wider effect by prompting
other companies to adopt similar practices.

History
Early history
The modern practice of corporate governance has its roots in the 17th-century Dutch Republic.[49][50][51][52] The first recorded
corporate governance dispute in history,[53] took place in 1609 between the shareholders/investors (most notably Isaac Le Maire) and
directors of the Dutch East India Company(VOC), the world's first formallylisted public company.[54]

United States of America

Robert E. Wright argues in Corporation Nation (2014) that the governance of early U.S. corporations, of which over 20,000 existed
by the Civil War of 1861-1865, was superior to that of corporations in the late 19th and early 20th centuries because early
corporations governed themselves like "republics", replete with numerous "checks and balances" against fraud and against usurpation
of power by managers or by large shareholders.[55] (The term "robber baron" became particularly associated with US corporate
figures in the Gilded Age - the late 19th century.)

In the immediate aftermath of the Wall Street Crash of 1929legal scholars such as Adolf Augustus Berle, Edwin Dodd, and Gardiner
C. Means pondered on the changing role of the modern corporation in society.[56] From the Chicago school of economics, Ronald
Coase[57] introduced the notion of transaction costs into the understanding of why firms are founded and how they continue to
behave.[58]

US economic expansion through the emergence of multinational corporations after World War II (1939-1945) saw the establishment
of the managerial class. Several Harvard Business School management professors studied and wrote about the new class: Myles
Mace (entrepreneurship), Alfred D. Chandler, Jr. (business history), Jay Lorsch (organizational behavior) and Elizabeth MacIver
(organizational behavior). According to Lorsch and MacIver "many large corporations have dominant control over business affairs
without sufficient accountability or monitoring bytheir board of directors".

In the 1980s, Eugene Fama and Michael Jensen[59] established the principal–agent problem as a way of understanding corporate
[60]
governance: the firm is seen as a series of contracts.

In the period from 1977 to 1997, corporate directors' duties in the U.S. expanded beyond their traditional legal responsibility of duty
[61]
of loyalty to the corporation and to its shareholders.

In the first half of the 1990s, the issue of corporate governance in the U.S. received considerable press attention due to a spate of
CEO dismissals (for example, atIBM, Kodak, and Honeywell) by their boards. The California Public Employees' Retirement System
(CalPERS) led a wave of institutional shareholder activism (something only very rarely seen before), as a way of ensuring that
corporate value would not be destroyed by the now traditionally cozy relationships between the CEO and the board of directors (for
example, by the unrestrained issuance of stock options, not infrequentlyback-dated).

In the early 2000s, the massive bankruptcies (and criminal malfeasance) of Enron and Worldcom, as well as lesser corporate scandals
(such as those involving Adelphia Communications, AOL, Arthur Andersen, Global Crossing, and Tyco) led to increased political
interest in corporate governance. This was reflected in the passage of the Sarbanes-Oxley Act of 2002. Other triggers for continued
interest in the corporate governance of organizations included the financial crisis of 2008/9and the level of CEO pay[62]

East Asia
In 1997 the East Asian Financial Crisis severely affected the economies of Thailand, Indonesia, South Korea, Malaysia, and the
Philippines through the exit of foreign capital after property assets collapsed. The lack of corporate governance mechanisms in these
countries highlighted the weaknesses of the institutions in their economies.

Saudi Arabia
In November 2006 the Capital Market Authority (Saudi Arabia) (CMA) issued a corporate governance code in the Arabic
language.[63] The Kingdom of Saudi Arabia has made considerable progress with respect to the implementation of viable and
culturally appropriate governance mechanisms Al-Hussain
( & Johnson, 2009).[64]

Al-Hussain, A. and Johnson, R. (2009) found a strong relationship between the efficiency of corporate governance structure and
Saudi bank performance when using return on assets as a performance measure with one exception - that government and local
ownership groups were not significant. However, using stock return as a performance measure revealed a weak positive relationship
between the efficiency of corporate governance structure and bank performance.[65]

List of countries by corporate governance

[66]
This is a list of countries by average overall rating in corporate governance:
Rank Country Companies Average Overall Rating
1 United Kingdom 395 7.60

2 Canada 132 7.36

3 Ireland 421 7.21

4 United States 1,761 7.16

5 New Zealand 100 6.70

6 Australia 194 6.65

7 Netherlands 30 6.45

8 Finland 28 6.38

9 South Africa 43 6.09

10 Sweden 40 5.88

11 Switzerland 51 5.86

12 Germany 79 5.80

13 Austria 22 5.77

14 Italy 52 5.25

15 Poland 14 5.11

16 Norway 26 4.90

17 Singapore 52 4.82

18 Denmark 24 4.79

19 France 100 4.70

20 India 56 4.54

21 Belgium 24 4.35

22 Greece 24 4.25

23 Malaysia 28 4.21

24 Thailand 15 4.20

25 Portugal 11 4.14

26 Hong Kong 72 4.06

27 Spain 43 3.97

28 South Korea 88 3.93

29 Brazil 67 3.91

30 Russia 25 3.90

31 Taiwan 78 3.84

32 Israel 17 3.79

33 Turkey 17 3.62

34 China 91 3.37

35 Japan 392 3.30

36 21 3.14
 Indonesia

37 Mexico 21 2.43

38 Chile 15 2.13

Stakeholders
Key parties involved in corporate governance include stakeholders such as the board of directors, management and shareholders.
External stakeholders such as creditors, auditors, customers, suppliers, government agencies, and the community at large also exert
influence. The agency view of the corporation posits that the shareholder forgoes decision rights (control) and entrusts the manager to
act in the shareholders' best (joint) interests. Partly as a result of this separation between the two investors and managers, corporate
governance mechanisms include a system of controls intended to help align managers' incentives with those of shareholders. Agency
concerns (risk) are necessarily lower for acontrolling shareholder.

In private for-profit corporations, shareholders elect the board of directors to represent their interests. In the case of nonprofits,
stakeholders may have some role in recommending or selecting board members, but typically the board itself decides who will serve
on the board as a 'self-perpetuating' board.[67] The degree of leadership that the board has over the organization varies; in practice at
large organizations, the executive management, principally the CEO, drives major initiatives with the oversight and approval of the
board.[68]

Responsibilities of the board of directors

Former Chairman of the Board of General Motors John G. Smale wrote in 1995: "The board is responsible for the successful
perpetuation of the corporation. That responsibility cannot be relegated to management."[69] A board of directors is expected to play
a key role in corporate governance. The board has responsibility for: CEO selection and succession; providing feedback to
management on the organization's strategy; compensating senior executives; monitoring financial health, performance and risk; and
ensuring accountability of the organization to its investors and authorities. Boards typically have several committees (e.g.,
[70]
Compensation, Nominating and Audit) to perform their work.

The OECD Principles of Corporate Governance (2004) describe the responsibilities of the board; some of these are summarized
below:[3]

Board members should be informed and act ethically and in good faith, with due diligence and care, in the best
interest of the company and the shareholders.
Review and guide corporate strategy, objective setting, major plans of action, risk policy
, capital plans, and annual
budgets.
Oversee major acquisitions and divestitures.
Select, compensate, monitor and replace key executives and oversee succession planning.
Align key executive and board remuneration (pay) with the longer-term interests of the company and its
shareholders.
Ensure a formal and transparent board member nomination and election process.
Ensure the integrity of the corporations accounting and financial reporting systems, including their independent audit.
Ensure appropriate systems of internal control are established.
Oversee the process of disclosure and communications.
Where committees of the board are established, their mandate, composition and working procedures should be well-
defined and disclosed.

Stakeholder interests
All parties to corporate governance have an interest, whether direct or indirect, in the financial performance of the corporation.
Directors, workers and management receive salaries, benefits and reputation, while investors expect to receive financial returns. For
lenders, it is specified interest payments, while returns to equity investors arise from dividend distributions or capital gains on their
stock. Customers are concerned with the certainty of the provision of goods and services of an appropriate quality; suppliers are
concerned with compensation for their goods or services, and possible continued trading relationships. These parties provide value to
the corporation in the form of financial, physical, human and other forms of capital. Many parties may also be concerned with
corporate social performance.

A key factor in a party's decision to participate in or engage with a corporation is their confidence that the corporation will deliver the
party's expected outcomes. When categories of parties (stakeholders) do not have sufficient confidence that a corporation is being
controlled and directed in a manner consistent with their desired outcomes, they are less likely to engage with the corporation. When
this becomes an endemic system feature, the loss of confidence and participation in markets may affect many other stakeholders, and
increases the likelihood of political action. There is substantial interest in how external systems and institutions, including markets,
influence corporate governance.[35]

’Absentee landlords’ vs. capital stewards

World Pensions Council (WPC) experts insist that “institutional asset owners now seem more eager to take to task [the] negligent
CEOs” of the companies whose shares they own.[71]

This development is part of a broader trend towards more fully exercised asset ownership – notably from the part of the boards of
directors (‘trustees’) of large UK, Dutch, Scandinavian andCanadian pension investors:

“No longer ‘absentee landlords’, [ pension fund ] trustees have started to exercise more
forcefully their governance prerogatives across the boardrooms of Britain, Benelux and
America: coming together through the establishment of engaged pressure groups […] to
‘shift the [whole economic] system towards sustainable investment’.”[71]

This could eventually put more pressure on the CEOs of publicly listed companies, as “more than ever before, many [North
American], UK and European Union pension trustees speak enthusiastically about flexing their fiduciary muscles for the UN’s
Sustainable Development Goals”, and other ESG-centric investment practices [72]

United Kingdom
In Britain, “The widespread social disenchantment that followed the [2008-2012] great recession had an impact” on all stakeholders,
including pension fund board members and investment managers.[73]

Many of the UK’s largest pension funds are thus already active stewards of their assets, engaging with corporate boards and speaking
up when they think it is necessary.[73]

Control and ownership structures

Control and ownership structure refers to the types and composition of shareholders in a corporation. In some countries such as most
of Continental Europe, ownership is not necessarily equivalent to control due to the existence of e.g. dual-class shares, ownership
pyramids, voting coalitions, proxy votes and clauses in the articles of association that confer additional voting rights to long-
term shareholders.[74] Ownership is typically defined as the ownership of cash flow rights whereas control refers to ownership of
control or voting rights.[74] Researchers often "measure" control and ownership structures by using some observable measures of
control and ownership concentration or the extent of inside control and ownership. Some features or types of control and ownership
structure involving corporate groups include pyramids, cross-shareholdings, rings, and webs. German "concerns" (Konzern) are
legally recognized corporate groups with complex structures. Japanese keiretsu (系列) and South Korean chaebol (which tend to be
family-controlled) are corporate groups which consist of complex interlocking business relationships and shareholdings. Cross-
shareholding are an essential feature of keiretsu and chaebol groups [4]. Corporate engagement with shareholders and other
stakeholders can differ substantially across different control and ownership structures.

Family control
Family interests dominate ownership and control structures of some corporations, and it has been suggested that the oversight of
family-controlled corporations are superior to corporations "controlled" by institutional investors (or with such diverse share
ownership that they are controlled by management). A recent study by Credit Suisse found that companies in which "founding
families retain a stake of more than 10% of the company's capital enjoyed a superior performance over their respective sectorial
peers." Since 1996, this superior performance amounts to 8% per year.[75] Forget the celebrity CEO. "Look beyond Six Sigma and
the latest technology fad. One of the biggest strategic advantages a company can have is blood ties," according to a Business Week
study[76][77]

Diffuse shareholders
The significance of institutional investors varies substantially across countries. In developed Anglo-American countries (Australia,
Canada, New Zealand, U.K., U.S.), institutional investors dominate the market for stocks in larger corporations. While the majority
of the shares in the Japanese market are held by financial companies and industrial corporations, these are not institutional investors
if their holdings are largely with-on group.

The largest pools of invested money (such as the mutual fund 'Vanguard 500', or the largest investment management firm for
corporations, State Street Corp.) are designed to maximize the benefits of diversified investment by investing in a very large number
of different corporations with sufficient liquidity. The idea is this strategy will largely eliminate individual firm financial or other
risk. A consequence of this approach is that these investors have relatively little interest in the governance of a particular corporation.
It is often assumed that, if institutional investors pressing for changes decide they will likely be costly because of "golden
handshakes" or the effort required, they will simply sell out their investment.

Mechanisms and controls

Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse
selection. There are both internal monitoring systems and external monitoring systems.[78] Internal monitoring can be done, for
example, by one (or a few) large shareholder(s) in the case of privately held companies or a firm belonging to a business group.
Furthermore, the various board mechanisms provide for internal monitoring. External monitoring of managers' behavior, occurs when
an independent third party (e.g. the external auditor) attests the accuracy of information provided by management to investors. Stock
analysts and debt holders may also conduct such external monitoring. An ideal monitoring and control system should regulate both
motivation and ability, while providing incentive alignment toward corporate goals and objectives. Care should be taken that
incentives are not so strong that some individuals are tempted to cross lines of ethical behavior, for example by manipulating revenue
[58]
and profit figures to drive the share price of the company up.

Internal corporate governance controls

Internal corporate governance controls monitor activities and then take corrective actions to accomplish organisational goals.
Examples include:

Monitoring by the board of directors: The board of directors, with its legal authority to hire, fire and compensate
top management, safeguards invested capital. Regular board meetings allow potential problems to be identified,
discussed and avoided. Whilst non-executive directors are thought to be more independent, they may not always
result in more effective corporate governanceand may not increase performance.[79] Different board structures are
optimal for different firms. Moreover, the ability of the board to monitor the firm's executives is a function of its access
to information. Executive directors possess superior knowledge of the decision-making process and therefore
evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes, ex
ante. It could be argued, therefore, that executive directors look beyond the financial criteria.
Internal control procedures and internal auditors : Internal control procedures are policies implemented by an
entity's board of directors, audit committee, management, and other personnel to provide reasonable assurance of
the entity achieving its objectives related to reliable financial reporting, operating ficiency,
ef and compliance with
laws and regulations. Internal auditors are personnel within an organization who test the design and implementation
of the entity's internal control procedures and the reliability of its financial reporting
Balance of power: The simplest balance of power is very common; require that the President be a dif ferent person
from the Treasurer. This application of separation of power is further developed in companies where separate
divisions check and balance each other's actions.One group may propose company-wide administrative changes,
 another group review and can veto the changes, and a third group check that the interests of people (customers,
shareholders, employees) outside the three groups are being met.
Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual
performance. It may be in the form of cash or non-cash payments such as shares and share options, superannuation
or other benefits. Such incentive schemes, however , are reactive in the sense that they provide no mechanism for
preventing mistakes or opportunistic behavior, and can elicit myopic behavior.
Monitoring by large shareholdersand/or monitoring by banks and other large creditors : Given their large
investment in the firm, these stakeholders have the incentives, combined with the right degree of control and power
,
to monitor the management.[80]
In publicly traded U.S. corporations, boards of directors are largely chosen by the President/CEO and the President/CEO often takes
the Chair of the Board position for him/herself (which makes it much more difficult for the institutional owners to "fire" him/her).
ge American corporations.[81]
The practice of the CEO also being the Chair of the Board is fairly common in lar

While this practice is common in the U.S., it is relatively rare elsewhere. In the U.K., successive codes of best practice have
recommended against duality.

External corporate governance controls

External corporate governance controls the external stakeholders' exercise over the ganization.
or Examples include:

competition
debt covenants
demand for and assessment of performance information (especiallyfinancial statements)
government regulations
managerial labour market
media pressure
takeovers
proxy firms

Financial reporting and the independent auditor

The board of directors has primary responsibility for the corporation's internal and external financial reporting functions. The Chief
Executive Officer and Chief Financial Officer are crucial participants and boards usually have a high degree of reliance on them for
the integrity and supply of accounting information. They oversee the internal accounting systems, and are dependent on the
corporation's accountants and internal auditors.

Current accounting rules under International Accounting Standards and U.S. GAAP allow managers some choice in determining the
methods of measurement and criteria for recognition of various financial reporting elements. The potential exercise of this choice to
improve apparent performance increases the information risk for users. Financial reporting fraud, including non-disclosure and
deliberate falsification of values also contributes to users' information risk. To reduce this risk and to enhance the perceived integrity
of financial reports, corporation financial reports must be audited by an independent external auditor who issues a report that
accompanies the financial statements.

One area of concern is whether the auditing firm acts as both the independent auditor and management consultant to the firm they are
auditing. This may result in a conflict of interest which places the integrity of financial reports in doubt due to client pressure to
appease management. The power of the corporate client to initiate and terminate management consulting services and, more
fundamentally, to select and dismiss accounting firms contradicts the concept of an independent auditor. Changes enacted in the
United States in the form of the Sarbanes-Oxley Act (following numerous corporate scandals, culminating with the Enron scandal)
prohibit accounting firms from providing both auditing and management consulting services. Similar provisions are in place under
clause 49 of Standard Listing Agreement in India.

Systemic problems
 Demand for information: In order to influence the directors, the shareholders must combine with others to form a
voting group which can pose a real threat of carrying resolutions or appointing directors at a general meeting. [82]

Monitoring costs: A barrier to shareholders using good information is the cost of processing it, especially to a small
shareholder. The traditional answer to this problem is the efficient-market hypothesis(in finance, the efficient market
hypothesis (EMH) asserts that financial markets are ef ficient), which suggests that the small shareholder will free
ride on the judgments of larger professional investors.[82]

Supply of accounting information: Financial accounts form a crucial link in enabling providers of finance to monitor
directors. Imperfections in the financial reporting process will cause imperfections in the fectiveness
ef of corporate
governance. This should, ideally, be corrected by the working of the external auditing process. [82]

Issues

Executive pay
Increasing attention and regulation (as under the Swiss referendum "against corporate Rip-offs" of 2013) has been brought to
executive pay levels since the financial crisis of 2007–2008. Research on the relationship between firm performance and executive
compensation does not identify consistent and significant relationships between executives' remuneration and firm performance. Not
all firms experience the same levels of agency conflict, and external and internal monitoring devices may be more effective for some
than for others.[62][83] Some researchers have found that the largest CEO performance incentives came from ownership of the firm's
shares, while other researchers found that the relationship between share ownership and firm performance was dependent on the level
of ownership. The results suggest that increases in ownership above 20% cause management to become more entrenched, and less
interested in the welfare of their shareholders.[83]

Some argue that firm performance is positively associated with share option plans and that these plans direct managers' energies and
extend their decision horizons toward the long-term, rather than the short-term, performance of the company. However, that point of
view came under substantial criticism circa in the wake of various security scandals including mutual fund timing episodes and, in
particular, the backdating of option grants as documented by University of Iowa academic Erik Lie[84] and reported by James
Blander and Charles Forelle of theWall Street Journal.[83][85]

Even before the negative influence on public opinion caused by the 2006 backdating scandal, use of options faced various criticisms.
A particularly forceful and long running argument concerned the interaction of executive options with corporate stock repurchase
programs. Numerous authorities (including U.S. Federal Reserve Board economist Weisbenner) determined options may be
employed in concert with stock buybacks in a manner contrary to shareholder interests. These authors argued that, in part, corporate
stock buybacks for U.S. Standard & Poors 500 companies surged to a $500 billion annual rate in late 2006 because of the effect of
options. A compendium of academic works on the option/buyback issue is included in the study Scandal by author M. Gumport
issued in 2006.

A combination of accounting changes and governance issues led options to become a less popular means of remuneration as 2006
progressed, and various alternative implementations of buybacks surfaced to challenge the dominance of "open market" cash
buybacks as the preferred means of implementing ashare repurchase plan.

Separation of Chief Executive Officer and Chairman of the Board roles

Shareholders elect a board of directors, who in turn hire a Chief Executive Officer (CEO) to lead management. The primary
responsibility of the board relates to the selection and retention of the CEO. However, in many U.S. corporations the CEO and
Chairman of the Board roles are held by the same person. This creates an inherent conflict of interest between management and the
board.

Critics of combined roles argue the two roles should be separated to avoid the conflict of interest and more easily enable a poorly
performing CEO to be replaced. Warren Buffett wrote in 2014: "In my service on the boards of nineteen public companies, however,
I’ve seen how hard it is to replace a mediocre CEO if that person is also Chairman. (The deed usually gets done, but almost always
very late.)"[86]
Advocates argue that empirical studies do not indicate that separation of the roles improves stock market performance and that it
[87]
should be up to shareholders to determine what corporate governance model is appropriate for the firm.

In 2004, 73.4% of U.S. companies had combined roles; this fell to 57.2% by May 2012. Many U.S. companies with combined roles
have appointed a "Lead Director" to improve independence of the board from management. German and UK companies have
generally split the roles in nearly 100% of listed companies. Empirical evidence does not indicate one model is superior to the other
in terms of performance. However, one study indicated that poorly performing firms tend to remove separate CEO's more frequently
than when the CEO/Chair roles are combined.[88]

See also
Agency cost
Agency Theory
Basel II
Business ethics
Corporate crime
Corporate Law Economic Reform Program Act 2004
Corporate social entrepreneur
Corporate transparency
Corporation
Creative accounting
Earnings management
Financial audit
Fund governance
Golden parachute
Governance
Interest of the company
Internal Control
International Organization of Supreme Audit Institutions
King Report on Corporate Governance
Legal origins theory
Private benefits of control
Proxy firm
Risk management
Say on pay
Sociocracy
Stakeholder theory

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d%20Six%20Sigma%20and%20the%20latest%20technology%20fad&f=false) By Prashant Mittal,
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81. Lin, Tom C. W., The Corporate Governance of Iconic Executives (2011). 87 Notre Dameaw
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T4fuHeW42wXIn5XaCQ&ved=0CE8Q6AEwAQ#v=onepage&q=Some%20researchers%20have%20found%20that%
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88. University of Cambridge-Magdalena Smith – Should the USA follow the UK's lead and split the dual
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D_SPLIT_THE_DUAL_CEO_CHAIRPERSONs_ROLE)

Further reading
Arcot, Sridhar, Bruno, Valentina and Antoine Faure-Grimaud, "Corporate Governance in th e U.K.: is the comply-or-
explain working?" (December 2005).FMG CG Working Paper 001.
Becht, Marco, Patrick Bolton, Ailsa Röell, "Corporate Governance and Control" (October 2002; updated August
2004). ECGI - Finance Working Paper No. 02/2002.
Bowen, William, 1998 and 2004, The Board Book: An Insider's Guide for Directors and rTustees, New York and
London, W.W. Norton & Company, ISBN 978-0-393-06645-6
Brickley, James A., William S. Klug and Jerold L. Zimmerman, Managerial Economics & Organizational Architecture,
ISBN
Cadbury, Sir Adrian, "The Code of Best Practice", Report of the Committee onthe Financial Aspects of Corporate
Governance, Gee and Co Ltd, 1992. Available online from [5]
Cadbury, Sir Adrian, "Corporate Governance: Brussels", Instituut voor Bestuurders, Brussels, 1996.
Claessens, Stijn, Djankov, Simeon & Lang, Larry H.P. (2000) The Separation of Ownership and Control in East Asian
Corporations, Journal of Financial Economics, 58: 81-112
Clarke, Thomas (ed.) (2004)"Theories of Corporate Governance: The Philosophical Foundations of Corporate
Governance," London and New York: Routledge, ISBN 0-415-32308-8
Clarke, Thomas (ed.) (2004)Critical Perspectives on Business and Management(5 Volume Series on Corporate
Governance – Genesis, Anglo-American, European, Asian and Contemporary Corporate Governance) London and
New York: Routledge, ISBN 0-415-32910-8
Clarke, Thomas (2007)"International Corporate Governance "London and New York: Routledge, ISBN 0-415-
32309-6
Clarke, Thomas & Chanlat, Jean-Francois (eds.) (2009)"European Corporate Governance "London and New York:
Routledge, ISBN 978-0-415-40533-1
Clarke, Thomas & dela Rama, Marie (eds.) (2006)Corporate Governance and Globalization(3 Volume Series)
London and Thousand Oaks, CA: SAGE,ISBN 978-1-4129-2899-1
Clarke, Thomas & dela Rama, Marie (eds.) (2008)Fundamentals of Corporate Governance(4 Volume Series)
London and Thousand Oaks, CA: SAGE,ISBN 978-1-4129-3589-0
Colley, J., Doyle, J., Logan, G., Stettinius, W., What is Corporate Governance ?(McGraw-Hill, December 2004)
ISBN
Crawford, C. J. (2007).Compliance & conviction: the evolution of enlightened corporate governance. Santa Clara,
Calif: XCEO. ISBN 0-9769019-1-9 ISBN 978-0-9769019-1-4
Denis, D.K.; McConnell, J.J. (2003). "International Corporate Governance". Journal of Financial and Quantitative
Analysis. 38 (1): 1–36. doi:10.2307/4126762.
Dignam, A and Lowry, J (2006) Company Law, Oxford University PressISBN 978-0-19-928936-3
Douma, Sytse and Hein Schreuder (2013), Economic Approaches to Organizations, 5th edition. London: Pearson[6]
ISBN 0273735292 • ISBN 9780273735298
Easterbrook, Frank H. and Daniel R. Fischel,The Economic Structure of Corporate Law , ISBN
Easterbrook, Frank H. and Daniel R. Fischel,International Journal of Governance,ISBN
Eccles, R.G. & T. Youmans (2015), Materiality in Corporate Governance: The Statement foSignificant Audiences
and Materiality, Boston: Harvard Business School, working paper 16-023,http://hbswk.hbs.edu/item/materiality-in-
corporate-governance-the-statement-of-significant-audiences-and-materiality
Erturk, Ismail, Froud, Julie, Johal, Sukhdev and Williams, Karel (2004)Corporate Governance and Disappointment
Review of International Political Economy , 11 (4): 677-713.
Garrett, Allison, "Themes and Variations: The Convergence of Corporate Governance Practices in Major W orld
Markets," 32 Denv. J. Int’l L. & Pol’y.
Goergen, Marc, International Corporate Governance,(Prentice Hall 2012) ISBN 978-0-273-75125-0
Holton, Glyn A (2006)."Investor Suffrage Movement" (PDF). Financial Analysits Journal. 62 (6): 15–20.
doi:10.2469/faj.v62.n6.4349. Archived from the original (PDF) on 2007-01-04.
Hovey, M.; Naughton, T. (2007). "A Survey of Enterprise Reforms in China: The W ay Forward". Economic Systems.
31 (2): 138–156. doi:10.1016/j.ecosys.2006.09.001.
Kay, John (2015), 'Shareholders think they own the company — they are wrong', The Financial T imes, 10 November
2015
Abu Masdoor, Khalid (2011). "Ethical Theories of Corporate Governance".International Journal of Governance. 1
(2): 484–492.
 La Porta, R.; Lopez-De-Silanes, F.; Shleifer, A. (1999). "Corporate Ownership around the World". The Journal of
Finance. 54 (2): 471–517. doi:10.1111/0022-1082.00115.
Low, Albert, 2008. "Conflict and Creativity at Work: Human Roots of Corporate Life, Sussex Academic Press.
ISBN 978-1-84519-272-3
Monks, Robert A.G. and Minow, Nell, Corporate Governance(Blackwell 2004) ISBN
Monks, Robert A.G. and Minow, Nell, Power and Accountability(HarperBusiness 1991), full text availableonline
Moebert, Jochen and Tydecks, Patrick (2007). Power and Ownership Structures among German Companies. A
Network Analysis of Financial Linkages[7]
Murray, Alan Revolt in the Boardroom(HarperBusiness 2007) (ISBN 0-06-088247-6) Remainder
OECD (1999, 2004, 2015) Principles of Corporate GovernanceParis: OECD
Sapovadia, Vrajlal K., "Critical Analysis of Accounting Standards Vis-À-Vis Corporate Governance Practice in India"
(January 2007). Available at SSRN: http://ssrn.com/abstract=712461
Ulrich Seibert (1999), Control and Transparency in Business (KonTraG) Corporate Governance Reform in Germany .
European Business Law Review 70
Shleifer, A.; Vishny, R.W. (1997). "A Survey of Corporate Governance". Journal of Finance. 52 (2): 737–783.
doi:10.1111/j.1540-6261.1997.tb04820.x.
Skau, H.O (1992), A Study in Corporate Governance: Strategic andactic T Regulation (200 p)
Sun, William (2009), How to Govern Corporations So They Serve the Public Good: A Theory of Corporate
Governance Emergence, New York: Edwin Mellen, ISBN 978-0-7734-3863-7.
Touffut, Jean-Philippe (ed.) (2009),Does Company Ownership Matter?, Cheltenham, UK, and Northampton, MA,
USA: Edward Elgar. Contributors: Jean-LouisBeffa, Margaret Blair, Wendy Carlin, Christophe Clerc, Simon Deakin,
Jean-Paul Fitoussi, Donatella Gatti, Gregory Jackson, Xavier Ragot, Antoine Rebérioux, Lorenzo Sacconi and
Robert M. Solow.
Tricker, Bob and The Economist Newspaper Ltd (2003, 2009),Essentials for Board Directors: An A–Z Guide,
Second Edition, New York, Bloomberg Press,ISBN 978-1-57660-354-3.
Zelenyuk, V.; Zheka, V. (2006). "Corporate Governance and Firm's Efficiency: The Case of a Transitional Country,
Ukraine". Journal of Productivity Analysis, Springer. 25 (1): 143–157. doi:10.1007/s11123-006-7136-8.
Shahwan, Y., & Mohammad, N. R. (2016). Descriptive Evidence Of Corporate Governance & Oecd Principles For
Compliance With Jordanian Companies. JOURNAL STUDIA UNIVERSIT ATIS BABES-BOLYAI NEGOTIA.

External links
OECD Corporate Governance Portal
WorldBank/IFC Corporate Governance Portal
World Bank Corporate Governance Reports

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