Corporate Governance

Corporate governance is a very poorly defined concept; it covers so many different economic issues. It is difficult to give a first class definition in one sentence. Corporate governance has succeeded in attracting a great deal of interests of the public because of its obvious importance for the economic health of corporations and society in general. As a result, different people have come up with different definitions that basically mirror their special interest in the field. It is difficult to see that this 'disorder' will be any different in the future so the best way to define the concept is perhaps to list a few of the different definitions rather than just mentioning one definition.

"Corporate governance 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." www.encycogov.com, Mathiesen [2002].

According to Shleifer and Vishny in The Journal of Finance, "corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment."

J. Wolfensohn, president of the Word bank, quoted by an article in Financial Times in June of 1999 that "corporate governance is about promoting corporate fairness, transparency and accountability."

"Corporate Governance looks at the institutional and policy framework for corporations - from their very beginnings, in entrepreneurship, through their governance structures, company law, privatization, to market exit and insolvency. The integrity of corporations, financial institutions and markets is particularly central to the health of our economies and their stability." (www.oecd.org)

What does this all mean and how does it affect the business world today is what may be asked. Criticism of corporate governance is back with a vengeance in the post-Enron era. Is the entire governance system broken down and in need of change, or was it just the wrong actions of a few people that has led to this new case of critisms? Either way it goes, the appearance of the problem in governance points to the fact that one of the most important issues corporations fact today is how to create a board of directors that effectively keep an eye on management. Critics often proclaim that boards fall sadly in this category and are simply assistants to their chief executive officers (CEOs). They get paid too much, work entirely too little, and have little expertise in corporate governance or possess unacceptable levels of financial literacy.

(Booker, 113-116)

Governance reform has been a hot topic of discussion since the 1980s, when firms in America faced increased globalization and change, and boards were scrutinized for being puppets of the chief executives. Supporters of reform called for larger independence of directors from the CEO so that the board could make the difficult decisions needed to monitor top management and protect shareholder interests. Before the 1980s, most boards were composed largely of directors who were currently employed by the company of had just retired from the company. Critics proclaimed that directors who "were selected by, reported to, and received paychecks from the CEO could hardly be the most objective management monitors." As a result of these complaints, many boards made changes so that most large company boards are composed of a majority of directors that "are not currently employed by, or retired from, the companies on whose boards the serve."

With these changes, however, came the understanding that even outside directors may not be completely independent of management. Many outside directors work for companies that do business with the firm on whose board the serve on. In other situations, outside directors serve as lawyers, consultants, or lenders to the board's