Summary: Corporate Governance
Chapter 1 – What is Corporate Governance?
1.1 INTRODUCTION
Corporate governance is the control and direction of companies by ownership, boards, incentives,
company law and other mechanism. It means setting the direction in which the company is going, its
goals and objectives, as well as controlling the implementation of these goals.
There are several definitions for Corporate governance, namely:
CG is the system by which companies are directed and controlled (Chadbury, 1992)
CG deals with the relationships among various participants in determining the directions and
performance of corporations (Monks and Minow, 1995)
CG deals with management and power, responsibility and influence, and accountability and
supervision (Peters Committee, NL, 1997)
CG deals with the ways in which suppliers of finance to corporations assure themselves of getting
a return on their investment (Shleifer and Vishny, 1997) narrow
CG deals with rules and incentives to effectively align the behaviour of agents (managers) with
the desires of principals (owners).
CG refers to the rules, procedures and administration of firm’s contracts with various
participants.
A key distinction in governance definitions is to what extent the company is seen as accountable to
shareholders or to a broader set of stakeholders. There is little doubt that Non-Government Agencies
(NGOs), ethical investors, and managers themselves have broadened the corporate governance
agenda in recent years. Since these trends do influence the direction and control of companies they
are effectively part of corporate governance whether or not they ought to be.
Corporate governance is influenced by national history, culture and institutions.
1.2 WHAT CORPORATE GOVERNANCE IS NOT
Corporate Governance is not about management as such, but about the control and direction of
managers. Operationally, this means that important business functions are not normally part of
corporate governance. It follows that top managers must necessarily be controlled by some other
mechanism than management: in other words, by some governance mechanisms.
Corporate governance is not a faith/belief, it is a field of practice and study. We are
concerned with corporate governance because we want companies to perform well and to create
value for society. Good management and good investments are clearly essential conditions for good
performance, and corporate governances aims to ensure good management and good investment.
Finally, corporate governance is not synonymous with governance codes or regulations.
Whenever there are companies there is governance of some kind.
1.3 THE BASIC GOVERNANCE PROBLEM
Economists have long recognized that conflicts of interest can arise in the direction and control of
companies. The basic problem of corporate governance, from a theoretical perspective, is the so-
called agency problem which occurs because of the separation between ownership and
management. This is termed ‘the separation of ownership and control (Berle and Means, 1932).
The idea is that owners (shareholders) hire executives to manage companies on their behalf.
In agency theory, we say that the agent (i.e. managers) acts on behalf of the principle (i.e.
shareholders). The shareholders leave their money and other assets in the custody of the managers.
Chapter 1 – What is Corporate Governance?
1.1 INTRODUCTION
Corporate governance is the control and direction of companies by ownership, boards, incentives,
company law and other mechanism. It means setting the direction in which the company is going, its
goals and objectives, as well as controlling the implementation of these goals.
There are several definitions for Corporate governance, namely:
CG is the system by which companies are directed and controlled (Chadbury, 1992)
CG deals with the relationships among various participants in determining the directions and
performance of corporations (Monks and Minow, 1995)
CG deals with management and power, responsibility and influence, and accountability and
supervision (Peters Committee, NL, 1997)
CG deals with the ways in which suppliers of finance to corporations assure themselves of getting
a return on their investment (Shleifer and Vishny, 1997) narrow
CG deals with rules and incentives to effectively align the behaviour of agents (managers) with
the desires of principals (owners).
CG refers to the rules, procedures and administration of firm’s contracts with various
participants.
A key distinction in governance definitions is to what extent the company is seen as accountable to
shareholders or to a broader set of stakeholders. There is little doubt that Non-Government Agencies
(NGOs), ethical investors, and managers themselves have broadened the corporate governance
agenda in recent years. Since these trends do influence the direction and control of companies they
are effectively part of corporate governance whether or not they ought to be.
Corporate governance is influenced by national history, culture and institutions.
1.2 WHAT CORPORATE GOVERNANCE IS NOT
Corporate Governance is not about management as such, but about the control and direction of
managers. Operationally, this means that important business functions are not normally part of
corporate governance. It follows that top managers must necessarily be controlled by some other
mechanism than management: in other words, by some governance mechanisms.
Corporate governance is not a faith/belief, it is a field of practice and study. We are
concerned with corporate governance because we want companies to perform well and to create
value for society. Good management and good investments are clearly essential conditions for good
performance, and corporate governances aims to ensure good management and good investment.
Finally, corporate governance is not synonymous with governance codes or regulations.
Whenever there are companies there is governance of some kind.
1.3 THE BASIC GOVERNANCE PROBLEM
Economists have long recognized that conflicts of interest can arise in the direction and control of
companies. The basic problem of corporate governance, from a theoretical perspective, is the so-
called agency problem which occurs because of the separation between ownership and
management. This is termed ‘the separation of ownership and control (Berle and Means, 1932).
The idea is that owners (shareholders) hire executives to manage companies on their behalf.
In agency theory, we say that the agent (i.e. managers) acts on behalf of the principle (i.e.
shareholders). The shareholders leave their money and other assets in the custody of the managers.
