Corporate Governance Adv. Diploma FM/BM
DEFINING CORPORATE GOVERNANCE
Governance refers to the new way in which something is governed and to the function of governing. The governance of a country, for example, refers to the powers and actions of the legislative assembly, the executive government and the Judiciary. Corporate governance refers to the way in which companies are governed, and to what purpose. It is concerned with practices and procedures for trying to ensure that a company is run in such a way that it achieves its objectives. This could be to maximize the wealth of its owners (the shareholders), subject to various guidelines and constraints and with regard to the other groups with an interest in what the company does. Guidelines and constraints include behaving in an ethical way in compliance with laws and regulations.
Some other definitions that have been provided are as follows: ‘Corporate governance is the system by which companies are directed and controlled’ (Cadbury Report, 1992). The Cadbury Report was a major UK inquiry into corporate governance, and this is a generally accepted definition. Governance is about seeing that is run properly. All companies need governing as well as managing ‘(Professor Bob Tricker, 1984). Corporate governance is concerned with how powers are shared and exercised by different groups to ensure that the objects of the company are achieved. Key issues in the corporate Government
the rights of the shareholders and other interest groups such as the employees, how powers are shared and exercised by the directors, and the holders of power in a company A company is a ‘legal entity’. As a person, it is able to enter into contracts and make business transactions. It can own assets and owe money to others, and it can sue and be sued in law. Human beings have to make decisions and arrange transactions in the company’s name. Just as a country has citizens, a company has members. The members of a company are its owners, the ‘equity’ shareholders or the “members”. Membership changes, as investors buy and sell the company’s shares. The citizens of a country, even a democracy, have relatively few powers. Power is in the hands of the legislative (parliament) and the executive (the government). In a similar way, shareholders have a relatively few powers, which are restricted mainly to certain voting rights. Power is in the hands of the board of directors. Corporate governance is not primarily concerned with day-to-day management of operations by business executives. The powers of executive managers are to direct business operations are one aspect of governance. Similarly, corporate governance is not concerned with formulating business strategy, although the board of directors is expected to take strategic decisions. SHAREHOLDER
A person who holds shares in a company. Shares may be held by the share owner or by a nominee who acts on behalf of the owner. (The US name for shares is “stock”.) Corporate governance is a matter of much greater importance for large public companies where the separation of ownership from management is much wider than for small private companies. Institutional investors hold vast portfolios of shares and other investments. Investors need to know that their money is reasonably safe. Should there be any doubts about integrity or intentions of the individual in charge of a company, the value of the company the value of the company’s shares will be affected and the company will have difficulty raising any new capital. Likewise, if there is weak corporate governance in a country generally, the country will struggle to attract foreign investment. It might seem self evident that good (or adequate) corporate governance supports capital markets. However, the impetus for the development of many, but not all the cords of best practice and stricter regulatory regimes...
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