Corporate Governance Definition
Corporate governance is viewed as both the structure and the relationships which determine corporate direction and performance. The board of directors is central to corporate governance. Its relationship to the other primary participants, shareholders, and management is critical. Additional participants include employees, customers, suppliers, and creditors. The corporate governance framework also depends on the legal, regulatory, institutional, and ethical environment of the community. Whereas the 20th century might be viewed as the age of management, the early 21st century is predicted to be more focused on governance. Both terms address control of corporations but governance has always required an examination of underlying purpose and legitimacy. – – James McRitchie, 12/2020
At its core, “corporate governance” is how a company is governed. It’s often described as a three-legged stool with senior management, the board of directors, and the company’s shareholders all playing major roles. Sometimes each of these three bodies work in unison towards a common goal. Sometimes they are at odds with each other—particularly shareholders who might not see eye-to-eye with a business strategy that management and the board has devised. –
Corporate Governance: Academic Definitions
Corporate governance describes the way trust is shown, power exercised, and accountability achieved in corporate entities, for the benefit of their members, other stakeholders, and society. (Bob Tricker, The Future of Corporate Governance: A Personal Odyssey, 2022)
The act of steering, guiding, and piloting—describes what boards [should] do when in session. It does not describe and is not a proxy for the board itself, nor any other party or activity outside the boardroom. Regulators (to set rules), proxy advisers (lobbyists on behalf of shareholders and other interests), and shareholder meetings (communications) are all important, but none is corporate governance. (Peter Crow, On ‘corporate governance’: Is our understanding flawed?, 9/12/2015)
… is “accountability to providers of capital.” — from Bruce Weber, dean of the Lerner College of Business at the University of Delaware. This took place at the inaugural meeting in November of the newly reconstituted advisory board for the John L. Weinberg Center for Corporate Governance.
Corporate governance is the control of management in the best interests of the company, including accountability to shareholders who elect directors and auditors and vote on say on pay. How a company is governed influences rights and relationships among organizational stakeholders, and ultimately how an organization is managed, and whether it succeeds or fails. Companies do not fail: boards do. – Dr. Richard Leblanc, Harvard University Summer 2015, MGMT S-5018 – Corporate Governance
“how investors get the managers to give them back their money” (Shleifer & Vishny, “A Survey of Corporate Governance,” Journal of Finance 52(2) 1997: 738)
[a] corporate governance system is the combination of mechanisms which ensure that the management (the agent) runs the firm for the benefit of one or several stakeholders (principals). Such stakeholders may cover shareholders, creditors, suppliers, clients, employees and other parties with whom the firm conducts its business. –in Corporate Governance and Shareholder Value, Goergen and Renneboog, 2006
…. deals with the conflicts of interests between the providers of finance and the managers; the shareholders and the stakeholders; different types of shareholders (mainly the large shareholder and the minority shareholders); and the prevention or mitigation of these conflicts of interests. — Marc Goergen, 2012.
…. is about how companies are directed and controlled. Good governance is an essential ingredient in corporate success and sustainable economic growth. Research in governance requires an interdisciplinary analysis, drawing above all on economics and law, and a close understanding of modern business practice of the kind which comes from detailed empirical studies in a range of national systems. – Simon Deakin, Robert Monks Professor of Corporate Governance
…. is about “the whole set of legal, cultural, and institutional arrangements that determine what public corporations can do, who controls them, how that control is exercised, and how the risks and return from the activities they undertake are allocated.” – Margaret Blair, Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century, 1995.
Corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the community. Since corporate governance also provides the framework for attaining a company’s objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure. By JAMES CHEN Reviewed By MARGARET JAMES, Investopdia, April 12, 2020
Corporate governance may be defined broadly as the study of power and influence over decision making within the corporation… Existing definitions of corporate governance are closely tied to different paradigms or ways of conceptualizing the organization or firm. Economists have tended to see corporate governance as a nexus of contracts among owners, who essentially pursue private means and run the corporation in their own self-interest without explicit obligations to society… Other approaches to corporate governance in economics and management are inspired by theories of the firm based on the unique nature of the employment relationship (Gospel & Pendleton, 2005)… Organizational sociologists take an even broader view of the organization, which is mostly concerned with the power and authority relationships within which organization are embedded. (Ruth V. Aguilera; Gregory Jackson, 2010)
Corporate Governance: Practitioner Definitions
“Corporate governance is ultimately a question of who the economy is for and whose voice matters. This isn’t an agenda that relies on higher public investment — though that is urgently needed — but instead, a recognition that we are the economy, that we all deserve a stake and a say in the governance of where we work, and that our workplaces would benefit as a result. Unless we rewrite the rules of the company, stagnation, and inequality will be our lot. But if we do, an inclusive, dynamic, high-investment, high-wage economy is possible. The prize is great — the question is, who will grasp it?” Mathew Lawrence; Founder and Director of Common Wealth; “Rewriting the rules of corporate governance could transform Britain”; The Times; 24/03/2023
… is gathering together a group of smart, accomplished people around a board table to make good decisions on behalf of the company and its stakeholders. — As We Start Anew, Jim Kristie, editor and associate publisher of Directors & Boards.
… is what you do with something after you acquire it. It’s really that simple. Most mammals do it. (Care for their property.) Unless they own stock. [She continues:] … it is almost comical to suggest that corporate governance is a new or complex or scary idea. When people own property they care for it: corporate governance simply means caring for property in the corporate setting. – Sarah Teslik, former Executive Director of the Council of Institutional Investors
… is the relationship among various participants [chief executive officer, management, shareholders, employees] in determining the direction and performance of corporations” – Monks and Minow, Corporate Governance, from 1995 version.
…. is about how suppliers of capital get managers to return profits, make sure managers do not misuse the capital by investing in bad projects, and how shareholders and creditors monitor managers.
– American Management Association
…. is the relationship between corporate managers, directors and the providers of equity, people and institutions who save and invest their capital to earn a return. It ensures that the board of directors is accountable for the pursuit of corporate objectives and that the corporation itself conforms to the law and regulations. – International Chamber of Commerce
The relationship between the shareholders, directors and management of a company, as defined by the corporate charter, bylaws, formal policy and rule of law. – The Corporate Library
…. is the relationship among various participants in determining the direction and performance of corporations. The primary participants are: shareholders; company management (led by the chief executive officer); and the board of directors. – CalPERS
… is the process carried out by the board of directors, and its related committees, on behalf of and for the benefit of the company’s stakeholders, to provide direction, authority, and oversights to management. (Paul J. Sobel, Auditor’s Risk Management Guide: Integrating Auditing and ERM (2007), from 2005 edition.
How a corporation is governed. Who has the authority to make decisions for a corporation within what guidelines? This is the corporation’s governance. In the United States, the governance of corporations is largely determined by state laws of incorporation. State laws typically say that each corporation must be “managed by or under the direction of its boards of directors.” More specifically, corporate boards of directors are responsible for certain decisions on behalf of the corporation. At a minimum, as stated in most state statutes of incorporation, director approval is usually required for amending corporation bylaws, issuing shares, or declaring dividends. Also, the board alone can recommend that shareholders vote to amend articles of incorporation, dissolve the corporation, or sell the corporation. No other person or entity except the board can take these actions. That is why discussions of “corporate governance” often focus on boards. (NACD)
Governance is taken herein to mean the process of deliberating, establishing, monitoring, and adjusting strategy, determining and communicating the rules by which strategy is implemented, and hiring, monitoring, and evaluating the senior executive team. It is both the domain and fiduciary duty of the Board of Directors. (Directors and Chief Risk Officers Guiding Principles for Compensation Committees, 2018)
Corporate Governance: Legal Definitions
Generally, corporate governance refers to the host of legal and non-legal principles and practices affecting control of publicly held business corporations. Most broadly, corporate governance affects not only who controls publicly traded corporations and for what purpose but also the allocation of risks and returns from the firm’s activities among the various participants in the firm, including stockholders and managers as well as creditors, employees, customers, and even communities. However, American corporate governance doctrine primarily describes the control rights and related responsibilities of three principal groups:
- the firm’s shareholders, who provide capital and must approve major firm transactions,
- the firm’s board of directors, who are elected by shareholders to oversee the management of the corporation, and
- the firm’s senior executives who are responsible for the day today operations of the corporation.
As the Delaware Supreme Court has stated, “the most fundamental principles of corporate governance are a function of the allocation of power within a corporation between its stockholders and its board of directors.” (J. Robert Brown, Jr. and Lisa L. Casey, Corporate Governance: Cases and Materials, 2012)
In broad terms, corporate governance refers to the way in which a corporation is directed, administered, and controlled. Corporate governance also concerns the relationships among the various internal and external stakeholders involved as well as the governance processes designed to help a corporation achieve its goals. Of prime importance are those mechanisms and controls that are designed to reduce or eliminate the principal-agent problem. (H. Kent Baker and Ronald Anderson, Corporate Governance: A Synthesis of Theory, Research, and Practice, 2010)
… is a field in economics that investigates how to secure/motivate efficient management of corporations by the use of incentive mechanisms, such as contracts, organizational designs and legislation. This is often limited to the question of improving financial performance, for example, how the corporate owners can secure/motivate that the corporate managers will deliver a competitive rate of return. (Mathiesen, 2002)
Corporate Governance: Commission Definitions
The system by which companies are directed and controlled. (Sir Adrian Cadbury, The Committee on the Financial Aspects of Corporate Governance)
“Good corporate governance helps to build an environment of trust, transparency and accountability necessary for fostering long-term investment, financial stability and business integrity, thereby supporting stronger growth and more inclusive societies.” (OECD, 2022)
“Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society” (Sir Adrian Cadbury in ‘Global Corporate Governance Forum’, World Bank, 2000)
… is the method by which a corporation is directed, administered or controlled. Corporate governance includes the laws and customs affecting that direction, as well as the goals for which the corporation is governed. The principal participants are the shareholders, management and the board of directors. Other participants include regulators, employees, suppliers, partners, customers, constituents (for elected bodies) and the general community. – Wikipedia
“Corporate governance is not an abstract goal, but exists to serve corporate purposes by providing a structure within which stockholders, directors and management can pursue most effectively the objectives of the corporation.” – US Business Round Table White Paper on Corporate Governance September 1997
… by definition rests with the conduct of the board of directors, who are chosen on behalf of the shareholders. – Corporate Governance Forum of Japan 1997
… is the system by which companies are directed and managed. It influences how the objectives of the company are set and achieved, how risk is monitored and assessed, and how performance is optimised. Good corporate governance structures encourage companies to create value (through entrepreneurism, innovation, development and exploration) and provide accountability and control systems commensurate with the risks involved. (ASX Principles of Good Corporate Governance and Best Practices Recommendations, 2003)
ISO 37000 defines good governance as a human-based system by which an organization is directed, overseen and held accountable for achieving its defined purpose in an ethical and responsible manner. The standard clarifies the distinct but integrated roles that governing bodies and management play in an organization and establishes a common language, principles and practices that apply across all organizations in all jurisdictions.
Corporate Governance: Other Definitions
The process by which corporations are made responsive to the rights and wishes of stakeholders. (Demb and Neubauer, The Corporate Board: Confronting the Paradoxes)
Corporate governance describes all the influences affecting the institutional processes, including those for appointing the controllers and/or regulators, involved in organizing the production and sale of goods and services. Described in this way, corporate governance includes all types of firms whether or not they are incorporated under civil law. – Shann Turnbull
Corporate governance deals with the way suppliers of finance assure themselves of getting a return on their investment. – Shleifer and Vishny, 1997.
The set of obligations and decision-making structures that shape the complex set of constraints that determine the profits generated by the firm and shape the ex-post bargaining over those profits. – Stijn Claessens
As Gourvevitch and Shinn, quoted in the above several paragraphs, note in their book Political Power and Corporate Control: The New Global Politics of Corporate Governance:
Corporate governance – the authority structure of a firm – lies at the heart of the most important issues of society”… such as “who has claim to the cash flow of the firm, who has a say in its strategy and its allocation of resources.” The corporate governance framework shapes corporate efficiency, employment stability, retirement security, and the endowments of orphanages, hospitals, and universities. “It creates the temptations for cheating and the rewards for honesty, inside the firm and more generally in the body politic.” It “influences social mobility, stability and fluidity… It is no wonder then, that corporate governance provokes conflict. Anything so important will be fought over… like other decisions about authority, corporate governance structures are fundamentally the result of political decisions.
Shareholder value is partly about efficiency. But there are serious issues of distribution at stake – job security, income inequality, social welfare. There may be many ways to organize an efficient firm.
Also from Political Power and Corporate Control:
Where the political scene is capital versus labor, “the investor coalition defined corporate governance in terms of meeting the challenge of financial globalization,’ adherence to the OECD Principles, fulfilling ‘international standards of governance in the global competition for capital.'”
From a labor power position, “blockholders and foreign portfolio investors were castigated as selfish oligarch in league with the heartless IMF and the faceless gnomes of Zurich.”
Those favoring the corporatist compromise made much of managers and workers “being in the ‘same boat’ together, of corporate governance choices that ensured that firms ‘served the nation’ in a ‘stable’ economy – with owners dismissed as oligarchs or ‘speculators.'”
Countries shifting transparency coalitions and managerism alignment “witnessed predictable invocations of corporate governance that protected ‘the little guy, ‘ the individual investor,’ the widow and orphans,” such as speeches by U.S. SEC commissioners.
“Meanwhile across the alignment divide, managers compete to hijack the notion of corporate governance for their own purpose…building shareholder value.”