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An Introduction to Corporate Governance

Corporate Governance is an increasingly significant aspect of business and organisational management, extending to international politics and trade laws in addition to globalised economics, corporations, organisations and markets.

Theories, standards and regulations relating to Corporate Governance began to develop properly in the 1990s, so it is a relatively recent field of economic and management practice.

Definition of Corporate Governance

From a simple and minimal point of view:

  • Corporate Governance is a specialised mechanism for regulating risk in corporate activities, thereby averting corporate disasters, scandals and consequential damage or losses to investors, staff, society and the wider world.

Or more broadly:

  • Corporate Governance is a very sophisticated and flexible concept which addresses fundamental organisational purposes (for every type of organisation - from small businesses to the largest multinational conglomerate) together with the most serious challenges arising from the globalisation of corporate and organisational structures and the markets they serve.

Corporate Governance has also become an instrument for understanding, questioning and refining some fundamental economic systems and philosophies, notably capitalism, free-market/market forces economics, business ethicscorporate leadership, the Psychological Contract, political economics and globalisation itself.

The emergence of Nudge theory in the 2000s - a powerful system for change/societal-management is increasingly used by governments to understand and alter group behaviour - reinforces the principle that governance must be driven by the needs of the people being governed, not by the governing authority.

Application of Corporate Governance

With special regard to globalisation, the US economist visionary and author, Joseph Stiglitz, winner of the Nobel Prize in Economics, noted the growing significance of Corporate Governance relating to globalisation, with these remarks in 2006: "...Corporate governance can recognise the rights not only of shareholders but of others who are touched by the actions of corporations... An engaged and educated citizenry can understand how to make globalisation work... and can demand that their political leaders shape globalisation accordingly." (Joseph Stiglitz, 2006.)

In recent and modern use the term Corporate Governance essentially refers to the actions of directors who run publicly quoted companies. Increasingly the principles of Corporate Governance also apply to public services organisations and can be adapted for small businesses and cooperatives and social enterprises too.

In fact, Corporate Governance is now a very flexible concept used to examine, develop and establish the fundamental aims and rules for any sort of organisation and especially organisations which serve multiple purposes (e.g., for owners, staff, customers, etc.).

Corporate Governance Scandals and Disasters

The concept of Corporate Governance and the term itself became prominent in the late 1900s and early 2000s, in response to several corporate scandals and disasters of that period, which did great harm to:

  • Company shareholders and stakeholders and/or
  • Staff and pension-holders and/or
  • Nations and economies and/or
  • The environment and/or
  • Sections of society, and by definition also to
  • The companies themselves (thereby reducing values for shareholders).

Many of these disasters and scandals involved criminal negligence or fraud by the directors responsible.

These incidents occurred largely because directors and/or senior managers were able to act:

  • With too much freedom,
  • Without reference to an appropriate transparent, firm, formal code of governance, and
  • In ways that were hidden from scrutiny, especially from shareholders.