Definition of CG

The system by which organizations are directed and controlled. [Cadbury report]
Corporate governance is the system by which companies are directed and controlled. It focuses
on the relationships between a company's directors, shareholders and other stakeholders. It
provides the structure through which the objectives of the company are set, and the means of
achieving those objectives and monitoring performance are determined. In other words, it is
an attempt to deal with the agency problem (conforming) with a view to maximising long term
performance.
Sound corporate governance
Promotion of relationships with shareholders
Good governance should ensure alignment of the interests of shareholders and directors. It
should minimise the chances of agency problems arising through directors pursuing their own
interests and threatening the company's future by reckless behaviour, or failing to
pursue the best long-term strategies for the company.
Risk management
If a company is to achieve its objectives, it must have systems in place for the identification,
evaluation and mitigation of risk. These systems should particularly highlight risks that may
have serious impacts upon the future of the company, so that effective action can be taken to
deal with them.
Control systems
As part of risk management good governance should ensure that effective controls that protect
the business are being operated. These include controls that ensure that business assets are
being safeguarded and resources are not being wasted on unprofitable activities, but are being
used efficiently and effectively.
Promotes reporting
A well-governed company will demonstrate transparency by providing financial information that
is accurate and fair and also additional, voluntary, disclosures. These will help investors and
other key stakeholders make informed decisions about the company. Full disclosure will also
encourage accountability, as directors and senior managers will know that stakeholders have
the information available to scrutinise their stewardship effectively
Promotes stakeholder confidence
If a company is believed to be well-governed, then those who deal with it can have trust in their
relationships with it. It is particularly important for shareholders to have confidence, as a loss of
belief will lead to the company's market price falling, maybe threatening its future. There are
also other important stakeholders, such as taxation authorities or industry regulators, who can
be a serious threat to companies that they do not believe to be sound and therefore take action
against them.
Attracts funding
Good governance can be a means of attracting additional funding into a company. More
sources of funds may be available and the costs of different sources of funds should be low. This
should enhance solvency as more cash will be available over the longer-term, and
liquidity, as fixed finance costs should be low.