Corporate governance is a nebulous subject of practice, policy and ethics that has many stakeholders. It includes the systems and structures that guarantee accountability, transparency and probity in company operations and reporting. It covers the manner in that boards oversee the executive management of a company and the way they select, monitor and evaluate the performance of the CEO. It also includes the manner directors make financial decisions and communicate these to shareholders.
Corporate Governance was a subject of intense debate in the 1990s with the implementation of structural reforms that helped build markets in former soviet countries and the Asian financial crisis. The Enron scandal of 2002, which was followed by the activism of institutional shareholders, and the 2008 financial crisis raised the level of scrutiny. Corporate governance is still a hot topic today with new challenges and new innovations constantly appearing.
The prevailing school of thought, also known as the “shareholder primacy” view or Anglo-Saxon approach, places a high priority on shareholders. Shareholders choose the board of directors which is responsible for managing the company and sets the strategic goals for the company. The board is accountable to select and evaluate the CEO, create and monitor the enterprise policies for risk management, and oversee the operations of the company. They also provide reports on their stewardship to shareholders.
Integrity, transparency, fairness, and responsibility are the four main principles of a successful corporate governance. Integrity is the way in the way board members make their decisions. Transparency is about transparency and honesty as well as full disclosure of material information to all stakeholders. Fairness is the way boards treat their employees as well as their suppliers and customers. Responsibility is the way a board deals with its members and the community at large.