corporate governance essay questions and answers

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A Guide to the Big Ideas and Debates in Corporate Governance

• Lynn S. Paine
• Suraj Srinivasan

The questions that boards, managers, and shareholders should be asking.

How corporations govern themselves has become a matter of broad public interest in recent decades. Amid this many commentators and experts still disagree on such basic matters as the purpose of the corporation, the role of corporate boards of directors, the rights of shareholders, and the proper way to measure corporate performance. The issue of how shareholder interests should be considered in corporate decision making is particularly contentious. This article is a resource for understanding today’s key debates around governance and identifying the main areas in which changes are being called for. Many readers are grappling with these questions now or may have to address in the near future; in any case, the debates are sure to affect how business operates across the globe.

Corporate governance has become a topic of broad public interest as the power of institutional investors has increased and the impact of corporations on society has grown. Yet ideas about how corporations should be governed vary widely. People disagree, for example, on such basic matters as the purpose of the corporation, the role of corporate boards of directors, the rights of shareholders, and the proper way to measure corporate performance. The issue of whose interests should be considered in corporate decision making is particularly contentious, with some authorities giving primacy to shareholders’ interest in maximizing their financial returns and others arguing that shareholders’ other interests — in corporate strategy, executive compensation, and environmental policies, for example — and the interests of other parties must be respected as well.

• Lynn S. Paine is a Baker Foundation Professor and the John G. McLean Professor of Business Administration, Emerita, at Harvard Business School.
• Suraj Srinivasan is the Philip J. Stomberg Professor of Business Administration at Harvard Business School and Chair of the Digital Value Lab at Harvard’s Digital, Data and Design Institute.

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What is corporate governance? Essay

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• As a source of information (ensure proper referencing)
• As a template for you assignment

Importance of corporate governance

Works cited.

Corporate governance refers to a system that enables us to control and direct organisations. The IUFC defines corporate governance as “the relationships among the management, Board of Directors, controlling shareholders, minority shareholders, and other shareholders” (IFC 1).

While the traditional definition of corporate governance recognizes the existence and significance of the terms “other stakeholders”, however, there is still a lot of debate on the kind of relationship between on the one hand, self-serving managers and on the other hand, disconnected owners (Applied Corporate Governance para. 2). Corporate governance consists of two key components:

• The long-term relationship between the management and owners of a firm and the incentives for managers, checks and balances, as well as communication between investors and the management;
• Transactional relationships that include issues of authority and disclosure.

What the above two elements appears to suggest is that business owners are suspicious of the activities of their managers, as explained by the need for checks and balances. In addition, both the management and investors share an adversarial relationship. Corporate governance consists of five components that are worth of consideration by both investors and the management.

They include the long-term strategic goals of an organisation, customers, the environment, employees, and regulatory/legal compliance (Applied Corporate Governance para. 5). As such, corporate governance can be thought of as a culture that is founded on strong business ethics.

Corporate governance enables managers of a firm to fulfill the long-term strategic goals of the shareholders. In the process of fulfilling such goals, there is need to also consider that the expectations of the various stakeholders of the organisation (Kirkpatrick 6).

Therefore, the past, present and future interests of employees at the firm need to be addressed. In addition, the management should endevour to enhance excellent relationships with both suppliers and customers. At the same time, the needs and interests of the local community should also be fulfilled.

Globalisation has seen organisations becoming more complex as most of them have increased in terms of size and scale of trade. As a result, most organisations have ended up with a very bureaucratic structure as they try to manage the emerging complexity (Applied Corporate Governance para. 5). This has led to an augmentation of the importance of internal regulation and corporate governance owing to the increased difficulty of regulating organisations externally.

Many organisations view corporate governance as an important undertaking when it comes to the issue of integrity. Shareholders and the general public would want to be associated with an organisation that is led by leaders with integrity (Kirkpatrick 9). In this respect, corporate governance acts as a vital tool for measuring, encouraging, and projecting integrity within the organisation.

Corporate governance in an organisation is also important in as far as the bonus culture is concerned. The recent financial crisis helped to reveal the system of remuneration and bonuses operated by many financial institutions. There is a widely held argument that this system of remuneration and bonuses encouraged irresponsible lending and excessive risk taking by financial institutions, thereby triggering the global financial crisis (Applied Corporate Governance para. 6).

Ideally, the existence of a better checks and balances system would have sounded warning bells before it was too late. A number of financial experts outside the financial systems who were privy to the dangerous levels of lending practiced by many financial institutions had tried to raise an alarm but in the absence of a sound system of corporate governance, it was hard to ascertain these allegations.

In this case, sound corporate governance practices would have helped to contain the situation. Indeed, weaknesses and failures in corporate governance arrangements played a key role in the financial crisis experienced by financial institutions. Good corporate governance offers the right incentives for both the management and the Board of Directors to pursue the goals that are in the best interest of shareholders and the organisations at large (Tricker and Tricker 27).

In addition, good corporate governance also facilitates effective monitoring, thereby making it easy to detect deviations from the accepted norm and practices. Consequently, remedial measures can be taken before it is too late.

Corporate governance results in better regulatory framework within the organisation. What this means is that corporate governance leads to sound management of the organisation (Applied Corporate Governance para. 7). In the same way, when governance within a corporation fails, the management is deemed to have failed as well. In the recent global financial crisis, many financial institutions were rewarding their CEOs with hefty pension and bonus packages, even as the government struggled to bail out failing firms.

This is a reflection of poor management because it does not make financial sense to award a CEO a hefty package to leave office while the organisation is in financial limbo. In the financial markets, good corporate governance requires the right balance between on the one hand, customer choice and innovation and on the other hand, implementing basic standards. This may require organisations to change their corporate culture but in the end, the ensuing rewards are worth the sacrifice.

Corporate governance is also important to an organisation when it comes to the issue of training the directors. Following the collapse of such organisations as WorldCom and Enron in the past decade, questions have been raised on the need to re-assess the qualifications of directors. In the past, there has never been any formal yardstick with which to assess the qualifications of the senior people who run an organisation (Applied Corporate Governance para. 8).

From a practical point of view, majority of the large and well run corporations seek for the most fitting qualifications from among their senior staff; however, an increasingly larger number of organisations are now offering selection services and training to non-executive directors.

The collapse of the above mentioned firms and a dozen others has seen more professionals reassessing the role of direction as a discipline or professionals that demands specific forms of training and development. In this case, corporate governance has played a crucial role in efforts to re-evaluate the qualifications of directors charged with the responsibility of overseeing the operations of organisations (Tricker and Tricker 33).

Some MBA courses now include corporate governance as part of their course content. Such a trend should be encouraged so that the true importance of corporate governance can get the recognition it deserves.

In summary, corporate governance refers to the system that ensures the control and management of organisations. It enshrines the components of the long-term relationship between the owners of an organisation and the management. A sound corporate governance system should take into account the interests of the firms, the shareholders, the employees, suppliers, and the local community as well.

Corporate governance is important to an organisation with regard to the issue of integrity because shareholders and the general public would want to be associated with an organisation that has integrity. Also, corporate governance helps to contain the bonus culture within organizations. It also leads to better regulatory framework, as well as in the training of directors.

Applied Corporate Governance. The importance of corporate governance . 2009. Web.

IFC. Corporate Governance . 2005. Web.

Kirkpatrick, Grant. The Corporate Governance Lessons from the Financial Crisis . 2009. Web.

Tricker, Robert and Tricker, Bob. Corporate Governance: Principles, Policies and Practices. Oxford, UK: Oxford University Press, 2009. Print.

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What Is Corporate Governance?

• How It Works
• Board of Directors
• Assessing Corporate Governance

The Bottom Line

• Corporate Finance

Corporate Governance: Definition, Principles, Models, and Examples

Good corporate governance can benefit investors and other stakeholders, while bad governance can lead to scandal and ruin

James Chen, CMT is an expert trader, investment adviser, and global market strategist.

Amanda Bellucco-Chatham is an editor, writer, and fact-checker with years of experience researching personal finance topics. Specialties include general financial planning, career development, lending, retirement, tax preparation, and credit.

Investopedia / Jessica Olah

Corporate governance is the system of rules, practices, and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders , which can include shareholders, senior management, customers, suppliers, lenders, the government, and the community. As such, corporate governance encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure .

Key Takeaways

• Corporate governance is the structure of rules, practices, and processes used to direct and manage a company.
• A company's board of directors is the primary force influencing corporate governance.
• Bad corporate governance can destroy a company's operations and ultimate profitability.

The basic principles of corporate governance are accountability, transparency, fairness, responsibility, and risk management.

Understanding Corporate Governance

Governance refers to the set of rules, controls, policies, and resolutions put in place to direct corporate behavior. A board of directors is pivotal in governance , while proxy advisors and shareholders are important stakeholders who can affect governance.

Communicating a company's corporate governance is a key component of community and  investor relations . For instance, Apple Inc.'s investor relations site profiles its corporate leadership (the executive team and board of directors) and provides information on its committee charters and governance documents, such as bylaws, stock ownership guidelines, and articles of incorporation .

Most successful companies strive to have exemplary corporate governance. For many shareholders, it is not enough for a company to be profitable; it also must demonstrate good corporate citizenship through environmental awareness, ethical behavior, and other sound corporate governance practices.

Benefits of Corporate Governance

• Good corporate governance creates transparent rules and controls, guides leadership, and aligns the interests of shareholders, directors, management, and employees.
• It helps build trust with investors, the community, and public officials.
• Corporate governance can give investors and stakeholders a clear idea of a company's direction and business integrity.
• It promotes long-term financial viability, opportunity, and returns.
• It can facilitate the raising of capital.
• Good corporate governance can translate to rising share prices.
• It can reduce the potential for financial loss, waste, risks, and corruption.
• It is a game plan for resilience and long-term success.

Corporate Governance and the Board of Directors

The board of directors is the primary direct stakeholder influencing corporate governance. Directors are elected by shareholders or appointed by other board members and charged with representing the interests of the company's shareholders.

The board is tasked with making important decisions, such as corporate officer appointments, executive compensation, and dividend policy. In some instances, board obligations stretch beyond financial optimization, as when shareholder resolutions call for certain social or environmental concerns to be prioritized.

Boards are often made up of a mix of insiders and independent members. Insiders are generally major shareholders, founders, and executives. Independent directors do not share the ties that insiders have. They are typically chosen for their experience managing or directing other large companies. Independents are considered helpful for governance because they dilute the concentration of power and help align shareholder interests with those of the insiders.

The board of directors must ensure that the company's corporate governance policies incorporate corporate strategy, risk management, accountability, transparency, and ethical business practices.

A board of directors should consist of a diverse group of individuals, including those with matching business knowledge and skills, and others who can bring a fresh perspective from outside the company and industry.

The Principles of Corporate Governance

While there can be as many principles as a company believes make sense, some of the most common ones are:

• Fairness : The board of directors must treat shareholders, employees, vendors, and communities fairly and with equal consideration.
• Transparency : The board should provide timely, accurate, and clear information about such things as financial performance, conflicts of interest, and risks to shareholders and other stakeholders.
• Risk Management : The board and management must determine risks of all kinds and how best to control them. They must act on those recommendations to manage risks and inform all relevant parties about the existence and status of risks.
• Responsibility : The board is responsible for the oversight of corporate matters and management activities. It must be aware of and support the successful, ongoing performance of the company. Part of its responsibility is to recruit and hire a chief executive officer (CEO) . It must act in the best interests of a company and its investors.
• Accountability : The board must explain the purpose of a company's activities and the results of its conduct. It and company leadership are accountable for the assessment of a company's capacity, potential, and performance. It must communicate issues of importance to shareholders.

Corporate Governance Models

There are many types of corporate governance that a company might follow. Some use a traditional hierarchical leadership structure, and others are more flexible . Different corporate governance models may be found throughout the world. Here are a few of them.

The Anglo-American Model

This model can take various forms, such as the Shareholder, Stewardship, and Political Models. The Shareholder Model is the principal model at present.

The Shareholder Model is designed so that the board of directors and shareholders are in control. Stakeholders such as vendors and employees, though acknowledged, lack control.

Management is tasked with running the company in a way that maximizes shareholder interest. Importantly, proper incentives should be made available to align management behavior with the goals of shareholders/owners.

The model accounts for the fact that shareholders provide the company with funds and may withdraw that support if dissatisfied. This is supposed to keep management working effectively.

The board will usually consist of both insiders and independent members. Although traditionally, the board chairperson and the CEO can be the same, this model seeks to have two different people hold those roles.

The success of this corporate governance model depends on ongoing communications among the board, company management, and the shareholders. Important issues are brought to shareholders' attention. Important decisions that need to be made are put to shareholders for a vote.

U.S. regulatory authorities tend to support shareholders over boards and executive management.

The Continental Model

Two groups represent the controlling authority under the Continental Model. They are the supervisory board and the management board.

In this two-tiered system, the management board is composed of company insiders, such as its executives. The supervisory board is made up of outsiders, such as shareholders and union representatives. Banks with stakes in a company also could have representatives on the supervisory board.

The two boards remain entirely separate. The size of the supervisory board is determined by a country's laws and can't be changed by shareholders.

National interests have a strong influence on corporations with this model of corporate governance. Companies can be expected to align with government objectives.

This model also greatly values the engagement of stakeholders, as they can support and strengthen a company's continued operations.

The Japanese Model

The key players in the Japanese Model of corporate governance are banks, affiliated entities, major shareholders called Keiretsu (who may be invested in common companies or have trading relationships), management, and the government. Smaller, independent, individual shareholders have no role or voice. Together, these key players establish and control corporate governance.

The board of directors is usually made up of insiders, including company executives. Keiretsu may remove directors from the board if profits wane.

The government affects the activities of corporate management via its regulations and policies.

In this model, corporate transparency is less likely because of the concentration of power and the focus on the interests of those with that power.

How to Assess Corporate Governance

As an investor, you want to select companies that practice good corporate governance in the hope that you can thereby avoid losses and other negative consequences such as bankruptcy.

You can research certain areas of a company to determine whether or not it's practicing good corporate governance. These areas include:

• Disclosure practices
• Executive compensation structure (whether it's tied only to performance or also to other metrics)
• Risk management (the checks and balances on decision-making)
• Policies and procedures for reconciling conflicts of interest (how the company approaches business decisions that might conflict with its mission statement)
• The members of the board of directors (their stake in profits or conflicting interests)
• Contractual and social obligations (how a company approaches issues such as climate change)
• Relationships with vendors
• Complaints received from shareholders and how they were addressed
• Audits (the frequency of internal and external audits and how any issues that those audits raised have been handled)

Types of bad governance practices include:

• Companies that do not cooperate sufficiently with auditors or do not select auditors with the appropriate scale, resulting in the publication of spurious or noncompliant financial documents
• Executive compensation packages that fail to create an optimal incentive for corporate officers
• Poorly structured boards that make it too difficult for shareholders to oust ineffective incumbents.

Examples of Corporate Governance: Bad and Good

Bad corporate governance can cast doubt on a company's reliability, integrity, or obligation to shareholders. All can have implications for the financial health of the business.

Volkswagen AG

Tolerance or support of illegal activities can create scandals like the one that rocked Volkswagen AG starting in September 2015. The details of "Dieselgate" (as the affair came to be known) revealed that for years, the automaker had deliberately and systematically rigged engine emission equipment in its cars to manipulate pollution test results in the U.S. and Europe.

Volkswagen saw its stock shed nearly half its value in the days following the start of the scandal. Its global sales in the first full month following the news fell 4.5%.

VW's board structure facilitated the emissions rigging and was a reason it wasn't caught earlier. In contrast to a one-tier board system common to most U.S. companies, VW had a two-tier board system consisting of a management board and a supervisory board, in keeping with the Continental Model of corporate governance.

The supervisory board was meant to monitor management and approve corporate decisions. However, it lacked the independence and authority to carry out these roles appropriately.

The supervisory board included a large portion of shareholders. Ninety percent of shareholder voting rights were controlled by members of the board. There was no real independent supervisor. As a result, shareholders were in control and negated the purpose of the supervisory board, which was to oversee management and employees, and how they operated. This allowed the rigged emissions to occur.

Public and government concern about corporate governance tends to wax and wane. Often, however, highly publicized revelations of corporate malfeasance revive interest in the subject.

For example, corporate governance became a pressing issue in the United States at the turn of the 21st century, after fraudulent practices bankrupted high-profile companies such as Enron and WorldCom .

The problem with Enron was that its board of directors waived many rules related to conflicts of interest by allowing the chief financial officer (CFO) , Andrew Fastow, to create independent, private partnerships to do business with Enron.

These private partnerships were used to hide Enron's debts and liabilities. If they'd been accounted for properly, they would have reduced the company's profits significantly.

Enron's lack of corporate governance allowed the creation of the entities that hid the losses. The company also employed dishonest people, from Fastow down to its traders, who made illegal moves in the markets.

The Enron scandal and others in the same period resulted in the 2002 passage of the Sarbanes-Oxley Act . It imposed more stringent recordkeeping requirements on companies and stiff criminal penalties for violating them and other securities laws. The aim was to restore confidence in public companies and how they operate.

It's common to hear examples of bad corporate governance. In fact, it's often why companies end up in the news. You rarely hear about companies with good corporate governance because their corporate guiding policies keep them out of trouble.

One company that seems to have consistently practiced good corporate governance, and adapts or updates it often, is PepsiCo. In drafting its 2020 proxy statement, PepsiCo sought input from investors in six areas:

• Board composition, diversity, and refreshment, plus leadership structure
• Long-term strategy, corporate purpose, and sustainability issues
• Good governance practices and ethical corporate culture
• Human capital management
• Compensation discussion and analysis
• Shareholder and stakeholder engagement

The company included in its proxy statement a graphic of its current leadership structure. It showed a combined chair and CEO along with an independent presiding director and a link between the company's "Winning With Purpose" vision and changes to the executive compensation program.

What Are the 4 Ps of Corporate Governance?

The four P's of corporate governance are people, process, performance, and purpose.

Why Is Corporate Governance Important?

Corporate governance is important because it creates a system of rules and practices that determines how a company operates and how it aligns with the interest of all its stakeholders. Good corporate governance fosters ethical business practices, which lead to financial viability. In turn, that can attract investors.

What Are the Basic Principles of Corporate Governance?

Corporate governance consists of the guiding principles that a company puts in place to direct all of its operations, from compensation, risk management, and employee treatment to reporting unfair practices, dealing with the impact on the climate, and more.

Corporate governance that calls for upstanding, transparent behavior can lead a company to make ethical decisions that will benefit all of its stakeholders, including investors. Bad corporate governance can lead to the breakdown of a company, often resulting in scandal and bankruptcy.

Apple. " Investor Relations. Leadership and Governance ."

BBC. " Scandal Cuts VW Sales by 4.5% This Year ."

Dibra, Rezart. " Corporate Governance Failure: The Case of Enron and Parmalat ." European Scientific Journal , vol.12, no. 16, June 2016, pp. 283-290.

Corporate Secretary. " PepsiCo Finds Governance Success Through Evolution ."

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