View source for Finance:Corporate governance

{{short description|Mechanisms, processes and relations by which corporations are controlled and operated}}
'''Corporate governance''' are mechanisms, processes and relations by which [[Company:Corporation|corporation]]s are controlled and operated ("[[Philosophy:Governance|governed]]").
{{Governance|Models}}
{{Business administration}}

==Definitions==
"Corporate governance" may be defined, described or delineated in diverse ways, depending on the writer's purpose. Writers focused on a disciplinary interest or context (such as [[Finance:Accounting|accounting]], [[Finance:Finance|finance]], [[Social:Corporate law|law]], or [[Social:Management|management]]) often adopt narrow definitions that appear purpose-specific. Writers concerned with regulatory policy in relation to corporate governance practices often use broader structural descriptions. A broad (meta) definition that encompasses many adopted definitions is "Corporate governance describes the processes, structures, and mechanisms that influence the control and direction of corporations."<ref>Shailer, Greg. ''Corporate Governance'', in D. C. Poff, A. C. Michalos (eds.), Encyclopedia of Business and Professional Ethics, Springer International Publishing AG, 2018. https://doi.org/10.1007/978-3-319-23514-1_155-1</ref>

This meta definition accommodates both the narrow definitions used in specific contexts and the broader descriptions that are often presented as authoritative. The latter include: the structural definition from the Cadbury Report, which identifies corporate governance as "the system by which companies are directed and controlled" (Cadbury 1992, p.&nbsp;15); and the relational-structural view adopted by the Organization for Economic Cooperation and Development ([[Organization:OECD|OECD]]) of "Corporate governance involves a set of relationships between a company's management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined" (OECD 2015, p.&nbsp;9).<ref>OECD (2015),  G20/OECD Principles of Corporate Governance,  OECD  Publishing,  Paris. http://dx.doi.org/10.1787/9789264236882-en</ref>

Examples of narrower definitions in particular contexts include:
* "a system of law and sound approaches by which corporations are directed and controlled focusing on the internal and external 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."<ref>{{cite journal|last=Sifuna|first=Anazett Pacy|title=Disclose or Abstain: The Prohibition of Insider Trading on Trial|journal=Journal of International Banking Law and Regulation|year=2012|volume=27|issue=9}}</ref>
* "the set of conditions that shapes the ''ex post'' bargaining over the [[Finance:Quasi-rent|quasi-rent]]s generated by a firm."<ref>Luigi Zingales, 2008. "Corporate governance", ''[[The New Palgrave Dictionary of Economics]]'', 2nd Edition. [http://www.dictionaryofeconomics.com/article?id=pde2008_C000370&edition=current&q= Abstract.]</ref>

The firm itself is modelled as a governance structure acting through the mechanisms of contract.<ref>{{cite journal |last1=Williamson |first1=Oliver E |title=The Theory of the Firm as Governance Structure: From Choice to Contract |journal=Journal of Economic Perspectives |date=1 August 2002 |volume=16 |issue=3 |pages=171–195 |doi=10.1257/089533002760278776 |doi-access=free }}</ref><ref>[[Biography:Oliver E. Williamson|Williamson, Oliver E.]] (1996). [https://books.google.com/books?hl=en&lr=&id=meERBVysP6YC&oi=fnd&pg=PA3 ''The Mechanisms of Governance'']. Oxford University Press.</ref><ref>{{cite journal |last1=Pagano |first1=Marco |last2=Volpin |first2=Paolo F. |title=The Political Economy of Corporate Governance |journal=The American Economic Review |date=2005 |volume=95 |issue=4 |pages=1005–1030 |doi=10.1257/0002828054825646 |jstor=132703 |url=http://www.csef.it/WP/wp29.pdf }}</ref><ref name="DainesKlausner"/> Here corporate governance may include its relation to [[Finance:Corporate finance|corporate finance]].<ref>{{cite journal |last1=Williamson |first1=Oliver E. |title=Corporate Finance and Corporate Governance |journal=The Journal of Finance |date=July 1988 |volume=43 |issue=3 |pages=567–591 |doi=10.1111/j.1540-6261.1988.tb04592.x }}</ref><ref>{{cite journal |last1=Schmidt |first1=Reinhard H. |last2=Tyrell |first2=Marcel |title=Financial Systems, Corporate Finance and Corporate Governance |journal=European Financial Management |date=November 1997 |volume=3 |issue=3 |pages=333–361 |doi=10.1111/1468-036X.00047 }}</ref><ref>[[Biography:Jean Tirole|Tirole, Jean]] (1999).''The Theory of Corporate Finance", Princeton. [http://press.princeton.edu/titles/8123.html Description] and scrollable [https://books.google.com/books?hl=en&lr=&id=p683L1gaVm4C&oi=fnd&pg=PR7&dq=false preview.]</ref>

== Principles ==
Contemporary discussions of corporate governance tend to refer to principles raised in three documents released since 1990: The Cadbury Report (UK, 1992), the Principles of Corporate Governance (OECD, 1999, 2004 and 2015), and the Sarbanes–Oxley Act of 2002 (US, 2002). The Cadbury and Organisation for Economic Co-operation and Development (OECD) reports present general principles around which businesses are expected to operate to assure proper governance. The Sarbanes–Oxley Act, informally referred to as Sarbox or Sox, is an attempt by the federal government in the United States to legislate several of the principles recommended in the Cadbury and OECD reports.
* ''Rights and equitable treatment of shareholders'':<ref>{{cite web|title=OECD Principles of Corporate Governance, 2004, Articles II and III|url=http://www.oecd.org/dataoecd/32/18/31557724.pdf|work=[[Organization:OECD|OECD]]|access-date=2011-07-24}}</ref><ref>Cadbury, Adrian, ''Report of the Committee on the Financial service Aspects of Corporate Governance'', Gee, London, December, 1992, Sections 3.4</ref><ref>''Sarbanes-Oxley Act of 2002'', US Congress, Title VIII</ref> Organizations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by openly and effectively communicating information and by encouraging shareholders to participate in general meetings.
* ''Interests of other stakeholders'':<ref>{{cite web|title=OECD Principles of Corporate Governance, 2004, Preamble and Article IV|url=http://www.oecd.org/dataoecd/32/18/31557724.pdf|work=[[Organization:OECD|OECD]]|access-date=2011-07-24}}</ref> Organizations should recognize that they have legal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, [[Finance:Investor|investor]]s, [[Finance:Creditor|creditor]]s, suppliers, local communities, customers, and policy makers.
* ''Role and responsibilities of the board'':<ref>{{cite web|title=OECD Principles of Corporate Governance, 2004, Article VI|url=http://www.oecd.org/dataoecd/32/18/31557724.pdf|work=[[Organization:OECD|OECD]]|access-date=2011-07-24}}</ref><ref>Cadbury, Adrian, ''Report of the Committee on the Financial Aspects of Corporate Governance'', Gee, London, December, 1992, Section 3.4</ref> The board needs sufficient relevant skills and understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment.
* ''Integrity and ethical behavior'':<ref>Cadbury, Adrian, ''Report of the Committee on the Financial Aspects of Corporate Governance'', Gee, London, December, 1992, Sections 3.2, 3.3, 4.33, 4.51 and 7.4</ref><ref>''Sarbanes-Oxley Act of 2002'', US Congress, Title I, 101(c)(1), Title VIII, and Title IX, 406</ref> Integrity should be a fundamental requirement in choosing corporate officers and board members. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making.
* ''Disclosure and transparency'':<ref>{{cite web|title=OECD Principals of Corporate Governance, 2004, Articles I and V|url=http://www.oecd.org/dataoecd/32/18/31557724.pdf|work=[[Organization:OECD|OECD]]|access-date=2011-07-24}}</ref><ref>Cadbury, Adrian, ''Report of the Committee on the Financial Aspects of Corporate Governance'', Gee, London, December, 1992, Section 3.2</ref> Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.

=== Principal–agent conflict ===
Some concerns regarding governance follows from the potential for [[Philosophy:Conflict of interest|conflicts of interests]] that are a consequence of the non-alignment of preferences between: shareholders and upper management (principal–agent problems); and among shareholders (principal–principal problems),<ref name="Voorn">{{cite journal |last1=Voorn |first1=Bart |last2=Genugten |first2=Marieke |last3=Thiel |first3=Sandra |title=Multiple principals, multiple problems: Implications for effective governance and a research agenda for joint service delivery |journal=Public Administration |date=September 2019 |volume=97 |issue=3 |pages=671–685 |doi=10.1111/padm.12587 |doi-access=free |hdl=2066/207394 |hdl-access=free }}</ref> although also other stakeholder relations are affected and coordinated through corporate governance.

In large firms where there is a separation of ownership and management, the [[Social:Principal–agent problem|principal–agent problem]]<ref>{{cite web | url=https://www.academia.edu/93596216 | title=Economic approaches to corporate governance }}</ref> can arise between upper-management (the "agent") and the shareholder(s) (the "principals"). The shareholders and upper management may have different interests. The shareholders typically desire returns on their investments through profits and dividends, while upper management may also be influenced by other motives, such as management remuneration or wealth interests, working conditions and perquisites, or relationships with other parties within (e.g., management-worker relations) or outside the corporation, to the extent that these are not necessary for profits. Those pertaining to self-interest are usually emphasized in relation to principal-agent problems. The effectiveness of corporate governance practices from a shareholder perspective might be judged by how well those practices align and coordinate the interests of the upper management with those of the shareholders.  However, corporations sometimes undertake initiatives, such as climate activism and voluntary emission reduction, that seems to contradict the idea that rational self-interest drives shareholders' governance goals.<ref>{{Cite journal|last=Condon|first=Madison|date=2020-03-01|title=Externalities and the Common Owner|url=https://scholarship.law.bu.edu/faculty_scholarship/992|journal=Washington Law Review|volume=95|issue=1|pages=1}}</ref>'''{{rp|3}}'''

An example of a possible conflict between shareholders and upper management materializes through stock repurchases ([[Finance:Treasury stock|treasury stock]]). Executives may have incentive to divert cash surpluses to buying treasury stock to support or increase the share price. However, that reduces the financial resources available to maintain or enhance profitable operations. As a result, executives can sacrifice long-term profits for short-term personal gain. Shareholders may have different perspectives in this regard, depending on their own [[Finance:Time preference|time preference]]s, but it can also be viewed as a conflict with broader corporate interests (including preferences of other stakeholders and the long-term health of the corporation).

=== Principal–principal conflict (the multiple principal problem) ===
The principal–agent problem can be intensified when upper management acts on behalf of multiple shareholders—which is often the case in large firms (see [[Social:Multiple principal problem|Multiple principal problem]]).<ref name="Voorn"/> Specifically, when upper management acts on behalf of multiple shareholders, the multiple shareholders face a [[Philosophy:Collective action problem|collective action problem]] in corporate governance, as individual shareholders may lobby upper management or otherwise have incentives to act in their individual interests rather than in the collective interest of all shareholders.<ref name="Bernheim">{{cite journal |last1=Bernheim |first1=B. Douglas |last2=Whinston |first2=Michael D. |title=Common Agency |journal=Econometrica |date=July 1986 |volume=54 |issue=4 |pages=923 |doi=10.2307/1912844 |jstor=1912844 }}</ref> As a result, there may be free-riding in steering and monitoring of upper management,<ref name="Gailmard">{{cite journal |last1=Gailmard |first1=Sean |title=Multiple Principals and Oversight of Bureaucratic Policy-Making |journal=Journal of Theoretical Politics |date=April 2009 |volume=21 |issue=2 |pages=161–186 |doi=10.1177/0951629808100762 |s2cid=11680915 }}</ref> or conversely, high costs may arise from duplicate steering and monitoring of upper management.<ref name="Khalil">{{cite journal |last1=Khalil |first1=Fahad |last2=Martimort |first2=David |last3=Parigi |first3=Bruno |title=Monitoring a common agent: Implications for financial contracting |journal=Journal of Economic Theory |date=July 2007 |volume=135 |issue=1 |pages=35–67 |doi=10.1016/j.jet.2005.08.010 |citeseerx=10.1.1.186.583 |s2cid=15387971 }}</ref> Conflict may break out between principals,<ref name="Garrone">{{cite journal |last1=Garrone |first1=Paola |last2=Grilli |first2=Luca |last3=Rousseau |first3=Xavier |title=Management Discretion and Political Interference in Municipal Enterprises. Evidence from Italian Utilities |journal=Local Government Studies |date=August 2013 |volume=39 |issue=4 |pages=514–540 |doi=10.1080/03003930.2012.726198 |s2cid=220386135 }}</ref> and this all leads to increased autonomy for upper management.<ref name="Voorn"/>

Ways of mitigating or preventing these conflicts of interests include the processes, customs, policies, laws, and institutions which affect the way a company is controlled—and this is the challenge of corporate governance.<ref>{{cite web|title=The Financial Times Lexicon|url=http://lexicon.ft.com/Term?term=corporate-governance|work=The Financial Times|access-date=2011-07-20|archive-url=https://web.archive.org/web/20110711115628/http://lexicon.ft.com/Term?term=corporate-governance|archive-date=2011-07-11|url-status=dead}}</ref><ref>Cadbury, Adrian, ''Report of the Committee on the Financial Aspects of Corporate Governance'', Gee, London, December, 1992, p. 15</ref> To solve the problem of governing upper management under multiple shareholders, corporate governance scholars have figured out that the straightforward solution of appointing one or more shareholders for governance is likely to lead to problems because of the information asymmetry it creates.<ref name="LaPorta">{{cite journal |last1=La Porta |first1=Rafael |last2=Lopez-de-Silanes |first2=Florencio |last3=Shleifer |first3=Andrei |last4=Vishny |first4=Robert |title=Investor protection and corporate governance |journal=Journal of Financial Economics |date=January 2000 |volume=58 |issue=1–2 |pages=3–27 |doi=10.1016/S0304-405X(00)00065-9 |citeseerx=10.1.1.202.2895 }}</ref><ref name="Kim">{{cite journal |last1=Kim |first1=Kenneth A. |last2=Kitsabunnarat-Chatjuthamard |first2=P. |last3=Nofsinger |first3=John R. |title=Large shareholders, board independence, and minority shareholder rights: Evidence from Europe |journal=Journal of Corporate Finance |date=December 2007 |volume=13 |issue=5 |pages=859–880 |doi=10.1016/j.jcorpfin.2007.09.001 }}</ref><ref name="Yeh">{{cite journal |last1=Yeh |first1=Yin-Hua |last2=Woidtke |first2=Tracie |title=Commitment or entrenchment?: Controlling shareholders and board composition |journal=Journal of Banking & Finance |date=July 2005 |volume=29 |issue=7 |pages=1857–1885 |doi=10.1016/j.jbankfin.2004.07.004 |citeseerx=10.1.1.601.3203 |s2cid=16829144 }}</ref> Shareholders' meetings are necessary to arrange governance under multiple shareholders, and it has been proposed that this is the solution to the problem of multiple principals due to median voter theorem: shareholders' meetings lead power to be devolved to an actor that approximately holds the median interest of all shareholders, thus causing governance to best represent the aggregated interest of all shareholders.<ref name="Voorn"/>

=== Other themes ===
An important theme of governance is the nature and extent of corporate accountability. A related discussion at the macro level focuses on the effect of a corporate governance system on [[Finance:Economic efficiency|economic efficiency]], with a strong emphasis on shareholders' welfare.<ref name="DainesKlausner">Daines, Robert, and Michael Klausner, 2008 "Corporate law, economic analysis of", ''The New Palgrave Dictionary of Economics'', 2nd Edition. [http://www.dictionaryofeconomics.com/article?id=pde2008_E000285&edition=current&q= Abstract.]</ref> This has resulted in a literature focused on economic analysis.<ref>[[Biography:Andrei Shleifer|Shleifer, Andrei]], and Robert W. Vishny (1997). "A Survey of Corporate Governance", ''Journal of Finance'', 52(2), pp. [https://web.archive.org/web/20100811175342/http://ws1.ad.economics.harvard.edu/faculty/shleifer/files/SurveyCorpGov.pdf 737–783].</ref><ref>[[Biography:Oliver Hart (economist)|Oliver Hart]] (1989). "An Economist's Perspective on the [[Finance:Theory of the firm|Theory of the firm]]", ''Columbia Law Review'', 89(7), pp. [http://business.illinois.edu/josephm/BA549_Fall%202010/Session%204/Hart%20(1989).pdf 1757–1774.]
</ref><ref>Valentin Zelenyuk, and Vitaliy Zheka (2006). "Corporate Governance and Firm's Efficiency: The Case of a Transitional Country, Ukraine", ''Journal of Productivity Analysis'', 25(1), pp. 143–157, [https://ideas.repec.org/a/kap/jproda/v25y2006i1p143-157.html]</ref>

== Models ==
Different models of corporate governance differ according to the variety of capitalism in which they are embedded. The Anglo-American "model" tends to emphasize the interests of shareholders. The coordinated or multistakeholder model associated with Continental Europe and Japan also recognizes the interests of workers, managers, suppliers, customers, and the community. A related distinction is between market-oriented and network-oriented models of corporate governance.<ref>Sytse Douma & Hein Schreuder (2013) ''[http://catalogue.pearsoned.co.uk/educator/product/Economic-Approaches-to-Organisations/9780273735298.page Economic Approaches to Organizations] {{Webarchive|url=https://web.archive.org/web/20150515235236/http://catalogue.pearsoned.co.uk/educator/product/Economic-Approaches-to-Organisations/9780273735298.page |date=2015-05-15 }}'', 5th edition, chapter 15, London: Pearson</ref>

=== Continental Europe (two-tier board system) ===
{{main|Finance:Aktiengesellschaft}}
Some continental European countries, including Germany, Austria, and the Netherlands, require a two-tiered board of directors as a means of improving corporate governance.<ref>Tricker, Bob, ''Essentials for Board Directors: An A–Z Guide, Second Edition'', Bloomberg Press, New York, 2009, {{ISBN|978-1-57660-354-3}}</ref> In the two-tiered board, the executive board, made up of company executives, generally runs day-to-day operations while the supervisory board, made up entirely of non-executive directors who represent shareholders and employees, hires and fires the members of the executive board, determines their compensation, and reviews major business decisions.<ref>Hopt, Klaus J., "The German Two-Tier Board (Aufsichtsrat), A German View on Corporate Governance" in Hopt, Klaus J. and Wymeersch, Eddy (eds), ''Comparative Corporate Governance: Essays and Materials'', de Gruyter, Berlin & New York, {{ISBN|3-11-015765-9}}</ref>

Germany, in particular, is known for its practice of [[Social:Co-determination|co-determination]], founded on the German Codetermination Act of 1976, in which workers are granted seats on the board as stakeholders, separate from the seats accruing to shareholder equity.

=== United States, United Kingdom ===
The so-called "Anglo-American model" of corporate governance emphasizes the interests of shareholders. It relies on a single-tiered board of directors that is normally dominated by non-executive directors elected by shareholders. Because of this, it is also known as "the unitary system".<ref>Cadbury, Adrian, ''Report of the Committee on the Financial Aspects of Corporate Governance'', Gee, London, December, 1992</ref><ref>Mallin, Christine A., "Corporate Governance Developments in the UK" in Mallin, Christine A (ed), ''Handbook on International Corporate Governance: Country Analyses, Second Edition'', Edward Elgar Publishing, 2011, {{ISBN|978-1-84980-123-2}}</ref> Within this system, many boards include some executives from the company (who are ''ex officio'' members of the board). Non-executive directors are expected to outnumber executive directors and hold key posts, including audit and compensation committees. In the United Kingdom, the [[Company:CEO|CEO]] generally does not also serve as chairman of the board, whereas in the US having the dual role has been the norm, despite major misgivings regarding the effect on corporate governance.<ref>Bowen, William G, ''The Board Book: An Insider's Guide for Directors and Trustees'', W.W. Norton & Company, New York & London, 2008, {{ISBN|978-0-393-06645-6}}</ref> The number of US firms combining both roles is declining, however.<ref>{{Cite web |url=http://www.russellreynolds.com/newsroom/splitting-the-ceo-and-chairman-roles-yes-or-no |title=Splitting the CEO and Chairman Roles – Yes or No? |date=2012-12-01 |website=russellreynolds.com |archive-url=https://web.archive.org/web/20150821022935/http://www.russellreynolds.com/newsroom/splitting-the-ceo-and-chairman-roles-yes-or-no |archive-date=2015-08-21 |publisher=Russell Reynolds Associates}}</ref>

In the United States, corporations are directly governed by state laws, while the exchange (offering and trading) of securities in corporations (including shares) is governed by federal legislation. Many US states have adopted the Model Business Corporation Act, but the dominant state law for publicly traded corporations is [[Company:Delaware General Corporation Law|Delaware General Corporation Law]], which continues to be the place of incorporation for the majority of publicly traded corporations.<ref name=Bebchuck2004>{{cite SSRN |last1=Bebchuk |first1=Lucian A. |title=The Case for Increasing Shareholder Power |date=17 March 2003 |ssrn=387940 }}</ref> Individual rules for corporations are based upon the corporate charter and, less authoritatively, the corporate bylaws.<ref name=Bebchuck2004/>
Shareholders cannot initiate changes in the corporate charter although they can initiate changes to the corporate bylaws.<ref name=Bebchuck2004/>

It is sometimes colloquially stated that in the US and the UK that "the shareholders own the company." This is, however, a misconception as argued by Eccles and Youmans (2015) and Kay (2015).<ref>http://hbswk.hbs.edu/item/materiality-in-corporate-governance-the-statement-of-significant-audiences-and-materiality; https://next.ft.com/content/7bd1b20a-879b-11e5-90de-f44762bf9896</ref> The American system has long been based on a belief in the potential of [[Finance:Shareholder democracy|shareholder democracy]] to efficiently allocate capital.

Cheffins & Reddy (2022) argue that after thirty years the UK Corporate Governance Code can (and should) be abolished: 'Early versions of the Code likely fortified governance norms that enhanced managerial accountability. Such norms, however, are now well-accepted, meaning the Code delivers few direct benefits for the ‘premium-listed’ companies that must take the Code into account. In addition, the Code in place has evolved considerably since 1992, and the changes have been detrimental in large measure for listed companies. The Code has grown in size substantially over the years, thereby increasing the disclosure burden for companies obliged to take the Code into account. Moreover, while the UK CGC is theoretically comply-or-explain in orientation, a bias in favour of full compliance arising from an investor predilection for ‘box-ticking’ has pressured companies to introduce what for them may well be sub-optimal governance arrangements. For companies, the costs to companies arising from the Code likely now markedly outweigh whatever benefits it delivers. 
An additional institutional downside with the Code further strengthens the case in favour of abolition. Over the past few years, the Code has increasingly dealt with matters it is poorly suited to address, particularly in relation to non-shareholder corporate constituencies, commonly referred to as stakeholders. Such matters may be of considerable societal importance. Still, with the Code being dependent on shareholder intervention to foster compliance, it is poorly situated institutionally to address stakeholder issues.'<ref>Brian R. Cheffins and Bobby V. Reddy,Thirty Years and Done – Time to Abolish the UK Corporate Governance Code, Working Paper N° 654/2022, ECGI Working Paper Series in Law, Cambridge, UK</ref>

=== Japan ===
The Japanese model of corporate governance has traditionally held a broad view that firms should account for the interests of a range of stakeholders. For instance, managers do not have a fiduciary responsibility to shareholders. This framework is rooted in the belief that a balance among stakeholder interests can lead to a superior allocation of resources for society. The Japanese model includes several key principles:<ref>{{Cite web |title=Publication of Revised Japan's Corporate Governance Code |url=https://www.jpx.co.jp/english/news/1020/20210611-01.html |access-date=2022-11-22 |website=Japan Exchange Group |language=en}}</ref>

* Security the rights and equal treatment of shareholders
* Appropriate cooperation with stakeholders (other than shareholders)
* Ensuring appropriate information disclosure and transparency
* Responsibility of the board
* Dialogue with shareholders

=== Founder centrism ===
An article published by the Australian Institute of Company Directors called "Do Boards Need to become more Entrepreneurial?" considered the need for founder centrism behaviour at board level to appropriately manage disruption.<ref>{{cite web|last1=Hennessy|first1=Nigel|title=Do boards need to become more entrepreneurial?|url=https://aicd.companydirectors.com.au/advocacy/governance-leadership-centre/governance-driving-performance/do-boards-need-to-be-more-entrepreneurial|publisher=AICD|access-date=March 5, 2022}}</ref>

== Regulation ==
{{Corporate law|doctrines}}

Corporations are created as [[Social:Legal person|legal person]]s by the laws and regulations of a particular jurisdiction. These may vary in many respects between countries, but a corporation's legal person status is fundamental to all jurisdictions and is conferred by statute. This allows the entity to hold property in its own right without reference to any real person. It also results in the perpetual existence that characterizes the modern corporation. The statutory granting of corporate existence may arise from general purpose legislation (which is the general case) or from a statute to create a specific corporation. Now, the formation of business corporations in most jurisdictions requires government legislation that facilitates incorporation. This legislation is often in the form of Companies Act or Corporations Act, or similar. Country-specific regulatory devices are summarized below.

It is generally perceived that regulatory attention on the corporate governance practices of publicly listed corporations, particularly in relation to [[Social:Transparency (behavior)|transparency]] and  [[Social:Accountability|accountability]], increased in many jurisdictions following the high-profile [[Social:List of corporate collapses and scandals|corporate scandals]] in 2001–2002, many of which involved accounting fraud; and then again after the [[Finance:Financial crisis of 2007–08|financial crisis in 2008]]. For example, in the U.S., these included scandals surrounding [[Company:Enron|Enron]] and MCI Inc. (formerly WorldCom). Their demise led to the enactment of the Sarbanes–Oxley Act in 2002, a U.S. federal law intended to improve corporate governance in the United States. Comparable failures in Australia (HIH, One.Tel) are linked to with the eventual passage of the CLERP 9 reforms there (2004), that similarly aimed to improve corporate governance.<ref>{{cite journal |last1= Lee |first1= Janet |last2= Shailer |first2= Greg |title= The Effect of Board-Related Reforms on Investors' Confidence |journal= Australian Accounting Review |date= June 2008 |volume= 18 |issue= 2 |pages= 123–134 |doi= 10.1111/j.1835-2561.2008.0014.x }}</ref> Similar corporate failures in other countries stimulated increased regulatory interest (e.g., Parmalat in Italy). Also see

In addition to legislation the facilitates incorporation, many jurisdictions have some major regulatory devices that impact on corporate governance. This includes statutory laws concerned with the functioning of [[Finance:Stock market|stock or securities markets]] (also see [[Finance:Security|Security]], [[Finance:Competition law|consumer and competition]] (antitrust) laws, [[Social:Labour law|labour or employment]] laws, and [[Social:Environmental law|environmental protection]] laws, which may also entail disclosure requirements. In addition to the statutory laws of the relevant jurisdiction, corporations are subject to common law in some countries.

In most jurisdictions, corporations also have some form of a corporate constitution that provides individual rules that govern the corporation and authorize or constrain its decision-makers. This constitution is identified by a variety of terms; in English-speaking jurisdictions, it is sometimes known as the corporate charter or articles of association (which also be accompanied by a [[Finance:Memorandum of association|memorandum of association]]).

== Country-specific regulation ==

=== Australia ===
==== Primary legislation ====
Incorporation in Australia originated under state legislation but has been under federal legislation since 2001. Also see Australian corporate law.
Other significant legislation includes:

=== Canada ===
==== Primary legislation ====
Incorporation in Canada can be done either under either federal or provincial legislation. See [[Finance:Canadian corporate law|Canadian corporate law]].

=== The Netherlands ===
==== Primary legislation ====
Dutch corporate law is embedded in the ondernemingsrecht and, specifically for limited liability companies, in the vennootschapsrecht.

=== Corporate Governance Code 2016-2022 ===
In addition The Netherlands has adopted a Corporate Governance Code in 2016, which has been updated twice since.
In the latest version (2022),<ref>{{cite web | url=https://www.mccg.nl/publicaties/codes/2022/12/20/corporate-governance-code-2022 | title=Corporate Governance Code 2022 - Code - Monitoring Commissie Corporate Governance | date=20 December 2022 }}</ref> the Executive Board of the company is held responsible for the continuity of the company and its ''sustainable long-term value creation''.
The executive board considers the impact of corporate actions on People and Planet and takes the effects on corporate stakeholders into account.<ref>{{cite web | url=https://www.academia.edu/91893819 | title=People, Planet, Profit and Purpose - from PhD to DSM Practice }}</ref> 
In the Dutch two-tier system, the Supervisory Board monitors and supervises the executive board in this respect.

=== UK ===
==== Primary legislation ====
The UK has a single jurisdiction for [[Social:Company formation|incorporation]]. Also see United Kingdom company law
Other significant legislation includes:

==== Bribery Act 2010 ====
The UK passed the Bribery Act in 2010. This law made it illegal to bribe either government or private citizens or make facilitating payments (i.e., payment to a government official to perform their routine duties more quickly). It also required corporations to establish controls to prevent bribery.

=== US ===
==== Primary legislation ====
Incorporation in the US is under state level legislation, but there important federal acts. in particular, see Securities Act of 1933, Securities Exchange Act of 1934, and Uniform Securities Act.

===== Sarbanes–Oxley Act =====
The Sarbanes–Oxley Act of 2002 (SOX) was enacted in the wake of a series of high-profile corporate scandals, which cost investors billions of dollars.<ref>{{Cite web |title=Corporate Governance: The Business Management Principles |url=https://www.ionos.ca/startupguide/grow-your-business/corporate-governance/ |access-date=2022-07-25 |website=IONOS Startupguide |date=29 December 2021 |language=en}}</ref> It established a series of requirements that affect corporate governance in the US and influenced similar laws in many other countries. SOX contained many other elements, but provided for several changes that are important to corporate governance practices:
* The [[Organization:Public Company Accounting Oversight Board|Public Company Accounting Oversight Board]] (PCAOB) 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.
* The [[Social:Chief executive officer|chief executive officer]] (CEO) and [[Social:Chief financial officer|chief financial officer]] (CFO) attest to the financial statements. Prior to the law, CEOs had claimed in court they hadn't reviewed the information as part of their defense.
* Board audit committees have members that are independent and disclose whether or not at least one is a financial expert, or reasons why no such expert is on the audit committee.
* External audit firms cannot provide certain types of consulting services and must rotate their lead partner every 5 years. Further, an audit firm cannot audit a company if those in specified senior management roles worked for the auditor in the past year. Prior 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.<ref>{{Cite web|url=http://www.gpo.gov/fdsys/pkg/PLAW-107publ204/pdf/PLAW-107publ204.pdf|title=Text of the Sarbanes-Oxley Act of 2002|access-date=Aug 11, 2020}}</ref>

==== Foreign Corrupt Practices Act ====
The U.S. passed the Foreign Corrupt Practices Act (FCPA) in 1977, with subsequent modifications. This law made it illegal to bribe government officials and required corporations to maintain adequate accounting controls. It is enforced by the U.S. Department of Justice and the Securities and Exchange Commission (SEC). Substantial civil and criminal penalties have been levied on corporations and executives convicted of bribery.<ref>{{Cite web|url=https://www.justice.gov/criminal-fraud/fcpa-guidance|title=The FCPA Guide|date=June 9, 2015|website=www.justice.gov}}</ref>

== Codes and guidelines ==
Corporate governance principles and codes have been developed in different countries and issued from stock exchanges, corporations, institutional investors, or associations (institutes) of directors and managers with the support of governments and international organizations. As a rule, compliance with these governance recommendations is not mandated by law, although the codes linked to stock exchange [[Finance:Stock exchange#Listing requirements|listing requirements]] may have a coercive effect.

=== Organisation for Economic Co-operation and Development principles ===
One of the most influential guidelines on corporate governance are the [[Organization:G20|G20]]/[[Organization:OECD|OECD]] Principles of Corporate Governance, first published as the OECD Principles in 1999, revised in 2004 and revised again and endorsed by the G20 in 2015.<ref name="oecd.org">{{cite web|title= OECD Principles of Corporate Governance, 2004|url= http://www.oecd.org/daf/ca/oecdprinciplesofcorporategovernance.htm|work= [[Organization:OECD|OECD]]|access-date= 2013-05-18}}</ref> The Principles are often referenced by countries developing local codes or guidelines. Building on the work of the OECD, other international organizations, private sector associations and more than 20 national corporate governance codes formed the {{wipe|United Nations}} Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) to produce their Guidance on Good Practices in Corporate Governance Disclosure.<ref>{{Cite web|url=http://www.unctad.org/en/docs/iteteb20063_en.pdf|title=Guidance on Good Practices in Corporate Governance Disclosure.|access-date=2008-04-04|archive-date=2009-11-26|archive-url=https://web.archive.org/web/20091126031629/http://www.unctad.org/en/docs/iteteb20063_en.pdf|url-status=dead}}</ref> This internationally agreed<ref>{{Cite web|url=http://www.unctad.org/en/docs/c2isard31_en.pdf|title=TD/B/COM.2/ISAR/31<!-- Bot generated title -->|access-date=2008-04-04|archive-date=2017-01-26|archive-url=https://web.archive.org/web/20170126044637/http://unctad.org/en/docs/c2isard31_en.pdf|url-status=dead}}</ref> benchmark consists of more than fifty distinct disclosure items across five broad categories:<ref>{{cite web|title=International Standards of Accounting and Reporting, Corporate Governance Disclosure |url=http://www.unctad.org/Templates/Page.asp?intItemID=2920&lang=1 |work=[[Organization:United Nations Conference on Trade and Development|United Nations Conference on Trade and Development]] |access-date=2008-11-09 |url-status=dead |archive-url=https://web.archive.org/web/20081123092039/http://www.unctad.org/Templates/Page.asp?intItemID=2920&lang=1 |archive-date=2008-11-23 }}</ref>
* Auditing
* Board and management structure and process
* Corporate responsibility and compliance in organization
* Financial transparency and information disclosure
* Ownership structure and exercise of control rights

The [[Organization:OECD|OECD]] Guidelines on Corporate Governance of State-Owned Enterprises<ref>{{cite web |url=https://www.oecd.org/daf/ca/guidelines-corporate-governance-soes.htm |title=OECD Guidelines on Corporate Governance of State-Owned Enterprises] |website=oecd.org}}</ref> are complementary to the G20/OECD Principles of Corporate Governance,<ref>{{cite web |url=https://www.oecd.org/corporate/principles-corporate-governance.htm |title=G20/OECD Principles of Corporate Governance |website=oecd.org}}</ref> providing guidance tailored to the corporate governance challenges unique to [[Finance:State-owned enterprise|state-owned enterprise]]s.

=== Stock exchange listing standards ===
Companies listed on the [[Company:New York Stock Exchange|New York Stock Exchange]] (NYSE) and other stock exchanges are required to meet certain governance standards. For example, the NYSE Listed Company Manual requires, among many other elements:
* [[Finance:Independent director|Independent director]]s: "Listed companies must have a majority of independent directors&nbsp;... Effective boards of directors exercise independent judgment in carrying out their responsibilities. Requiring a majority of independent directors will increase the quality of board oversight and lessen the possibility of damaging conflicts of interest." (Section 303A.01) An independent director is not part of management and has no "material financial relationship" with the company.
* Board meetings that exclude management: "To 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 executive sessions without management." (Section 303A.03)
* Boards organize their members into committees with specific responsibilities per defined charters. "Listed companies must have a nominating/corporate governance committee composed entirely of independent directors." This committee is responsible for nominating new members for the board of directors. Compensation and Audit Committees are also specified, with the latter subject to a variety of listing standards as well as outside regulations.

=== Other guidelines ===
The investor-led organisation International Corporate Governance Network (ICGN) was set up by individuals centered around the ten largest pension funds in the world 1995. The aim is to promote global corporate governance standards. The network is led by investors that manage 18 trillion dollars, and members are located in fifty different countries. ICGN has developed a suite of global guidelines ranging from shareholder rights to business ethics.<ref>{{Cite web|url=http://icgn.flpbks.com/icgn_global_governance_principles/ICGN_Global_Governance_Principles.pdf|title=ICGN Global Governance Principles|date=2017|access-date=21 May 2019|archive-date=28 July 2020|archive-url=https://web.archive.org/web/20200728234632/http://icgn.flpbks.com/icgn_global_governance_principles/ICGN_Global_Governance_Principles.pdf|url-status=dead}}</ref>

The World Business Council for Sustainable Development (WBCSD) has done work on corporate governance, particularly on accounting and reporting.<ref>{{cite web |url=http://www.wbcsd.org/Pages/EDocument/EDocumentDetails.aspx?ID%3D80%26NoSearchContextKey%3Dtrue |archive-url=http://arquivo.pt/wayback/20160515141435/http%3A//www.wbcsd.org/Pages/EDocument/EDocumentDetails.aspx?ID%3D80%26NoSearchContextKey%3Dtrue |archive-date=2016-05-15 |title=Accountability & reporting: New accountabilities, new networks, new leaders}} In 2004 WBCSD released [https://archive.today/20140625080626/http://www.wbcsd.org/Pages/EDocument/EDocumentDetails.aspx?ID=15610&NoSearchContextKey=true Issue Management Tool: Strategic challenges for business in the use of corporate responsibility codes, standards, and frameworks]. This document offers general information and a perspective from a business association/think-tank on a few key codes, standards and frameworks relevant to the sustainability agenda.</ref> In 2009, the [[Organization:International Finance Corporation|International Finance Corporation]] and the UN Global Compact released a report, "Corporate Governance: the Foundation for Corporate Citizenship and Sustainable Business",<ref>{{cite web |url=https://www.unglobalcompact.org/docs/issues_doc/Corporate_Governance/Corporate_Governance_IFC_UNGC.pdf |title=Corporate Governance: the Foundation for Corporate Citizenship and Sustainable Business |website=unglobalcompact.org}}</ref> linking the environmental, social and governance responsibilities of a company to its financial performance and long-term sustainability.

Most codes are largely voluntary. An issue raised in the U.S. since the 2005 Disney decision<ref>{{Cite web|url=http://www.akingump.com/docs/publication/795.pdf|archive-url=https://web.archive.org/web/20070615105810/http://www.akingump.com/docs/publication/795.pdf|url-status=dead|title=The Disney Decision of 2005 and the precedent it sets for corporate governance and fiduciary responsibility, Kuckreja, Akin Gump, Aug 2005|archive-date=June 15, 2007}}</ref> 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. For example, 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.{{citation needed|date=June 2012}}

In 2021, the first ever [[International standard|international standard]], ISO 37000, was published as guidance for good governance.<ref>{{cite web |title=First International Benchmark for Good Governance |url=https://www.iso.org/news/ref2717.html |website=iso.org |date=15 September 2021 |publisher=International Organization for Standardization}}</ref> The guidance places emphasis on purpose which is at the heart of all organizations, i.e. a meaningful reason to exist. Values inform both the purpose and the way the purpose is achieved.<ref>{{cite web |title=ISO 37000 - the first ever international benchmark for good governance |url=https://committee.iso.org/ISO_37000_Governance |website=committee.iso.org |publisher=ISO/TC 309}}</ref>

== History ==
=== United States ===
Robert E. Wright argued in ''Corporation Nation'' (2014) that the governance of early U.S. corporations, of which over 20,000 existed by the Civil War of 1861–1865, was superior to that of corporations in the late 19th and early 20th centuries because early corporations governed themselves like "republics", replete with numerous "checks and balances" against fraud and against usurpation of power by managers or by large shareholders.<ref>Robert E. Wright, Corporation Nation (Philadelphia: University of Pennsylvania Press, 2014).</ref> (The term [[Finance:Robber baron (industrialist)|"robber baron"]] became particularly associated with US corporate figures in the [[Finance:Gilded Age|Gilded Age]]—the late 19th century.)

In the immediate aftermath of the [[Finance:Wall Street Crash of 1929|Wall Street Crash of 1929]] legal scholars such as Adolf Augustus Berle, Edwin Dodd, and Gardiner C. Means pondered on the changing role of the modern corporation in society.<ref>Berle and Means' ''The Modern Corporation and Private Property'', (1932, Macmillan)</ref> From the Chicago school of economics, Ronald Coase<ref>Ronald Coase, ''The Nature of the Firm'' (1937)</ref> introduced the notion of transaction costs into the understanding of why firms are founded and how they continue to behave.<ref name="catalogue.pearsoned.co.uk">Sytse Douma & Hein Schreuder (2013) "Economic Approaches to Organizations", 5th edition, London: Pearson [http://catalogue.pearsoned.co.uk/educator/product/Economic-Approaches-to-Organisations/9780273735298.page] {{Webarchive|url=https://web.archive.org/web/20150515235236/http://catalogue.pearsoned.co.uk/educator/product/Economic-Approaches-to-Organisations/9780273735298.page |date=2015-05-15 }}</ref>

US economic expansion through the emergence of multinational corporations after World War&nbsp;II (1939–1945) saw the establishment of the managerial class. Several Harvard Business School management professors studied and wrote about the new class: Myles Mace (entrepreneurship), Alfred D. Chandler, Jr. (business history), Jay Lorsch (organizational behavior) and Elizabeth MacIver (organizational behavior). According to Lorsch and MacIver "many large corporations have dominant control over business affairs without sufficient accountability or monitoring by their board of directors".{{citation needed|date=June 2012}}

In the 1980s, [[Biography:Eugene Fama|Eugene Fama]] and Michael Jensen<ref>[[Biography:Eugene Fama|Eugene Fama]] and Michael Jensen ''The Separation of Ownership and Control'', (1983, Journal of Law and Economics)</ref> established the [[Social:Principal–agent problem|principal–agent problem]] as a way of understanding corporate governance: the firm is seen as a series of contracts.<ref>{{cite journal |last1=Eisenhardt |first1=Kathleen M. |title=Agency Theory: An Assessment and Review |journal=Academy of Management Review |date=January 1989 |volume=14 |issue=1 |pages=57–74 |doi=10.5465/amr.1989.4279003 }}</ref>

In the period from 1977 to 1997, corporate directors' duties in the U.S. expanded beyond their traditional legal responsibility of duty of loyalty to the corporation and to its shareholders.<ref>Crawford, Curtis J. (2007). The Reform of Corporate Governance: Major Trends in the U.S. Corporate Boardroom, 1977–1997. doctoral dissertation, Capella University. {{cite web |url=http://xceo.net/about_us/crawford_dissertation.cfm |title=Home |access-date=2011-09-21 |url-status=dead |archive-url=http://arquivo.pt/wayback/20160517010633/http://xceo.net/about_us/crawford_dissertation.cfm |archive-date=2016-05-17 }}</ref> {{vague|date=October 2012}}

In the first half of the 1990s, the issue of corporate governance in the U.S. received considerable press attention due to a spate of CEO dismissals (for example, at [[Company:IBM|IBM]], [[Company:Kodak|Kodak]], and [[Company:Honeywell|Honeywell]]) by their boards. The California Public Employees' Retirement System (CalPERS) 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 cozy relationships between the CEO and the board of directors (for example, by the unrestrained issuance of stock options, not infrequently [[Finance:Options backdating|back-dated]]).

In the early 2000s, the massive bankruptcies (and criminal malfeasance) of [[Company:Enron|Enron]] and Worldcom, as well as lesser corporate scandals (such as those involving Adelphia Communications, AOL, Arthur Andersen, Global Crossing, and [[Company:Tyco International|Tyco]]) led to increased political interest in corporate governance. This was reflected in the passage of the Sarbanes–Oxley Act of 2002. Other triggers for continued interest in the corporate governance of organizations included the [[Finance:Financial crisis of 2007–08|financial crisis of 2008/9]] and the level of CEO pay.<ref name="ReferenceA">Steven N. Kaplan, Executive Compensation and Corporate Governance in the U.S.: Perceptions, Facts and Challenges, Chicago Booth Paper No. 12-42, Fama-Miller Center for Research in Finance, Chicago, July 2012</ref>

Some corporations have tried to burnish their ethical image by creating whistle-blower protections, such as anonymity. In the case of [[Company:Citigroup|Citi]], they call this the Ethics Hotline.<ref>{{Cite web|title=Citi {{!}} Investor Relations {{!}} Ethics Hotline|url=https://www.citigroup.com/citi/investor/ethics_hotline.html|access-date=2020-06-15|website=www.citigroup.com}}</ref> Though it is unclear whether firms such as Citi take offences reported to these hotlines seriously or not.

=== East Asia ===
In 1997 the East Asian Financial Crisis severely affected the economies of Thailand, Indonesia, {{wipe|South Korea}}, Malaysia, and the {{wipe|Philippines}} through the exit of foreign capital after property assets collapsed. The lack of corporate governance mechanisms in these countries highlighted the weaknesses of the institutions in their economies.{{citation needed|date=June 2017}}

=== Saudi Arabia ===
In November 2006 the Capital Market Authority (Saudi Arabia) (CMA) issued a corporate governance code in the [[Social:Arabic language|Arabic language]].<ref>{{cite thesis |id={{ProQuest|305122134}} |last1=Al-Hussain |first1=Adel Hassan |year=2009 |title=Corporate governance structure efficiency and bank performance in Saudi Arabia }}</ref> The Kingdom of Saudi Arabia has made considerable progress with respect to the implementation of viable and culturally appropriate governance mechanisms (Al-Hussain & Johnson, 2009).<ref>{{cite journal |last1=Robertson |first1=Christopher J. |last2=Diyab |first2=Abdulhamid A. |last3=Al-Kahtani |first3=Ali |title=A cross-national analysis of perceptions of corporate governance principles |journal=International Business Review |date=February 2013 |volume=22 |issue=1 |pages=315–325 |doi=10.1016/j.ibusrev.2012.04.007 }}</ref>{{request quotation|date=April 2016}}

Al-Hussain, A. and Johnson, R. (2009) found a strong relationship between the efficiency of corporate governance structure and Saudi bank performance when using [[Finance:Return on assets|return on assets]] as a performance measure with one exception—that government and local ownership groups were not significant. However, using [[Rate of return|rate of return]] as a performance measure revealed a weak positive relationship between the efficiency of corporate governance structure and bank performance.<ref>Al-Hussain, A. H., & Johnson, R. L. (2009). Relationship between corporate governance efficiency and Saudi banks' performance. The Business Review, 14, 111–117. Retrieved from http://www.jaabc.com/brcv14n1preview.html</ref>

== List of countries by corporate governance ==
This is a list of countries by average overall rating in corporate governance:<ref>{{Cite web|url=http://www.gmiratings.com/Images/GMI_Country_Rankings_as_of_10_27_2010.pdf|date=Jan 25, 2011|archive-url=https://web.archive.org/web/20110125201141/http://www.gmiratings.com/Images/GMI_Country_Rankings_as_of_10_27_2010.pdf|access-date=Aug 11, 2020|archive-date=2011-01-25|title=ESG Investing }}</ref>

{| class="sortable wikitable"
|- bgcolor="#ececec" valign=top
! Rank !! Country !! Companies !! Average overall rating
|-
| 1 || {{flag|United Kingdom}} || 395 ||  7.60
|-
| 2 || {{flag|Canada}} || 132 ||  7.36
|-
| 3 || {{flag|Ireland}} || 421 ||  7.21
|-
| 4 || {{flag|United States}} || 1,761 ||  7.16
|-
| 5 || {{flag|New Zealand}} || 100 || 6.70
|-
| 6 || {{flag|Australia}} || 194 ||  6.65
|-
| 7 || {{flag|Netherlands}} || 30 || 6.45
|-
| 8 || {{flag|Finland}} || 28 ||  6.38
|-
| 9 || {{flag|South Africa}} || 43 ||  6.09
|-
| 10 || {{flag|Sweden}} || 40 ||  5.88
|-
| 11 || {{flag|Switzerland}} || 51 || 5.86
|-
| 12 || {{flag|Germany}} || 79 ||  5.80
|-
| 13 || {{flag|Austria}} || 22 ||  5.77
|-
| 14 || {{flag|Italy}} || 52 ||  5.25
|-
| 15 || {{flag|Poland}} || 14 ||  5.11
|-
| 16 || {{flag|Norway}} || 26 ||  4.90
|-
| 17 || {{flag|Singapore}} || 52 || 4.82
|-
| 18 || {{flag|Denmark}} || 24 ||  4.79
|-
| 19 || {{flag|France}} || 100 || 4.70
|-
| 20 || {{flag|India}} || 56 || 4.54
|-
| 21 || {{flag|Belgium}} || 24 || 4.35
|-
| 22 || {{flag|Greece}} || 24 || 4.25
|-
| 23 || {{flag|Malaysia}} || 28 || 4.21
|-
| 24 || {{flag|Thailand}} || 15 || 4.20
|-
| 25 || {{flag|Portugal}} || 11 || 4.14
|-
| 26 || {{flag|Hong Kong}} || 72 || 4.06
|-
| 27 || {{flag|Spain}} || 43 || 3.97
|-
| 28 || {{flag|South Korea}} || 88 || 3.93
|-
| 29 || {{flag|Brazil}} || 67 || 3.91
|-
| 30 || {{flag|Russia}} || 25 || 3.90
|-
| 31 || {{flag|Taiwan}} || 78 || 3.84
|-
| 32 || {{flag|Israel}} || 17 || 3.79
|-
| 33 || {{flag|Turkey}} || 17 || 3.62
|-
| 34 || {{flag|China}} || 91 || 3.37
|-
| 35 || {{flag|Japan}} || 392 || 3.30
|-
| 36 || {{flag|Indonesia}} || 21 || 3.14
|-
| 37 || {{flag|Mexico}} || 21 || 2.43
|-
| 38 || {{flag|Chile}} || 15 || 2.13
|}

== Stakeholders ==
Key parties involved in corporate governance include stakeholders such as the board of directors, management and shareholders. External stakeholders such as creditors, auditors, customers, suppliers, government agencies, and the community at large also exert influence. The agency view of the corporation posits that the shareholder forgoes decision rights (control) and entrusts the manager to act in the shareholders' best (joint) interests. Partly 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 [[Finance:Controlling interest|controlling shareholder]].<ref>Sytse Douma and Hein Schreuder, Economic Approaches to Organizations, 6th edition, Harlow: Pearson, 2017</ref>

In private for-profit corporations, shareholders elect the board of directors to represent their interests. In the case of nonprofits, stakeholders may have some role in recommending or selecting board members, but typically the board itself decides who will serve on the board as a 'self-perpetuating' board.<ref>{{cite journal |last1=Dent |first1=George W. |title=Corporate Governance Without Shareholders: A Cautionary Lesson From Non-Profit Organizations |journal=Delaware Journal of Corporate Law |date=1 June 2013 |volume=39 |issue=1 |pages=93–116 |id={{ProQuest|1716891093}} |ssrn=2285730 }}</ref> The degree of leadership that the board has over the organization varies; in practice at large organizations, the executive management, principally the CEO, drives major initiatives with the oversight and approval of the board.<ref>{{Cite web|url=https://hbswk.hbs.edu/archive/4735.html|title=Why Nonprofits Have a Board Problem – HBS Working Knowledge – Harvard Business School|publisher=Harvard Business School|access-date=2016-08-08}}{{dead link|date=April 2023|bot=medic}}{{cbignore|bot=medic}}</ref>

=== Responsibilities of the board of directors ===
Former Chairman of the Board of [[Company:General Motors|General Motors]] John G. Smale wrote in 1995: "The board is responsible for the successful perpetuation of the corporation.  That responsibility cannot be relegated to management."<ref name="HBRGov1">{{cite book |last= |first= |title=HBR on Corporate Governance |publisher=Harvard Business School Press |year=2000 |isbn=978-1-57851-237-9}}</ref> A [[Organization:Board of directors|board of directors]] is expected to play a key role in corporate governance. The board has responsibility for: CEO selection and succession; providing feedback to management on the organization's strategy; compensating senior executives; monitoring financial health, performance and risk; and ensuring accountability of the organization to its investors and authorities. Boards typically have several committees (e.g., Compensation, Nominating and Audit) to perform their work.<ref name="Charan 2005">{{cite book | last = Charan | first = Ram |  year = 2005 | title = Boards that Deliver | publisher = Jossey-Bass | isbn = 978-0-7879-7139-7}}</ref>

The OECD Principles of Corporate Governance (2004) describe the responsibilities of the board; some of these are summarized below:<ref name="oecd.org" />
* Board members should be informed and act ethically and in good faith, with due diligence and care, in the best [[Finance:Interest of the company|interest of the company]] and its shareholders.
* Review and guide corporate strategy, objective setting, major plans of action, risk policy, capital plans, and annual budgets.
* Oversee major acquisitions and divestitures.
* Select, compensate, monitor and replace key executives and oversee succession planning.
* Align key executive and board remuneration (pay) with the longer-term [[Finance:Interest of the company|interest of the company]] and its shareholders.
* Ensure a formal and transparent board member nomination and election process.
* Ensure the integrity of the corporation's accounting and financial reporting systems, including their independent audit.
* Ensure appropriate systems of internal control are established.
* Oversee the process of disclosure and communications.
* Where committees of the board are established, their mandate, composition and working procedures should be well-defined and disclosed.

=== Stakeholder interests ===
All parties to corporate governance have an interest, whether direct or indirect, in the financial performance of the corporation. Directors, workers and management receive salaries, benefits and reputation, while investors expect to receive financial returns. For lenders, it is specified interest payments, while returns to equity 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 quality; suppliers are concerned with compensation for their goods or services, and possible continued trading relationships. These parties provide value to the corporation in the form of financial, physical, human and other forms of capital. Many parties may also be concerned with [[Philosophy:Corporate social responsibility|corporate social performance]].{{citation needed|date=June 2012}}

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 expected outcomes. When 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. When 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. There is substantial interest in how external systems and institutions, including markets, influence corporate governance.<ref name="Routledge">{{cite book|author1=Mia Mahmudur Rahim|author2=Sanjaya Kuruppu|editor1-last=Franklin|editor1-first=Ngwu|editor2-last=Onyeka|editor2-first=Osuji|editor3-last=Frank|editor3-first=Stephen|title=Corporate Governance in Developing and Emerging Markets|date=2016|publisher=Routledge|location=London|chapter-url=http://www.tandfebooks.com/isbn/9781315666020|chapter=Corporate Governance in India: The Potential for Ghandism|doi=10.4324/9781315666020 |isbn=9781315666020 }}</ref>

=== "Absentee landlords" vs. capital stewards ===
In 2016 the director of the World Pensions Council (WPC) said that "institutional asset owners now seem more eager to take to task [the] negligent CEOs" of the companies whose shares they own.<ref name="Analyse Financière">{{cite news |first1=M. Nicolas J. |last1=Firzli |title= Beyond SDGs: Can Fiduciary Capitalism and Bolder, Better Boards Jumpstart Economic Growth? |url= https://www.academia.edu/28982570 |access-date=1 November 2016 |work=Analyse Financière| date=October 2016}}</ref>

This development is part of a broader trend towards more fully exercised asset ownership—notably from the part of the [[Organization:Board of directors|boards of directors]] ('trustees') of large UK, Dutch, Scandinavian and Canadian pension investors:

{{Blockquote|No longer 'absentee landlords', {{bracket|pension fund}} trustees have started to exercise more forcefully their [[Philosophy:Governance|governance]] prerogatives across the boardrooms of {{wipe|United Kingdom}}, [[Organization:Benelux|Benelux]] and America: coming together through the establishment of engaged pressure groups […] to 'shift the [whole economic] system towards sustainable investment'.<ref name="Analyse Financière"/>}}

This could eventually put more pressure on the [[Company:CEO|CEO]]s of [[Finance:Public company|publicly listed companies]], as "more than ever before, many [North American,] UK and European Union [[Social:Trustee|pension trustees]] speak enthusiastically about flexing their [[Social:Fiduciary|fiduciary]] muscles for the UN's Sustainable Development Goals", and other [[Finance:Environmental, social and corporate governance|ESG-centric]] investment practices.<ref>{{cite news|last1=Firzli|first1=Nicolas|title=Greening, Governance and Growth in the Age of Popular Empowerment|url=http://www.pensions-expert.com/Special-Features/The-Cut/Greening-governance-and-growth-in-the-age-of-popular-empowerment|access-date=27 April 2018|work=FT Pensions Experts|publisher=Financial Times|date=3 April 2018}}</ref>

==== United Kingdom ====
In Britain, "The widespread social disenchantment that followed the [2008–2012] great recession had an impact" on all stakeholders, including pension fund board members and investment managers.<ref name="Pensions Age">{{cite news |first1=Louise |last1=Farrand |title= Investing in Change |url= http://www.pensionsage.com/pa/images/activism_Nov2016.pdf|access-date=2 April 2017 |work=Pensions Age| date=November 2016}}</ref>

Many of the UK's largest pension funds are thus already active stewards of their assets, engaging with corporate boards and speaking up when they think it is necessary.<ref name="Pensions Age"/>

=== 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 Europe, ownership is not necessarily equivalent to control due to the existence of e.g. dual-class shares, ownership pyramids, voting coalitions, proxy votes and clauses in the articles of association that confer additional voting rights to long-term shareholders.<ref name="Goergen, Marc 2012">Goergen, Marc, ''International Corporate Governance'', Prentice Hall, Harlow, January, 2012, Chapter 3, {{ISBN|978-0-273-75125-0}}</ref> Ownership is typically defined as the ownership of cash flow rights whereas control refers to ownership of control or voting rights.<ref name="Goergen, Marc 2012"/> Researchers often "measure" control and ownership structures by using some observable measures of control and ownership concentration or the extent of inside control and ownership. Some features or types of control and ownership structure involving [[Social:Corporate group|corporate group]]s include pyramids, [[Social:Cross ownership|cross-shareholdings]], rings, and webs. German "concerns" (Konzern) are legally recognized corporate groups with complex structures. Japanese [[Social:Keiretsu|keiretsu]] (系列) and South Korean chaebol (which tend to be family-controlled) are corporate groups which consist of complex interlocking business relationships and shareholdings. Cross-shareholding is an essential feature of keiretsu and chaebol groups. Corporate engagement with shareholders and other stakeholders can differ substantially across different control and ownership structures.

==== Difference in firm size ====
In smaller companies founder‐owners often play a pivotal role in shaping corporate value systems that influence companies for years to come. In larger companies that separate ownership and control, managers and boards come to play an influential role.<ref>{{cite journal |title=Corporate values and corporate governance | year=2004 |url=https://www.emerald.com/insight/content/doi/10.1108/14720700410558862/full/html?fullSc=1 |publisher=Emerald Insight| doi=10.1108/14720700410558862 | last1=Thomsen | first1=Steen | journal=Corporate Governance: The International Journal of Business in Society | volume=4 | issue=4 | pages=29–46 }}</ref> This is in part due to the distinction between employees and shareholders in large firms, where labour forms part of the corporate organization to which it belongs whereas shareholders, creditors and investors act outside of the organization of interest.

==== Family control ====
Family interests dominate ownership and control structures of some corporations, and it has been suggested that the oversight of family-controlled corporations are superior to corporations "controlled" by institutional investors (or with such diverse share ownership that they are controlled by management). A 2003 ''Business Week'' study said: "Forget the celebrity CEO. Look beyond Six Sigma and the latest technology fad. One of the biggest strategic advantages a company can have, it turns out, is blood lines."<ref>{{Cite web|url=http://www.businessweek.com/magazine/content/03_45/b3857002.htm|archive-url=https://web.archive.org/web/20080724055953/http://www.businessweek.com/magazine/content/03_45/b3857002.htm|url-status=dead|title=Special report: Family, Inc. Surprise! One-third of the S&P 500 companies have founding families involved in management. And those are usually the best performers|archive-date=July 24, 2008}}</ref> A 2007 study by [[Company:Credit Suisse|Credit Suisse]] found that European companies in which "the founding family or manager retains a stake of more than 10 per cent of the company’s capital enjoyed a superior performance over their respective sectoral peers", reported ''[[Social:Financial Times|Financial Times]]''.<ref name="Flood">{{cite news |last=Flood |first=Chris |date=29 January 2007 |title=Advantages with family values |url=https://www.ft.com/content/3b57193c-afc2-11db-94ab-0000779e2340 |archive-url=https://ghostarchive.org/archive/20221210201242/https://www.ft.com/content/3b57193c-afc2-11db-94ab-0000779e2340 |archive-date=2022-12-10 |url-access=subscription |newspaper=[[Social:Financial Times|Financial Times]] |access-date=2019-10-07 |url-status=live }}</ref> Since 1996, this superior performance amounted to 8% per year.<ref name="Flood"/>

==== Diffuse shareholders ====
The significance of institutional investors varies substantially across countries. In developed Anglo-American countries (Australia, Canada, New Zealand, U.K., U.S.), institutional investors dominate the market for stocks in larger corporations. While the majority of the shares in the Japanese market are held by financial companies and industrial corporations, these are not institutional investors if their holdings are largely with-on group.{{citation needed|date=June 2012}}

The largest funds of invested money or the largest investment management firm for corporations are designed to maximize the benefits of diversified investment by investing in a very large number of different corporations with sufficient [[Finance:Market liquidity|liquidity]]. The idea is this strategy will largely eliminate individual firm [[Finance:Financial risk|financial]] or other risk. A consequence 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 changes decide they will likely be costly because of "[[Finance:Golden handshake|golden handshake]]s" or the effort required, they will simply sell out their investment.{{citation needed|date=June 2012}}

=== Proxy access ===
Particularly in the United States, proxy access allows shareholders to nominate candidates which appear on the [[Finance:Proxy statement|proxy statement]], as opposed to restricting that power to the nominating committee. The SEC had attempted a proxy access rule for decades,<ref name=":0">{{Cite web|url=https://corpgov.law.harvard.edu/2019/02/01/the-latest-on-proxy-access/|title=The Latest on Proxy Access|last1=Gregory|first1=Holly J.|last2=Grapsas|first2=Rebecca|website=corpgov.law.harvard.edu|language=en-US|access-date=2019-08-29|last3=Holl|first3=Claire|last4=LLP|first4=Sidley Austin|last5=on|date=February 2019 }}</ref> and the United States Dodd–Frank Wall Street Reform and Consumer Protection Act specifically allowed the SEC to rule on this issue, however, the rule was struck down in court.<ref name=":0" /> Beginning in 2015, proxy access rules began to spread driven by initiatives from major institutional investors, and as of 2018, 71% of S&P 500 companies had a proxy access rule.<ref name=":0" />

== Mechanisms and controls ==
Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from [[Moral hazard|moral hazard]] and [[Finance:Adverse selection|adverse selection]]. There are both internal monitoring systems and external monitoring systems.<ref>Sytse Douma & Hein Schreuder (2013) "Economic Approaches to Organizations", 5th edition, chapter 15, London: Pearson [http://catalogue.pearsoned.co.uk/educator/product/Economic-Approaches-to-Organisations/9780273735298.page] {{Webarchive|url=https://web.archive.org/web/20150515235236/http://catalogue.pearsoned.co.uk/educator/product/Economic-Approaches-to-Organisations/9780273735298.page |date=2015-05-15 }}</ref> Internal monitoring can be done, for example, by one (or a few) large shareholder(s) in the case of privately held companies or a firm belonging to a business group. Furthermore, the various board mechanisms provide for internal monitoring. External monitoring of managers' behavior occurs when an independent third party (e.g. the external auditor) attests the accuracy of information provided by management to investors. Stock analysts and debt holders may also conduct such external monitoring. An ideal monitoring and control system should regulate both motivation and ability, while providing incentive alignment toward corporate goals and objectives. Care should be taken that incentives are not so strong that some individuals are tempted to cross lines of ethical behavior, for example by manipulating revenue and profit figures to drive the share price of the company up.<ref name="catalogue.pearsoned.co.uk"/>

=== Internal corporate governance controls ===
Internal corporate governance controls monitor activities and then take corrective actions to accomplish organisational goals. Examples include:
* ''Monitoring by the board of directors'': The board of directors, with its legal authority to hire, fire and compensate top management, safeguards invested capital. Regular board meetings allow potential problems to be identified, discussed and avoided. Whilst non-executive directors are thought to be more independent, they may not always result in more effective corporate governance and may not increase performance.<ref>Bhagat & Black, "The Uncertain Relationship Between Board Composition and Firm Performance", 54 Business Lawyer</ref> Different board structures are optimal for different firms. Moreover, the ability of the board to monitor the firm's executives is a function of its access to information. Executive directors possess superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes, ''ex ante''. It could be argued, therefore, that executive directors look beyond the financial criteria.{{citation needed|date=June 2012}}
* ''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 objectives related to reliable financial reporting, operating efficiency, and compliance with laws and regulations. Internal auditors are personnel within an organization who test the design and implementation of the entity's internal control procedures and the reliability of its financial reporting.{{citation needed|date=June 2012}}
* ''Balance of power'': The simplest balance of power is very common; require that the president be a different person from the treasurer. This application of separation of power is further developed in companies where separate divisions check and balance each other's actions. One 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.{{citation needed|date=June 2012}}
* ''Remuneration'': Performance-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 [[Finance:Share|shares]] and [[Finance:Employee stock option|share option]]s, superannuation or other benefits. Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behavior, and can elicit myopic behavior.{{citation needed|date=June 2012}}
* ''Monitoring by large shareholders'' and/or ''monitoring by banks 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.<ref>Goergen, Marc, ''International Corporate Governance'', Prentice Hall, Harlow, January, 2012, pp. 104–105, {{ISBN|978-0-273-75125-0}}</ref>

In publicly traded U.S. corporations, boards of directors are largely ''chosen'' by the president/CEO, and the president/CEO often takes the chair of the board position for him/herself (which makes it much more difficult for the institutional owners to "fire" him/her). The practice of the CEO also being the chair of the Board is fairly common in large American corporations.<ref>{{cite journal |last1=Lin |first1=Tom |title=Corporate Governance of Iconic Executives, The |journal=Notre Dame Law Review |date=1 November 2011 |volume=87 |issue=1 |pages=351 |url=https://scholarship.law.nd.edu/ndlr/vol87/iss1/7/ |ssrn=2040922 }}</ref>

While this practice is common in the U.S., it is relatively rare elsewhere. In the U.K., successive codes of best practice have recommended against duality.{{citation needed|date=June 2012}}

=== External corporate governance controls ===
External corporate governance controls the external stakeholders' exercise over the organization. Examples include:
* competition
* debt covenants
* demand for and assessment of performance information (especially financial statements)
* government regulations
* managerial labour market
* media pressure
* takeovers
* proxy firms
* mergers and acquisitions

=== Financial reporting and the independent auditor ===
The board of directors has primary responsibility for the corporation's internal and external financial reporting functions. The [[Social:Chief executive officer|chief executive officer]] and [[Social:Chief financial officer|chief financial officer]] are crucial participants, and boards usually have a high degree of reliance on them for the integrity and supply of accounting information. They oversee the internal accounting systems, and are dependent on the corporation's accountants and internal auditors.

Current accounting rules under International Accounting Standards and U.S. GAAP allow managers some choice in determining the methods of measurement and criteria for recognition of various financial reporting elements. The potential exercise of this choice to improve apparent performance increases the information risk for users. Financial reporting fraud, including non-disclosure and deliberate falsification of values also contributes to users' information risk. To reduce this risk and to enhance the perceived integrity of financial reports, corporation financial reports must be audited by an independent external auditor who issues a report that accompanies the financial statements.

One area of concern is whether the auditing firm acts as both the independent auditor and management consultant to the firm they are auditing. This may result in a conflict of interest which places the integrity of financial reports in doubt due to client pressure to appease management. The 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 United States in the form of the Sarbanes–Oxley Act (following numerous corporate scandals, culminating with the [[Company:Enron scandal|Enron scandal]]) prohibit accounting firms from providing both auditing and management consulting services. Similar provisions are in place under clause 49 of Standard Listing Agreement in India.

== Systems perspective ==
A basic comprehension of corporate positioning on the market can be found by looking at which market area or areas a corporation acts in, and which stages of the respective value chain for that market area or areas it encompasses.<ref>{{Cite journal |date=2022-01-01 |title=Trade credit and profitability in production networks |url=https://www.sciencedirect.com/science/article/pii/S0304405X21002488 |journal=Journal of Financial Economics |language=en |volume=143 |issue=1 |pages=593–618 |doi=10.1016/j.jfineco.2021.05.054 |issn=0304-405X |last1=Gofman |first1=Michael |last2=Wu |first2=Youchang }}</ref><ref>{{Cite journal |doi = 10.1108/IJLM-08-2012-0083|title = The interplay of different types of governance in horizontal cooperations|journal = The International Journal of Logistics Management|volume = 26|issue = 2|pages = 401–423|year = 2015|url = https://research-api.cbs.dk/ws/files/44030905/andreas_wieland_interplay_different_types_postprint.pdf|hdl = 10398/4de0953a-3920-409a-b63a-60342c976528| s2cid=166497725 |hdl-access = free | last1=Raue | first1=Jan Simon | last2=Wieland | first2=Andreas }}</ref>

A corporation may from time to time decide to alter or change its market positioning – through [[Social:Mergers and acquisitions|M&A activity]] for example – however it may loose some or all of its market efficiency in the process due to commercial operations depending to a large extent on its ability to account for a specific positioning on the market.<ref>{{cite journal |title=Corporate Positioning: A Business Game Perspective |journal=Developments in Business Simulation and Experiential Learning: Proceedings of the Annual Absel Conference |year=2007 |volume=34 |url=https://absel-ojs-ttu.tdl.org/absel/article/view/450 |publisher=ABSEL |last1=Ben-Zvi |first1=Tal |last2=Gordon |first2=Goren }}</ref>

=== Systemic problems ===
* Demand 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.<ref name=6.9>[https://books.google.com/books?id=K8zJw-CshBYC&dq=%22A+barrier+to+shareholders+using+good+information+%22&pg=SA6-PA9 Current Trends in Management] 6.9</ref>
* Monitoring costs: A barrier to shareholders using good information is the cost of processing it, especially to a small shareholder. The traditional answer to this problem is the [[Finance:Efficient-market hypothesis|efficient-market hypothesis]] (in finance, the efficient market hypothesis (EMH) asserts that financial markets are efficient), which suggests that the small shareholder will free ride on the judgments of larger professional investors.<ref name=6.9/>
* Supply of accounting information: Financial 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. This should, ideally, be corrected by the working of the external auditing process.<ref name=6.9/>

== Issues ==

=== Executive pay ===
{{main|Finance:Say on pay}}
Increasing attention and regulation (as under the Swiss referendum "against corporate rip-offs" of 2013) has been brought to executive pay levels since the [[Finance:Financial crisis of 2007–2008|financial crisis of 2007–2008]]. Research on the relationship between firm performance and executive compensation does not identify consistent and significant relationships between executives' remuneration and firm performance. Not all firms experience the same levels of agency conflict, and external and internal monitoring devices may be more effective for some than for others.<ref name="ReferenceA"/><ref name=current/> Some researchers have found that the largest CEO 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. The results suggest that increases in ownership above 20% cause management to become more entrenched, and less interested in the welfare of their shareholders.<ref name=current/>

Some argue that firm performance is positively associated with [[Finance:Employee stock option|share option]] plans and that these plans direct managers' energies and extend their decision horizons toward the long-term, rather than the short-term, performance of the company. However, 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 University of Iowa academic Erik Lie<ref>{{cite journal |last1=Heron |first1=Randall A. |last2=Lie |first2=Erik |title=Does backdating explain the stock price pattern around executive stock option grants? |journal=Journal of Financial Economics |date=February 2007 |volume=83 |issue=2 |pages=271–295 |doi=10.1016/j.jfineco.2005.12.003 |s2cid=153491365 }}</ref> and reported by James Blander and Charles Forelle of the ''Wall Street Journal''.<ref name=current>{{Cite book|url=https://books.google.com/books?id=K8zJw-CshBYC&q=Some+researchers+have+found+that+the+largest+CEO+performance+incentives+came+from+ownership+of+the+firm's+shares&pg=SA6-PA14|title=Current Trends in Management|publisher=Nirali Prakashan|via=Google Books|isbn=9789380064062}}</ref><ref>[http://www.pulitzer.org/archives/7193 As Companies Probe Backdating, More Top Officials Take a Fall] |Charles Forelle and James Bandler| October 12, 2006| wsj.com</ref>

Even before the negative influence on public opinion caused by the 2006 backdating scandal, use of options faced various criticisms. A particularly forceful and long running argument concerned the interaction of executive options with corporate stock repurchase programs. Numerous authorities (including U.S. Federal Reserve Board economist Weisbenner) determined options may be employed in concert with stock buybacks in a manner contrary to shareholder interests. These authors argued that, in part, corporate stock buybacks for U.S. Standard & Poor's 500 companies surged to a $500 billion annual rate in late 2006 because of the effect of options.<ref>{{cite journal |last1=Gumport |first1=M. A. |title=The Next, Great, Corporate Scandal: Potential Liability of Corporations Engaged in Open Market, 10b-18 Buybacks; a Minority View; Case Histories; Summary of Published Studies; Direction of Future Research |date=7 September 2006 |doi=10.2139/ssrn.927111 |ssrn=927111 |s2cid=166563271 }}</ref>

A combination of accounting changes and governance issues led options to become a less popular means of remuneration as 2006 progressed, and various alternative implementations of buybacks surfaced to challenge the dominance of "open market" cash buybacks as the preferred means of implementing a [[Finance:Share repurchase|share repurchase]] plan.

=== Separation of Chief Executive Officer and Chairman of the Board roles ===
Shareholders elect a board of directors, who in turn hire a [[Social:Chief executive officer|chief executive officer]] (CEO) to lead management. The primary responsibility of the board relates to the selection and retention of the CEO. However, in many U.S. corporations the CEO and chairman of the board roles are held by the same person. This creates an inherent conflict of interest between management and the board.

Critics of combined roles argue the two roles that should be separated to avoid the conflict of interest and more easily enable a poorly performing CEO to be replaced. Warren Buffett wrote in 2014: "In my service on the boards of nineteen public companies, however, I've seen how hard it is to replace a mediocre CEO if that person is also Chairman. (The deed usually gets done, but almost always very late.)"<ref>{{Cite web|url=http://www.berkshirehathaway.com/letters/letters.html|title=Shareholder Letters|website=www.berkshirehathaway.com}}</ref>

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.<ref>{{Cite news|url=https://www.nytimes.com/2013/05/09/opinion/the-jamie-dimon-witch-hunt.html|title=Opinion &#124; The Jamie Dimon Witch Hunt|first=Jeffrey A.|last=Sonnenfeld|newspaper=The New York Times |date=May 8, 2013}}</ref>

In 2004, 73.4% of U.S. companies had combined roles; this fell to 57.2% by May 2012. Many U.S. companies with combined roles have appointed a "Lead Director" to improve independence of the board from management. German and UK companies have generally split the roles in nearly 100% of listed companies. Empirical evidence does not indicate one model is superior to the other in terms of performance. However, one study indicated that poorly performing firms tend to remove separate CEOs more frequently than when the CEO/Chair roles are combined.<ref>{{Cite journal|url=https://www.academia.edu/3290632|title=Should the USA follow the UK's lead and split the dual CEO/chairperson's role?|first=Magdalena|last=Smith|website=www.academia.edu|date=15 April 2013}} Student paper.</ref>

=== Shareholder apathy ===
{{main|Finance:Shareholder apathy}}

Certain groups of shareholders may become disinterested in the corporate governance process, potentially creating a power vacuum in corporate power. Insiders, other shareholders, and stakeholders may take advantage of these situations to exercise greater influence and extract rents from the corporation. Shareholder apathy may result from the increasing popularity of passive investing, [[Finance:Diversification|diversification]], and investment vehicles such as mutual funds and ETFs.

== See also ==
{{cmn|colwidth=20em|
* {{annotated link|Social:Co-determination}}
** {{annotated link|Social:Worker representation on corporate boards of directors}}
* {{annotated link|Social:Corporate social entrepreneurship}}
* {{annotated link|Finance:Creative accounting}}
* {{annotated link|Finance:Earnings management}}
* {{annotated link|Finance:Environmental, social and corporate governance}}
* {{annotated link|Finance:Fund governance}}
* {{annotated link|Finance:Golden parachute}}
* {{annotated link|Organization:International Organization of Supreme Audit Institutions}}
* {{annotated link|Finance:Legal origins theory}}
* {{annotated link|Social:Market socialism}}
* {{annotated link|Finance:Private benefits of control}}
* {{annotated link|Risk management}}
* {{annotated link|Social:Social ownership}}
* {{annotated link|Sociocracy}}
* {{annotated link|Social:Stakeholder theory}}
}}

== References ==
{{reflist}}

== Further reading ==
* {{cite journal |last1=Arcot |first1=Sridhar |last2=Bruno |first2=Valentina |last3=Faure-Grimaud |first3=Antoine |title=Corporate governance in the UK: Is the comply or explain approach working? |journal=International Review of Law and Economics |date=June 2010 |volume=30 |issue=2 |pages=193–201 |doi=10.1016/j.irle.2010.03.002 |s2cid=53448414 |url=http://eprints.lse.ac.uk/24673/1/dp581_Corporate_Governance_at_LSE_001.pdf }}
* {{cite SSRN |last1=Becht |first1=Marco |last2=Bolton |first2=Patrick |last3=Röell |first3=Ailsa |title=Corporate Governance and Control |date=1 October 2002 |ssrn=343461 }}
* Bowen, William, 1998 and 2004, ''The Board Book: An Insider's Guide for Directors and Trustees'', New York and London, W.W. Norton & Company, {{ISBN|978-0-393-06645-6}}
* Brickley, James A., William S. Klug and Jerold L. Zimmerman, ''Managerial Economics & Organizational Architecture,'' ISBN
* Cadbury, Sir Adrian, "The Code of Best Practice", Report of the Committee on the Financial Aspects of Corporate Governance, Gee and Co Ltd, 1992. Available online from [https://web.archive.org/web/20100503035947/http://www.ecgi.org/codes/]
* Cadbury, Sir Adrian, "Corporate Governance: Brussels", Instituut voor Bestuurders, Brussels, 1996.
* {{cite journal |last1=Claessens |first1=Stijn |last2=Djankov |first2=Simeon |last3=Lang |first3=Larry H.P |title=The separation of ownership and control in East Asian Corporations |journal=Journal of Financial Economics |date=January 2000 |volume=58 |issue=1–2 |pages=81–112 |doi=10.1016/S0304-405X(00)00067-2 }}
* Clarke, Thomas (ed.) (2004) ''Theories of Corporate Governance: The Philosophical Foundations of Corporate Governance'', London and New York: Routledge, {{ISBN|0-415-32308-8}}
* Clarke, Thomas (ed.) (2004) ''Critical Perspectives on Business and Management'' (5 Volume Series on Corporate Governance – Genesis, Anglo-American, European, Asian and Contemporary Corporate Governance) London and New York: Routledge, {{ISBN|0-415-32910-8}}
* Clarke, Thomas (2007) ''International Corporate Governance'' London and New York: Routledge, {{ISBN|0-415-32309-6}}
* Clarke, Thomas & Chanlat, Jean-Francois (eds.) (2009) ''European Corporate Governance'' London and New York: Routledge, {{ISBN|978-0-415-40533-1}}
* Clarke, Thomas & dela Rama, Marie (eds.) (2006) ''Corporate Governance and Globalization'' (3 Volume Series) London and Thousand Oaks, CA: SAGE, {{ISBN|978-1-4129-2899-1}}
* Clarke, Thomas & dela Rama, Marie (eds.) (2008) ''Fundamentals of Corporate Governance'' (4 Volume Series) London and Thousand Oaks, CA: SAGE, {{ISBN|978-1-4129-3589-0}}
* Colley, J., Doyle, J., Logan, G., Stettinius, W., ''What is Corporate Governance?'' (McGraw-Hill, December 2004) ISBN
* Crawford, C. J. (2007). Compliance & conviction: the evolution of enlightened corporate governance. Santa Clara, Calif: XCEO. {{ISBN|978-0-9769019-1-4}}
* {{cite journal |last1=Denis |first1=Diane K. |last2=McConnell |first2=John J. |title=International Corporate Governance |journal=The Journal of Financial and Quantitative Analysis |date=March 2003 |volume=38 |issue=1 |pages=1–36 |doi=10.2307/4126762 |jstor=4126762 |citeseerx=10.1.1.470.957 |s2cid=232330567 }}
* Dignam, Alan and Lowry, John (2020) ''Company Law,'' Oxford University Press {{ISBN|978-0-19-928936-3}}
* Douma, Sytse and Hein Schreuder (2013), ''Economic Approaches to Organizations'', 5th edition. London: Pearson [http://catalogue.pearsoned.co.uk/educator/product/Economic-Approaches-to-Organisations/9780273735298.page] {{Webarchive|url=https://web.archive.org/web/20150515235236/http://catalogue.pearsoned.co.uk/educator/product/Economic-Approaches-to-Organisations/9780273735298.page |date=2015-05-15 }} {{ISBN|9780273735298}} Uploaded at: https://www.academia.edu/93596216/Economic_approaches_to_corporate_governance_PDF_
* Easterbrook, Frank H. and Daniel R. Fischel, ''The Economic Structure of Corporate Law,'' ISBN
* Easterbrook, Frank H. and Daniel R. Fischel, ''International Journal of Governance,'' ISBN
* Eccles, R.G. & T. Youmans (2015), Materiality in Corporate Governance: The Statement of Significant Audiences and Materiality, Boston: Harvard Business School, working paper 16-023, http://hbswk.hbs.edu/item/materiality-in-corporate-governance-the-statement-of-significant-audiences-and-materiality
* {{cite journal |last1=Erturk |first1=Ismail |last2=Froud |first2=Julie |last3=Johal |first3=Sukhdev |last4=Williams |first4=Karel |title=Corporate governance and disappointment |journal=Review of International Political Economy |date=August 2004 |volume=11 |issue=4 |pages=677–713 |doi=10.1080/0969229042000279766 |s2cid=153865396 }}
* Garrett, Allison, "Themes and Variations: The Convergence of Corporate Governance Practices in Major World Markets", 32 ''Denv. J. Int'l L. & Pol'y.''
* Goergen, Marc, ''International Corporate Governance,'' (Prentice Hall 2012) {{ISBN|978-0-273-75125-0}}
* {{cite journal |last1=Holton |first1=Glyn A. |title=Investor Suffrage Movement |journal=Financial Analysts Journal |date=November 2006 |volume=62 |issue=6 |pages=15–20 |doi=10.2469/faj.v62.n6.4349 |s2cid=153833506 }}
* {{cite journal |last1=Hovey |first1=Martin |last2=Naughton |first2=Tony |title=A survey of enterprise reforms in China: The way forward |journal=Economic Systems |date=June 2007 |volume=31 |issue=2 |pages=138–156 |doi=10.1016/j.ecosys.2006.09.001 |url=http://eprints.usq.edu.au/2504/2/Hovey_EconSystems_2007_AV.pdf }}
* Kay, John (2015), 'Shareholders think they own the company — they are wrong', ''The Financial Times'', 10 November 2015
* {{cite journal | last1 = Abu Masdoor | first1 = Khalid | year = 2011 | title = Ethical Theories of Corporate Governance | journal = International Journal of Governance | volume = 1 | issue = 2| pages = 484–492 }}
* {{cite journal |last1=La Porta |first1=Rafael |last2=Lopez-De-Silanes |first2=Florencio |last3=Shleifer |first3=Andrei |title=Corporate Ownership Around the World |journal=The Journal of Finance |date=April 1999 |volume=54 |issue=2 |pages=471–517 |doi=10.1111/0022-1082.00115 |url=http://nrs.harvard.edu/urn-3:HUL.InstRepos:30747162 |doi-access=free }}
* Low, Albert, 2008. "[https://web.archive.org/web/20180804012800/http://conflictandcreativityatwork.ca/ Conflict and Creativity at Work: Human Roots of Corporate Life], Sussex Academic Press. {{ISBN|978-1-84519-272-3}}
* Monks, Robert A.G. and Minow, Nell, ''Corporate Governance'' (Blackwell 2004) ISBN
* Monks, Robert A.G. and Minow, Nell, ''Power and Accountability'' (HarperBusiness 1991), full text available [https://web.archive.org/web/20000817213735/http://www.thecorporatelibrary.com/power/contents.html online]
* Moebert, Jochen and Tydecks, Patrick (2007). ''Power and Ownership Structures among German Companies. A Network Analysis of Financial Linkages'' [http://www.vwl.tu-darmstadt.de/vwl/forsch/veroeff/papers/ddpie_179.pdf]{{dead link|date=December 2016 |bot=InternetArchiveBot |fix-attempted=yes }}
* Murray, Alan ''Revolt in the Boardroom'' (HarperBusiness 2007) ({{ISBN|0-06-088247-6}}) [https://www.amazon.com/dp/B0013L4DZI Remainder]
* [[Organization:OECD|OECD]] (1999, 2004, 2015) [http://www.oecd.org/corporate/principles-corporate-governance.htm ''Principles of Corporate Governance''] Paris: OECD
* {{cite SSRN |last1=Sapovadia |first1=Vrajlal K. |title=Critical Analysis of Accounting Standards Vis-À-Vis Corporate Governance Practice in India |date=1 January 2007 |ssrn=712461 }}
* Ulrich Seibert (1999), Control and Transparency in Business (KonTraG) Corporate Governance Reform in Germany. ''European Business Law Review'' 70
* {{cite journal |last1=Shleifer |first1=Andrei |last2=Vishny |first2=Robert W. |title=A Survey of Corporate Governance |journal=The Journal of Finance |date=June 1997 |volume=52 |issue=2 |pages=737–783 |doi=10.1111/j.1540-6261.1997.tb04820.x |citeseerx=10.1.1.489.2497 |s2cid=54538527 }}
* Skau, H.O (1992), A Study in Corporate Governance: Strategic and Tactic Regulation (200 p)
* Sun, William (2009), How to Govern Corporations So They Serve the Public Good: A Theory of Corporate Governance Emergence, New York: Edwin Mellen, {{ISBN|978-0-7734-3863-7}}.
* Touffut, Jean-Philippe (ed.) (2009), ''[https://web.archive.org/web/20120509090524/http://www.centre-cournot.org/index.php/2009/11/16/does-company-ownership-matter/ Does Company Ownership Matter?]'', Cheltenham, UK, and Northampton, MA, US: Edward Elgar. Contributors: Jean-Louis Beffa, Margaret Blair, Wendy Carlin, Christophe Clerc, Simon Deakin, Jean-Paul Fitoussi, Donatella Gatti, Gregory Jackson, Xavier Ragot, Antoine Rebérioux, Lorenzo Sacconi and Robert M. Solow.
* Tricker, Bob and [[Finance:The Economist|The Economist]] Newspaper Ltd (2003, 2009), ''Essentials for Board Directors: An A–Z Guide, Second Edition'', New York, Bloomberg Press, {{ISBN|978-1-57660-354-3}}.
* {{cite journal |last1=Zelenyuk |first1=Valentin |last2=Zheka |first2=Vitaliy |title=Corporate Governance and Firm's Efficiency: The Case of a Transitional Country, Ukraine |journal=Journal of Productivity Analysis |date=April 2006 |volume=25 |issue=1–2 |pages=143–157 |doi=10.1007/s11123-006-7136-8 |s2cid=5712854 }}
* Shahwan, Y., & Mohammad, N. R. (2016). Descriptive Evidence of Corporate Governance & OECD Principles for Compliance with Jordanian Companies. ''Journal Studia Universitatis Babes-Bolyai Negotia''.

== External links ==
* [http://www.oecd.org/corporate/principles-corporate-governance.htm OECD Corporate Governance Portal]
* [http://www.ifc.org/corporategovernance WorldBank/IFC Corporate Governance Portal]
* [http://www.worldbank.org/ifa/rosc_cg.html World Bank Corporate Governance Reports]

{{corporate titles}}
{{Management}}

[[Category:Information governance]]
[[Category:Records management]]

{{Sourceattribution|Corporate governance|1}}