Corporate governance is a complex area of practice, policy and ethics that has many stakeholders. It is the system and structures that ensure transparency, accountability and probity in company operations and reporting. It covers the manner in which boards oversee the executive management of a business, and how they select, monitor and evaluate the performance of the CEO. It also includes the way directors make financial decisions and how they communicate these decisions to shareholders.
Corporate Governance became the subject of intense debate in the 1990s, due to the introduction of market-building structural reforms in former Soviet countries as well as the Asian financial crisis. The 2002 Enron incident, followed by a wave of shareholder activism in the form of institutional shareholders and the 2008 financial crisis, increased scrutiny. Corporate governance is a hot topic in the present, with new ideas and pressures constantly surfacing.
The prevailing school of thought, referred to as the “shareholder primacy” view or Anglo-Saxon method, places a higher priority on shareholders. Shareholders elect the board of directors, which directs management and establishes the strategic objectives for the company. The board of directors is responsible for select and assess the CEO, establish and monitor enterprise risk management policies and supervise the operations of the company. They also provide reports on their management to shareholders.
Effective corporate governance focuses on four fundamentals that are integrity, transparency, accountability and fairness. Integrity is a reflection of the ethical and responsible way board members make decisions. Transparency means openness and honesty, as well as full disclosure of material information to all stakeholders. Fairness is the way boards treat their employees, suppliers and customers. Responsibility is how a board interacts with its members and the community as a whole.