Lesson 15
Corporate Governance

Corporate governance is the set of processes, policies, laws and institutions affecting the way a corporation is directed or controlled. Corporate governance also includes the relationships among the stakeholders and the goals for which the corporation is governed.

Corporate governance is a multi-faceted subject. An important part of corporate governance deals with accountability, fiduciary duty and mechanisms of auditing and control. Thus, corporate governance players should comply with codes to the overall good of all constituents. Another important focus is economic efficiency, both within the corporation (such as the best practice guidelines) and externally.

Recently there has been considerable interest in the corporate governance practices of corporations, particularly since the high-profile collapse of Enron. Also, during the Asian financial crisis, a lot of the attention fell into the corporate governance systems of the developing world.

The corporate governance structure spells out the rules and procedures for making decisions on corporate affairs. It also provides the mechanisms through which the company objectives are set, as well as the means of attaining and monitoring the achievement of those objectives.

As a result of the separation of stakeholder influence from control in modern organizations, a system of corporate governance controls is implemented on behalf of stakeholders to reduce agency costs and information asymmetry. Corporate governance is used to monitor whether outcomes are in accordance with plans; and to motivate the organization to be more fully informed in order to maintain or alter organizational activity. Primarily, corporate governance is the mechanism by which individuals are motivated to align their actual behaviors with the overall corporate good.