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Corporate Governance: Introduction: Corporate Governance may be defined as a set of systems, processes and principles which ensure that

a company is governed in the best interest of all stakeholders. It is the system by which companies are directed and controlled the way they are performing acts. It is about promoting corporate fairness, transparency and accountability. In other words, 'good corporate governance' is simply 'good business'. It ensures: Ade uate disclosures and effective decision making to achieve corporate ob!ectives" #ransparency in business transactions" $tatutory and legal compliances" %rotection of shareholder interests" Commitment to values and ethical conduct of business. Corporate governance also refers to the system by which corporations are directed and controlled. #he governance structure specifies the distribution of rights and responsibilities among different participants in the corporation &such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders' and specifies the rules and procedures for making decisions in corporate affairs. Governance provides the structure through which corporations set and pursue their ob!ectives, while reflecting the conte(t of the social, regulatory and market environment. Governance is a mechanism for monitoring the actions, policies and decisions of corporations. Governance involves the alignment of interests among the stakeholders and handling the things and making the decision in the right way. It is about commitment to values, about ethical business conduct and about making a distinction between personal and corporate funds in the management of a company. )thical dilemmas arise from conflicting interests of the parties involved. In this regard, managers make decisions based on a set of principles influenced by

the values, conte(t and culture of the organi+ation. )thical leadership is good for business as the organi+ation is seen to conduct its business in line with the e(pectations of all stakeholders. #here has been renewed interest in the corporate governance practices of modern corporations, particularly in relation to accountability, since the high,profile collate is about commitment to values, about ethical business conduct and about making a distinction between personal and corporate funds in the management of a company. )thical dilemmas arise from conflicting interests of the parties involved. In this regard, managers make decisions based on a set of principles influenced by the values, conte(t and culture of the organi+ation. )thical leadership is good for business as the organi+ation is seen to conduct its business in line with the e(pectations of all stakeholders. Apses of a number of large corporations during -..*/-..-, most of which involved accounting fraud. Corporate scandals of various forms have maintained public and political interest in the regulation of corporate governance. In the 0.$., these include )nron Corporation and 1CI Inc. &formerly 2orldCom'. #heir demise is associated with the 0.$. federal government passing the $arbanes,3(ley Act in -..-, intending to restore public confidence in corporate governance. Corporate governance has also been defined as 4a system of law and sound approaches by which corporations are directed and controlled focusing on the internal and e(ternal corporate structures with the intention of monitoring the actions of management and directors and thereby mitigating agency risks which may stem from the misdeeds of corporate officers.4 In contemporary business corporations, the main e(ternal stakeholder groups are shareholders, debt holders, trade creditors, suppliers, customers and communities affected by the corporation's activities. Internal stakeholders are the board of directors, e(ecutives, and other employees. 1uch of the contemporary interest in corporate governance is concerned with mitigation of the conflicts of interests between stakeholders. 2ays of mitigating or preventing these conflicts of interests include the processes, customs, policies, laws, and institutions which have an impact on the way a company is controlled.

An important theme of governance is the nature and e(tent of corporate accountability. A related but separate thread of discussions focuses on the impact of a corporate governance system on economic efficiency, with a strong emphasis on shareholders' welfare. In large firms where there is a separation of ownership and management and no controlling shareholder, the principal/agent issue arises between upper,management &the 4agent4' which may have very different interests, and by definition considerably more information, than shareholders &the 4principals4'. #he danger arises that rather than overseeing management on behalf of shareholders, the board of directors may become insulated from shareholders and beholden to management. #his aspect is particularly present in contemporary public debates and developments in regulatory policy. )conomic analysis has resulted in a literature on the sub!ect. 3ne source defines corporate governance as 4the set of conditions that shapes the e( post bargaining over the uasi,rents generated by a firm. #he firm itself is modelled as a governance structure acting through the mechanisms of contract. 5ere corporate governance may include its relation to corporate finance. Principles of corporate governance Contemporary discussions of corporate governance tend to refer to principles raised in three documents released since *66.: #he Cadbury 7eport &08, *66-', the %rinciples of Corporate Governance &3)C9, *66: and -..;', the $arbanes, 3(ley Act of -..- &0$, -..-'. #he Cadbury and 3)C9 reports present general principles around which businesses are e(pected to operate to assure proper governance. #he $arbanes,3(ley Act, informally referred to as $arbo( or $o(, is an attempt by the federal government in the 0nited $tates to legislate several of the principles recommended in the Cadbury and 3)C9 reports. 7ights and e uitable treatment of shareholders: 3rgani+ations should respect the rights of shareholders and help shareholders to e(ercise those rights. #hey can help shareholders e(ercise their rights by openly and effectively communicating information and by encouraging shareholders to participate in general meetings.

Interests of other stakeholders: 3rgani+ations should recogni+e that they have legal, contractual, social, and market driven obligations to non,shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers. 7ole and responsibilities of the board: #he board needs sufficient relevant skills and understanding to review and challenge management performance. It also needs ade uate si+e and appropriate levels of independence and commitment. Integrity and ethical behavior: Integrity should be a fundamental re uirement in choosing corporate officers and board members. 3rgani+ations should develop a code of conduct for their directors and e(ecutives that promotes ethical and responsible decision making. 9isclosure and transparency: 3rgani+ations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. #hey should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. 9isclosure of material matters concerning the organi+ation should be timely and balanced to ensure that all investors have access to clear, factual information. Corporate governance models around the world: #here are many different models of corporate governance around the world. #hese differ according to the variety of capitalism in which they are embedded. #he Anglo,American 4model4 tends to emphasi+e the interests of shareholders. #he coordinated or 1ulti stakeholder 1odel associated with Continental )urope and =apan also recogni+es the interests of workers, managers, suppliers, customers, and the community. A related distinction is between market,orientated and network, orientated models of corporate governance. Continental Europe $ome continental )uropean countries, including Germany and the >etherlands, re uire a two,tiered ?oard of 9irectors as a means of improving corporate

governance. In the two,tiered board, the )(ecutive ?oard, made up of company e(ecutives, generally runs day,to,day operations while the supervisory board, made up entirely of non,e(ecutive directors who represent shareholders and employees, hires and fires the members of the e(ecutive board, determines their compensation, and reviews ma!or business decisions. India India's $)?I Committee on Corporate Governance defines corporate governance as the 4acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal @ corporate funds in the management of a company.4 It has been suggested that the Indian approach is drawn from the Gandhian principle of trusteeship and the 9irective %rinciples of the Indian Constitution, but this conceptuali+ation of corporate ob!ectives is also prevalent in Anglo,American and most other !urisdictions. United States, United Kingdom #he so,called 4Anglo,American model4 of corporate governance emphasi+es the interests of shareholders. It relies on a single,tiered ?oard of 9irectors that is normally dominated by non,e(ecutive directors elected by shareholders. ?ecause of this, it is also known as 4the unitary system4. 2ithin this system, many boards include some e(ecutives from the company &who are e( officio members of the board'. >on,e(ecutive directors are e(pected to outnumber e(ecutive directors and hold key posts, including audit and compensation committees. #he 0nited $tates and the 0nited 8ingdom differ in one critical respect with regard to corporate governance: In the 0nited 8ingdom, the C)3 generally does not also serve as Chairman of the ?oard, whereas in the 0$ having the dual role is the norm, despite ma!or misgivings regarding the impact on corporate governance. In the 0nited $tates, corporations are directly governed by state laws, while the e(change &offering and trading' of securities in corporations &including shares' is governed by federal legislation. 1any 0$ states have adopted the 1odel ?usiness Corporation Act, but the dominant state law for publicly traded corporations is 9elaware, which continues to be the place of incorporation for the ma!ority of

publicly traded corporations. Individual rules for corporations are based upon the corporate charter and, less authoritatively, the corporate bylaws. $hareholders cannot initiate changes in the corporate charter although they can initiate changes to the corporate by laws. Regulation: egal environment ! General Corporations are created as legal persons by the laws and regulations of a particular !urisdiction. #hese may vary in many respects between countries, but a corporation's legal person status is fundamental to all !urisdictions and is conferred by statute. #his allows the entity to hold property in its own right without reference to any particular real person. It also results in the perpetual e(istence that characteri+es the modern corporation. #he statutory granting of corporate e(istence may arise from general purpose legislation &which is the general case' or from a statute to create a specific corporation, which was the only method prior to the *6th century. In addition to the statutory laws of the relevant !urisdiction, corporations are sub!ect to common law in some countries, and various laws and regulations affecting business practices. In most !urisdictions, corporations also have a constitution that provides individual rules that govern the corporation and authori+e or constrain its decision,makers. #his constitution is identified by a variety of terms" in )nglish,speaking !urisdictions, it is usually known as the Corporate Charter or the and Articles of Association. #he capacity of shareholders to modify the constitution of their corporation can vary substantially. #he 0.$. passed the Boreign Corrupt %ractices Act &BC%A' in *6CC, with subse uent modifications. #his law made it illegal to bribe government officials and re uired corporations to maintain ade uate accounting controls. It is enforced by the 0.$. 9epartment of =ustice and the $ecurities and )(change Commission &$)C'. $ubstantial civil and criminal penalties have been levied on corporations and e(ecutives convicted of bribery. #he 08 passed the ?ribery Act in -.*.. #his law made it illegal to bribe either government or private citi+ens or make facilitating payments &i.e., payment to a

government official to perform their routine duties more uickly'. It also re uired corporations to establish controls to prevent bribery. Sar"anes#$%le& 'ct of ())( *ain article: Sar"anes#$%le& 'ct #he $arbanes,3(ley Act of -..- was enacted in the wake of a series of high profile corporate scandals. It established a series of re uirements that affect corporate governance in the 0.$. and influenced similar laws in many other countries. #he law re uired, along with many other elements, that: #he %ublic Company Accounting 3versight ?oard &%CA3?' be established to regulate the auditing profession, which had been self,regulated prior to the law. Auditors are responsible for reviewing the financial statements of corporations and issuing an opinion as to their reliability. #he Chief )(ecutive 3fficer &C)3' and Chief Binancial 3fficer &CB3' attest to the financial statements. %rior to the law, C)3's had claimed in court they hadn't reviewed the information as part of their defense. ?oard audit committees have members that are independent and disclose whether or not at least one is a financial e(pert, or reasons why no such e(pert is on the audit committee. )(ternal audit firms cannot provide certain types of consulting services and must rotate their lead partner every A years. Burther, an audit firm cannot audit a company if those in specified senior management roles worked for the auditor in the past year. %rior to the law, there was the real or perceived conflict of interest between providing an independent opinion on the accuracy and reliability of financial statements when the same firm was also providing lucrative consulting services. Codes and guidelines Corporate governance principles and codes have been developed in different countries and issued from stock e(changes, corporations, institutional investors, or associations &institutes' of directors and managers with the support of governments and international organi+ations. As a rule, compliance with these governance

recommendations is not mandated by law, although the codes linked to stock e(change listing re uirements may have a coercive effect. $EC+ principles 3ne of the most influential guidelines has been the 3)C9 %rinciples of Corporate GovernanceEpublished in *666 and revised in -..;. #he 3)C9 guidelines are often referenced by countries developing local codes or guidelines. ?uilding on the work of the 3)C9, other international organi+ations, private sector associations and more than -. national corporate governance codes formed the 0nited >ations Intergovernmental 2orking Group of )(perts on International $tandards of Accounting and 7eporting &I$A7' to produce their Guidance on Good %ractices in Corporate Governance 9isclosure. #his internationally agreed benchmark consists of more than fifty distinct disclosure items across five broad categories: Auditing ?oard and management structure and process Corporate responsibility and compliance Binancial transparency and information disclosure 3wnership structure and e(ercise of control rights Stoc, e%change listing standards Companies listed on the >ew Fork $tock )(change &>F$)' and other stock e(changes are re uired to meet certain governance standards. Bor e(ample, the >F$) Gisted Company 1anual re uires, among many other elements: Independent directors: 4Gisted companies must have a ma!ority of independent directors...)ffective boards of directors e(ercise independent !udgment in carrying out their responsibilities. 7e uiring a ma!ority of independent directors will increase the uality of board oversight and lessen the possibility of damaging conflicts of interest.4 &$ection <.<A..*' An independent director is not part of management and has no 4material financial relationship4 with the company.

?oard meetings that e(clude management: 4#o empower non,management directors to serve as a more effective check on management, the non,management directors of each listed company must meet at regularly scheduled e(ecutive sessions without management.4 ?oards organi+e their members into committees with specific responsibilities per defined charters. 4Gisted companies must have a nominatingHcorporate governance committee composed entirely of independent directors.4 #his committee is responsible for nominating new members for the board of directors. Compensation and Audit Committees are also specified, with the latter sub!ect to a variety of listing standards as well as outside regulations. $ther guidelines #he investor,led organi+ation International Corporate Governance >etwork &ICG>' was set up by individuals centered around the ten largest pension funds in the world *66A. #he aim is to promote global corporate governance standards. #he network is led by investors that manage *: trillion dollars and members are located in fifty different countries. ICG> has developed a suite of global guidelines ranging from shareholder rights to business ethics. #he 2orld ?usiness Council for $ustainable 9evelopment &2?C$9' has done work on corporate governance, particularly on accountability and reporting, and in -..; released Issue 1anagement #ool: $trategic challenges for business in the use of corporate responsibility codes, standards, and frameworks. #his document offers general information and a perspective from a business associationHthink,tank on a few key codes, standards and frameworks relevant to the sustainability agenda. In -..6, the International Binance Corporation and the 0> Global Compact released a report, Corporate Governance , the Boundation for Corporate Citi+enship and $ustainable ?usiness, linking the environmental, social and governance responsibilities of a company to its financial performance and long, term sustainability. 1ost codes are largely voluntary. An issue raised in the 0.$. since the -..A 9isney decision is the degree to which companies manage their governance responsibilities" in other words, do they merely try to supersede the legal threshold,

or should they create governance guidelines that ascend to the level of best practice. Bor e(ample, the guidelines issued by associations of directors, corporate managers and individual companies tend to be wholly voluntary but such documents may have a wider effect by prompting other companies to adopt similar practices. -istor& In the -.th century in the immediate aftermath of the 2all $treet Crash of *6-6 legal scholars such as Adolf Augustus ?erle, )dwin 9odd, and Gardiner C. 1eans pondered on the changing role of the modern corporation in society. Brom the Chicago school of economics, 7onald Coase introduced the notion of transaction costs into the understanding of why firms are founded and how they continue to behave. 0$ e(pansion after 2orld 2ar II through the emergence of multinational corporations saw the establishment of the managerial class. $tudying and writing about the new class were several 5arvard ?usiness $chool management professors: 1yles 1ace &entrepreneurship', Alfred 9. Chandler, =r. &business history', =ay Gorsch &organi+ational behavior' and )li+abeth 1acIver &organi+ational behavior'. According to Gorsch and 1acIver 4many large corporations have dominant control over business affairs without sufficient accountability or monitoring by their board of directors.4 In the *6:.s, )ugene Bama and 1ichael =ensen established the principal/agent problem as a way of understanding corporate governance: the firm is seen as a series of contracts. 3ver the past three decades, corporate directorsI duties in the 0.$. have e(panded beyond their traditional legal responsibility of duty of loyalty to the corporation and its shareholders. In the first half of the *66.s, the issue of corporate governance in the 0.$. received considerable press attention due to the wave of C)3 dismissals &e.g.: I?1, 8odak, 5oneywell' by their boards. #he California %ublic )mployees' 7etirement $ystem &Cal%)7$' led a wave of institutional shareholder activism &something only very rarely seen before', as a way of ensuring that corporate value would not be

destroyed by the now traditionally co+y relationships between the C)3 and the board of directors &e.g., by the unrestrained issuance of stock options, not infre uently back dated'. In the early -...s, the massive bankruptcies &and criminal malfeasance' of )nron and 2orldcom, as well as lesser corporate scandals, such as Adelphia Communications, A3G, Arthur Andersen, Global Crossing, #yco, led to increased political interest in corporate governance. #his is reflected in the passage of the $arbanes,3(ley Act of -..-. 3ther triggers for continued interest in the corporate governance of organi+ations included the financial crisis of -..:H6 and the level of C)3 pay. East 'sia In *66C, the )ast Asian Binancial Crisis severely affected the economies of #hailand, Indonesia, $outh 8orea, 1alaysia, and the %hilippines through the e(it of foreign capital after property assets collapsed. #he lack of corporate governance mechanisms in these countries highlighted the weaknesses of the institutions in their economies. Parties to corporate governance: 8ey parties involved in corporate governance include stakeholders such as the board of directors, management and shareholders. )(ternal stakeholders such as creditors, auditors, customers, suppliers, government agencies, and the community at large also e(ert influence. #he agency view of the corporation posits that the shareholder forgoes decision rights &control' and entrusts the manager to act in the shareholders' best &!oint' interests. %artly as a result of this separation between the two investors and managers, corporate governance mechanisms include a system of controls intended to help align managers' incentives with those of shareholders. Agency concerns &risk' are necessarily lower for a controlling shareholder. Responsi"ilities of the "oard of directors Bormer Chairman of the ?oard of General 1otors =ohn G. $male wrote in *66A: 4#he board is responsible for the successful perpetuation of the corporation. #hat responsibility cannot be relegated to management. 4A board of directors is e(pected to play a key role in corporate governance. #he board has responsibility

for: C)3 selection and succession" providing feedback to management on the organi+ation's strategy" compensating senior e(ecutives" monitoring financial health, performance and risk" and ensuring accountability of the organi+ation to its investors and authorities. ?oards typically have several committees &e.g., Compensation, >ominating and Audit' to perform their work. #he 3)C9 %rinciples of Corporate Governance &-..;' responsibilities of the board" some of these are summari+ed below: describe the

?oard members should be informed and act ethically and in good faith, with due diligence and care, in the best interest of the company and the shareholders. 7eview and guide corporate strategy, ob!ective setting, ma!or plans of action, risk policy, capital plans, and annual budgets. 3versee ma!or ac uisitions and divestitures. $elect, compensate, monitor and replace key e(ecutives and oversee succession planning. Align key e(ecutive and board remuneration &pay' with the longer,term interests of the company and its shareholders. )nsure a formal and transparent board member nomination and election process. )nsure the integrity of the corporations accounting and financial reporting systems, including their independent audit. )nsure appropriate systems of internal control are established. 3versee the process of disclosure and communications. 2here committees of the board are established, their mandate, composition and working procedures should be well,defined and disclosed. Sta,eholder interests

All parties to corporate governance have an interest, whether direct or indirect, in the financial performance of the corporation. 9irectors, workers and management receive salaries, benefits and reputation, while investors e(pect to receive financial returns. Bor lenders, it is specified interest payments, while returns to e uity investors arise from dividend distributions or capital gains on their stock. Customers are concerned with the certainty of the provision of goods and services of an appropriate uality" suppliers are concerned with compensation for their goods or services, and possible continued trading relationships. #hese parties provide value to the corporation in the form of financial, physical, human and other forms of capital. 1any parties may also be concerned with corporate social performance. A key factor in a party's decision to participate in or engage with a corporation is their confidence that the corporation will deliver the party's e(pected outcomes. 2hen categories of parties &stakeholders' do not have sufficient confidence that a corporation is being controlled and directed in a manner consistent with their desired outcomes, they are less likely to engage with the corporation. 2hen this becomes an endemic system feature, the loss of confidence and participation in markets may affect many other stakeholders, and increases the likelihood of political action. #here is substantial interest in how e(ternal systems and institutions, including markets, influence corporate governance. Control and ownership structures: Control and ownership structure refers to the types and composition of shareholders in a corporation. In some countries such as most of Continental )urope, ownership is not necessarily e uivalent to control due to the e(istence of e.g. dual,class shares, ownership pyramids, voting coalitions, pro(y votes and clauses in the articles of association that confer additional voting rights to long, term shareholders. 3wnership is typically defined as the ownership of cash flow rights whereas control refers to ownership of control or voting rights. 7esearchers often 4measure4 control and ownership structures by using some observable measures of control and ownership concentration or the e(tent of inside control and ownership. $ome features or types of control and ownership structure involving corporate groups include pyramids, cross,shareholdings, rings, and webs. German 4concerns4 &8on+ern' are legally recogni+ed corporate groups with

comple( structures. =apanese keiretsu and $outh 8orean chaebol &which tend to be family,controlled' are corporate groups which consist of comple( interlocking business relationships and shareholdings. Cross,shareholding are an essential feature of keiretsu and chaebol groups . Corporate engagement with shareholders and other stakeholders can differ substantially across different control and ownership structures. .amil& control Bamily interests dominate ownership and control structures of some corporations, and it has been suggested the oversight of family controlled corporation is superior to that of corporations 4controlled4 by institutional investors &or with such diverse share ownership that they are controlled by management'. A recent study by Credit $uisse found that companies in which 4founding families retain a stake of more than *.J of the company's capital en!oyed a superior performance over their respective sectorial peers.4 $ince *66D, this superior performance amounts to :J per year. Borget the celebrity C)3. 4Gook beyond $i( $igma and the latest technology fad. 3ne of the biggest strategic advantages a company can have is blood ties,4 according to a ?usiness 2eek study. +iffuse shareholders #he significance of institutional investors varies substantially across countries. In developed Anglo,American countries &Australia, Canada, >ew Kealand, 0.8., 0.$.', institutional investors dominate the market for stocks in larger corporations. 2hile the ma!ority of the shares in the =apanese market are held by financial companies and industrial corporations, these are not institutional investors if their holdings are largely with,on group. #he largest pools of invested money &such as the mutual fund 'Languard A..', or the largest investment management firm for corporations, $tate $treet Corp.' are designed to ma(imi+e the benefits of diversified investment by investing in a very large number of different corporations with sufficient li uidity. #he idea is this strategy will largely eliminate individual firm financial or other risk and. A conse uence of this approach is that these investors have relatively little interest in the governance of a particular corporation. It is often assumed that, if institutional

investors pressing for will likely be costly because of 4golden handshakes4 or the effort re uired, they will simply sell out their interest. *echanisms and controls Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral ha+ard and adverse selection. #here are both internal monitoring systems and e(ternal monitoring systems. Internal monitoring can be done, for e(ample, by one &or a few' large shareholder&s' in the case of privately held companies or a firm belonging to a business group. Burthermore, the various board mechanisms provide for internal monitoring. )(ternal monitoring of managers' behavior, occurs when an independent third party &e.g. the e(ternal auditor' attests the accuracy of information provided by management to investors. $tock analysts and debt holders may also conduct such e(ternal monitoring. An ideal monitoring and control system should regulate both motivation and ability, while providing incentive alignment toward corporate goals and ob!ectives. Care should be taken that incentives are not so strong that some individuals are tempted to cross lines of ethical behavior, for e(ample by manipulating revenue and profit figures to drive the share price of the company up. $"/ective of Corporate Governance: #he aim of 4Good Corporate Governance4 is to ensure commitment of the board in managing the company in a transparent manner for ma(imi+ing long,term value of the company for its shareholders and all other partners. It integrates all the participants involved in a process, which is economic, and at the same time social. #he fundamental ob!ective of corporate governance is to enhance shareholders' value and protect the interests of other stakeholders by improving the corporate performance and accountability. 5ence it harmoni+es the need for a company to strike a balance at all times between the need to enhance shareholders' wealth whilst not in any way being detrimental to the interests of the other stakeholders in the company. Burther, its ob!ective is to generate an environment of trust and confidence amongst those having competing and conflicting interests. It is integral to the very e(istence of a company and strengthens investor's confidence by ensuring company's commitment to higher growth and profits.

?roadly, it seeks to achieve the following ob!ectives: A properly structured board capable of taking independent and ob!ective decisions is in place at the helm of affairs" #he board is balance as regards the representation of ade uate number of non, e(ecutive and independent directors who will take care of their interests and well, being of all the stakeholders" #he board adopts transparent procedures and practices and arrives at decisions on the strength of ade uate information" #he board has an effective machinery to sub serve the concerns of stakeholders" #he board keeps the shareholders informed of relevant developments impacting the company" #he board effectively and regularly monitors the functioning of the management team" #he board remains in effective control of the affairs of the company at all times. #he overall endeavor of the board should be to take the organi+ation forward so as to ma(imi+e long term value and shareholders' wealth0

Internal corporate governance controls Internal corporate governance controls monitor activities and then take corrective action to accomplish organi+ational goals. )(amples include: *onitoring "& the "oard of directors: #he board of directors, with its legal authority to hire, fire and compensate top management, safeguards invested capital. 7egular board meetings allow potential problems to be identified, discussed and avoided. 2hilst non,e(ecutive directors are thought to be more independent, they may not always result in more effective corporate governance and may not increase performance. 9ifferent board structures are optimal for different firms. 1oreover, the ability of the board to monitor the firm's e(ecutives is a function of its access to information. )(ecutive directors possess superior knowledge of the

decision,making process and therefore evaluate top management on the basis of the uality of its decisions that lead to financial performance outcomes, e( ante. It could be argued, therefore, that e(ecutive directors look beyond the financial criteria. Internal control procedures and internal auditors: Internal control procedures are policies implemented by an entity's board of directors, audit committee, management, and other personnel to provide reasonable assurance of the entity achieving its ob!ectives related to reliable financial reporting, operating efficiency, and compliance with laws and regulations. Internal auditors are personnel within an organi+ation who test the design and implementation of the entity's internal control procedures and the reliability of its financial reporting. 1alance of power: #he simplest balance of power is very common" re uire that the %resident be a different person from the #reasurer. #his application of separation of power is further developed in companies where separate divisions check and balance each other's actions. 3ne group may propose company,wide administrative changes, another group review and can veto the changes, and a third group check that the interests of people &customers, shareholders, employees' outside the three groups are being met. Remuneration: %erformance,based remuneration is designed to relate some proportion of salary to individual performance. It may be in the form of cash or non,cash payments such as shares and share options, superannuation or other benefits. $uch incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behavior, and can elicit myopic behavior. *onitoring "& large shareholders and2or monitoring "& "an,s and other large creditors: Given their large investment in the firm, these stakeholders have the incentives, combined with the right degree of control and power, to monitor the management. In publicly traded 0.$. corporations, boards of directors are largely chosen by the %residentHC)3 and the %residentHC)3 often takes the Chair of the ?oard position for hisHherself &which makes it much more difficult for the institutional owners to

4fire4 himHher'. #he practice of the C)3 also being the Chair of the ?oard is fairly common in large American corporations. 2hile this practice is common in the 0.$., it is relatively rare elsewhere. In the 0.8., successive codes of best practice have recommended against duality. E%ternal corporate governance controls )(ternal corporate governance controls encompass the controls e(ternal stakeholders e(ercise over the organi+ation. )(amples include: competition debt covenants demand for and assessment of performance information &especially financial statements' government regulations managerial labour market media pressure takeovers

.inancial reporting and the independent auditor #he board of directors has primary responsibility for the corporation's e(ternal financial reporting functions. #he Chief )(ecutive 3fficer and Chief Binancial 3fficer are crucial participants and boards usually have a high degree of reliance on them for the integrity and supply of accounting information. #hey oversee the internal accounting systems, and are dependent on the corporation's accountants and internal auditors. Current accounting rules under International Accounting $tandards and 0.$. GAA% allow managers some choice in determining the methods of measurement and criteria for recognition of various financial reporting elements. #he potential

e(ercise of this choice to improve apparent performance &see creative accounting and earnings management' increases the information risk for users. Binancial reporting fraud, including non,disclosure and deliberate falsification of values also contributes to users' information risk. #o reduce this risk and to enhance the perceived integrity of financial reports, corporation financial reports must be audited by an independent e(ternal auditor who issues a report that accompanies the financial statements &see financial audit'. 3ne area of concern is whether the auditing firm acts as both the independent auditor and management consultant to the firm they are auditing. #his may result in a conflict of interest which places the integrity of financial reports in doubt due to client pressure to appease management. #he power of the corporate client to initiate and terminate management consulting services and, more fundamentally, to select and dismiss accounting firms contradicts the concept of an independent auditor. Changes enacted in the 0nited $tates in the form of the $arbanes,3(ley Act &following numerous corporate scandals, culminating with the )nron scandal' prohibit accounting firms from providing both auditing and management consulting services. $imilar provisions are in place under clause ;6 of $tandard Gisting Agreement in India. S&stemic pro"lems of corporate governance 9emand for information: In order to influence the directors, the shareholders must combine with others to form a voting group which can pose a real threat of carrying resolutions or appointing directors at a general meeting. 1onitoring costs: A barrier to shareholders using good information is the cost of processing it, especially to a small shareholder. #he traditional answer to this problem is the efficient market hypothesis &in finance, the efficient market hypothesis &)15' asserts that financial markets are efficient', which suggests that the small shareholder will free ride on the !udgments of larger professional investors. $upply of accounting information: Binancial accounts form a crucial link in enabling providers of finance to monitor directors. Imperfections in the financial reporting process will cause imperfections in the effectiveness of corporate

governance. #his should, ideally, be corrected by the working of the e(ternal auditing process. +e"ates in corporate governance E%ecutive pa& *ain article: Sa& on pa& Increasing attention and regulation &as under the $wiss referendum 4against corporate 7ip,offs4 of -.*<' has been brought to e(ecutive pay levels since the financial crisis of -..C/-..:. 7esearch on the relationship between firm performance and e(ecutive compensation does not identify consistent and significant relationships between e(ecutives' remuneration and firm performance. >ot all firms e(perience the same levels of agency conflict, and e(ternal and internal monitoring devices may be more effective for some than for others. $ome researchers have found that the largest C)3 performance incentives came from ownership of the firm's shares, while other researchers found that the relationship between share ownership and firm performance was dependent on the level of ownership. #he results suggest that increases in ownership above -.J cause management to become more entrenched, and less interested in the welfare of their shareholders. $ome argue that firm performance is positively associated with share option plans and that these plans direct managers' energies and e(tend their decision hori+ons toward the long,term, rather than the short,term, performance of the company. 5owever, that point of view came under substantial criticism circa in the wake of various security scandals including mutual fund timing episodes and, in particular, the backdating of option grants as documented by 0niversity of Iowa academic )rik Gie and reported by =ames ?lander and Charles Borelle of the 2all $treet =ournal. )ven before the negative influence on public opinion caused by the -..D backdating scandal, use of options faced various criticisms. A particularly forceful and long running argument concerned the interaction of e(ecutive options with corporate stock repurchase programs. >umerous authorities &including 0.$. Bederal 7eserve ?oard economist 2eisbenner' determined options may be employed in concert with stock buybacks in a manner contrary to shareholder interests. #hese authors argued that, in part, corporate stock buybacks for 0.$.

$tandard @ %oors A.. companies surged to a MA.. billion annual rate in late -..D because of the impact of options. A compendium of academic works on the optionHbuyback issue is included in the study $candal by author 1. Gumport issued in -..D. A combination of accounting changes and governance issues led options to become a less popular means of remuneration as -..D progressed, and various alternative implementations of buybacks surfaced to challenge the dominance of 4open market4 cash buybacks as the preferred means of implementing a share repurchase plan. Separation of Chief E%ecutive $fficer and Chairman of the 1oard roles $hareholders elect a board of directors, who in turn hire a Chief )(ecutive 3fficer &C)3' to lead management. #he primary responsibility of the board relates to the selection and retention of the C)3. 5owever, in many 0.$. corporations the C)3 and Chairman of the ?oard roles are held by the same person. #his creates an inherent conflict of interest between management and the board. Critics of combined roles argue the two roles should be separated to avoid the conflict of interest. Advocates argue that empirical studies do not indicate that separation of the roles improves stock market performance and that it should be up to shareholders to determine what corporate governance model is appropriate for the firm. In -..;, C<.;J of 0.$. companies had combined roles" this fell to AC.-J by 1ay -.*-. 1any 0.$. companies with combined roles have appointed a 4Gead 9irector4 to improve independence of the board from management. German and 08 companies have generally split the roles in nearly *..J of listed companies. )mpirical evidence does not indicate one model is superior to the other in terms of performance. 5owever, one study indicated that poorly performing firms tend to remove separate C)3's more fre uently than when the C)3HChair roles are combined.