What is Good Corporate Governance?

Governance Regulators, courts and investors frequently extol the virtues of 'good corporate governance' in organisations but often fail to define exactly what that means. It's often a case of "we'll know it when we see it" or, in the case of the regulators, courts and investors, "we know what it isn't when we see it". It is important to understand that what would be considered 'good corporate governance' differs for each individual organisation according to its circumstances. What is inadequate for one organisation may be onerous for another. It is also important to realise that good corporate governance isn't just about compliance. Whilst compliance will keep you out of trouble, it won't help your organisation be successful. To understand what would constitute good corporate governance for your organisation, it helps to understand what corporate governance is from a fundamental level.

The most fundamental definition for corporate governance is based on the idea that an organisation is essentially a nexus of contractual agreements between many parties for the purpose of achieving the organisation's objectives. These parties include shareholders, directors, managers, suppliers, employees, customers, financiers, government authorities, other stakeholders and the society in which the company operates. Whilst some of these contractual agreements are formal written ones, many are implicit. Likewise, some of these contractual agreements are financially based but many are not. Although the company enjoys the status of a person through legal cti on, in reality a company is constituted entirely by the actions and interactions of people with other people, products of technology, systems, and the natural world. Corporate governance involves managing the framework within which these complex relationships operate. The quality and nature of these relationships has a strong influence on the long term nancial interests of the organisation. It can be expected that the negotiation and administration of these contractual agreements to the benefit of each of the parties involved will maximise the long term results of the organisation. So good corporate governance is all about ensuring that the needs and interests of all of an organisation's stakeholders are taken into account in a balanced and transparent manner.

However, good corporate governance is not just a matter of having the right policies and procedures in place. It has to be embedded into the culture of the organisation from the very top down. As Justice Owen, the Royal Commissioner into the collapse of HIH Insurance, warned: "Systems and structures can provide an environment conducive to good corporate governance practices, but at the end of the day it is the acts or omissions of the people charged with relevant responsibilities that will determine whether governance objectives are in fact achieved." (The failure of HIH Insurance. HIH Royal Commission. 2003) Good corporate governance is also no guarantee of success. It is a necessary but not sufficient foundation for success as strategic factors play a more important role in determining the eventual success or failure of an organisation. In the majority of large business failures, it is essentially the failure of the underlying business strategy that causes each business to fail. Corporate governance iss ues allow the awed businesses to continue and amplify the magnitude of their eventual collapse. Justice Owen expressed the view: Good governance processes are likely in my view to create an environment that is conducive to success. It does not follow th at those who have good governance processes will perform well or be immune from failure. Risk exists to some extent at the heart of any business. Risks are taken in the search for rewards. No system of corporate governance can prevent mistakes or shield companies and their stakeholders from the consequences of error. Corporate failures will occur. (The failure of HIH Insurance. HIH Royal Commiss ion., 2003)

Corporate Governance Defined

Corporate governance is most often viewed as both the structure and the relationships which determine corporate direction and performance. The board of directors is typically central to corporate governance. Its relationship to the other primary participants, typically shareholders and management, is critical. Additional participants include employees, customers, suppliers, and creditors. The corporate governance framework also depends on the legal, regulatory, institutional and ethical environment of the community. Whereas the 20th century might be viewed as the age of management, the early 21st century is predicted to be more focused on governance. Both terms address control of corporations but governance has always required an examination of underlying purpose and legitimacy. - James McRitchie, 8/1999 Accountability to providers of capital. Bruce Weber, dean of the Lerner College of Business at the University of Delaware, at the inaugural meeting in November of the newly reconstituted advisory board for the John L. Weinberg Center for Corporate Governance. Corporate governance is gathering together a group of smart, accomplished people around a board table to make good decisions on behalf of the company and its stakeholders. As We Start Anew, Jim Kristie, editor and associate publisher of Directors & Boards. Generally, corporate governance refers to the host of legal and non-legal principles and practices affecting control of publicly held business corporations. Most broadly, corporate governance affects not only who controls publicly traded corporations and for what purpose but also the allocation of risks and returns from the firms activities among the various participants in the firm, including stockholders and managers as well as creditors, employees, customers, and even communities.

However, American corporate governance doctrine primarily describes the control rights and related responsibilities of three principal groups: 1. the firms shareholders, who provide capital and must approve major firm transactions, 2. the firms board of directors, who are elected by shareholders to oversee the management of the corporation, and 3. the firms senior executives who are responsible for the day today operations of the corporation. As the Delaware Supreme Court has stated, the most fundamental principles of corporate governance are a function of the allocation of power within a corporation between its stockholders and its board of directors. (J. Robert Brown, Jr. and Lisa L. Casey, Corporate Governance: Cases and Materials, 2012) [a] corporate governance system is the combination of mechanisms which ensure that the management (the agent) runs the firm for the benefit of one or several stakeholders (principals). Such stakeholders may cover shareholders, creditors, suppliers, clients, employees and other parties with whom the firm conducts its business. Goergen and Renneboog, 2006 Corporate governance deals with the conflicts of interests between the providers of finance and the managers; the shareholders and the stakeholders; different types of shareholders (mainly the large shareholder and the minority shareholders); and the prevention or mitigation of these conflicts of interests. Marc Goergen, 2012. In broad terms, corporate governance refers to the way in which a corporations is directed, administered, and controlled. Corporate governance also concerns the relationships among the various internal and external stakeholders involved as well as the governance processes designed to help a corporation achieve its goals. Of prime importance are those mechanisms and controls that are designed to reduce or eliminate the principal-agent problem. (H. Kent Baker and Ronald Anderson,Corporate Governance: A Synthesis of Theory, Research, and Practice, 2010) Corporate governance is a field in economics that investigates how to secure/motivate efficient management of corporations by the use of incentive mechanisms, such as contracts, organizational designs and legislation. This is often limited to the question of improving financial performance, for example, how the corporate owners can secure/motivate that the corporate managers will deliver a competitive rate of return. (Mathiesen, 2002) The system by which companies are directed and controlled. (Sir Adrian Cadbury, The Committee on the Financial Aspects of Corporate Governance) Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of

those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society (Sir Adrian Cadbury in Global Corporate Governance Forum, World Bank, 2000) The process by which corporations are made responsive to the rights and wishes of stakeholders. (Demb and Neubauer, The Corporate Board: Confronting the Paradoxes) Corporate governance is about how companies are directed and controlled. Good governance is an essential ingredient in corporate success and sustainable economic growth. Research in governance requires an interdisciplinary analysis, drawing above all on economics and law, and a close understanding of modern business practice of the kind which comes from detailed empirical studies in a range of national systems. Simon Deakin, Robert Monks Professor of Corporate Governance Corporate governance is what you do with something after you acquire it. Its really that simple. Most mammals do it. (Care for their property.) Unless they own stock. [She continues:] it is almost comical to suggest that corporate governance is a new or complex or scary idea. When people own property they care for it: corporate governance simply means caring for property in the corporate setting. Sarah Teslik, former Executive Director of the Council of Institutional Investors Corporate governance describes all the influences affecting the institutional processes, including those for appointing the controllers and/or regulators, involved in organizing the production and sale of goods and services. Described in this way, corporate governance includes all types of firms whether or not they are incorporated under civil law. Shann Turnbull Corporate governance is about the whole set of legal, cultural, and institutional arrangements that determine what public corporations can do, who controls them, how that control is exercised, and how the risks and return from the activities they undertake are allocated. Margaret Blair,Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century, 1995. Corporate governance is the relationship among various participants [chief executive officer, management, shareholders, employees] in determining the direction and performance of corporations Monks and Minow, Corporate Governance, from 1995 version. Corporate governance deals with the way suppliers of finance assure themselves of getting a return on their investment. Shleifer and Vishny, 1997. Corporate governance is about how suppliers of capital get managers to return profits, make sure managers do not misuse the capital by investing in bad projects, and how shareholders and creditors monitor managers. - American Management Association

Corporate governance is the relationship between corporate managers, directors and the providers of equity, people and institutions who save and invest their capital to earn a return. It ensures that the board of directors is accountable for the pursuit of corporate objectives and that the corporation itself conforms to the law and regulations. International Chamber of Commerce The relationship between the shareholders, directors and management of a company, as defined by the corporate charter, bylaws, formal policy and rule of law. The Corporate Library Corporate governance is the relationship among various participants in determining the direction and performance of corporations. The primary participants are: shareholders; company management (led by the chief executive officer); and the board of directors. CalPERS Corporate governance is the method by which a corporation is directed, administered or controlled. Corporate governance includes the laws and customs affecting that direction, as well as the goals for which the corporation is governed. The principal participants are the shareholders, management and the board of directors. Other participants include regulators, employees, suppliers, partners, customers, constituents (for elected bodies) and the general community. Wikipedia The set of obligations and decision-making structures that shape the complex set of constraints that determine the profits generated by the firm and shape the exp post bargaining over those profits. Stijn Claessens Where the political scene is capital versus labor, the investor coalition defined corporate governance in terms of meeting the challenge of financial globalization, adherence to the OECD Principles, fulfilling international standards of governance in the global competition for capital. From a labor power position, blockholders and foreign portfolio investors were castigated as selfish oligarch in league with the heartless IMF and the faceless gnomes of Zurich. Those favoring the corporatist compromise made much of managers and workers being in the same boat together, of corporate governance choices that ensured that firms served the nation in a stable economy with owners dismissed as oligarchs or speculators. Countries shifting transparency coalitions and managerism alignment witnessed predictable invocations of corporate governance that protected the little guy, the individual investor, the widow and orphans, such as speeches by U.S. SEC commissioners.

Meanwhile across the alignment divide, managers compete to hijack the notion of corporate governance for their own purposebuilding shareholder value. As Gourvevitch and Shinn, quoted in the above several paragraphs, note in their book Political Power and Corporate Control: The New Global Politics of Corporate Governance: Corporate governance the authority structure of a firm lies at the heart of the most important issues of society such as who has claim to the cash flow of the firm, who has a say in its strategy and its allocation of resources. The corporate governance framework shapes corporate efficiency, employment stability, retirement security, and the endowments of orphanages, hospitals, and universities. It creates the temptations for cheating and the rewards for honesty, inside the firm and more generally in the body politic. It influences social mobility, stability and fluidity It is no wonder then, that corporate governance provokes conflict. Anything so important will be fought over like other decisions about authority, corporate governance structures are fundamentally the result of political decisions. Shareholder value is partly about efficiency. But there are serious issues of distribution at stake job security, income inequality, social welfare. There may be many ways to organize an efficient firm. Corporate governance refers to how a corporation is governed. Who has the authority to make decisions for a corporation within what guidelines? This is the corporations governance. In the United States, the governance of corporations is largely determined by state laws of incorporation. State laws typically say that each corporation must be managed by or under the direction of its boards of directors. More specifically, corporate boards of directors are responsible for certain decisions on behalf of the corporation. At a minimum, as stated in most state statutes of incorporation, director approval is usually required for amending corporation bylaws, issuing shares, or declaring dividends. Also, the board alone can recommend that shareholders vote to amend articles of incorporation, dissolve the corporation, or sell the corporation. No other person or entity except the board can take these actions. That is why discussions of corporate governance often focus on boards.( NACD) Corporate governance is not an abstract goal, but exists to serve corporate purposes by providing a structure within which stockholders, directors and management can pursue most effectively the objectives of the corporation. US Business Round Table White Paper on Corporate Governance September 1997 Corporate governance by definition rests with the conduct of the board of directors, who are chosen on behalf of the shareholders. Corporate Governance Forum of Japan 1997

Corporate governance is the system by which companies are directed and managed. It influences how the objectives of the company are set and achieved, how risk is monitored and assessed, and how performance is optimised. Good corporate governance structures encourage companies to create value (through enterpreneurism, innovation, development and exploration) and provide accountability and control systems commensurate with the risks involved. (ASX Principles of Good Corporate Governance and Best Practices Recommendations, 2003) Corporate governance is the process carried out by the board of directors, and its related committees, on behalf of and for the benefit of the companys stakeholders, to provide direction, authority, and oversights to management. (Paul J. Sobel, Auditors Risk Management Guide: Integrating Auditing and ERM (2007), from 2005 edition.

Concept and Objectives

Corporate Governance may be defined as a set of systems, processes and principles which ensure that a company is governed in the best interest of all stakeholders. It is the system by which companies are directed and controlled. It is about promoting corporate fairness, transparency and accountability. In other words, 'good corporate governance' is simply 'good business'. It ensures:

Adequate disclosures and effective decision making to achieve corporate objectives; Transparency in business transactions; Statutory and legal compliances; Protection of shareholder interests; Commitment to values and ethical conduct of business.

In other words, corporate governance is the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It deals with conducting the affairs of a company such that there is fairness to all stakeholders and that its actions benefit the greatest number of stakeholders. In this regard, the management needs to prevent asymmetry of benefits between various sections of shareholders, especially between the ownermanagers and the rest of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal and corporate funds in the management of a company. Ethical dilemmas arise from conflicting interests of the parties involved. In this regard, managers make decisions based on a set of principles influenced by the values, context and culture of the organization. Ethical leadership is good for business as the organization is seen to conduct its business in line with the expectations of all stakeholders. The aim of "Good Corporate Governance" is to ensure commitment of the board in managing the company in a transparent manner for maximizing long-term value of the company for its shareholders and all other partners. It integrates all the participants involved in a process, which is economic, and at the same time social. The fundamental objective of corporate governance is to enhance shareholders' value and protect the interests of other stakeholders by improving the corporate performance and accountability. Hence it harmonizes the need for a company to strike a balance at all times between the need to enhance shareholders' wealth whilst not in any way being detrimental to the interests of the other stakeholders in the company. Further, its objective is to generate an environment of trust and confidence amongst those having competing and conflicting interests. It is integral to the very existence of a company and strengthens investor's confidence by ensuring

company's commitment to higher growth and profits. Broadly, it seeks to achieve the following objectives:

A properly structured board capable of taking independent and objective decisions is in place at the helm of affairs; The board is balance as regards the representation of adequate number of non-executive and independent directors who will take care of their interests and well-being of all the stakeholders; The board adopts transparent procedures and practices and arrives at decisions on the strength of adequate information; The board has an effective machinery to subserve the concerns of stakeholders; The board keeps the shareholders informed of relevant developments impacting the company; The board effectively and regularly monitors the functioning of the management team; The board remains in effective control of the affairs of the company at all times.

The overall endeavour of the board should be to take the organisation forward so as to maximize long term value and shareholders' wealth.

Corporate governance is a set of rules that define the relationship between stakeholders, management, and board of directors of a company and influence how that company is operating. At its most basic level, corporate governance deals with issues that result from the separation of ownership and control. But corporate governance goes beyond simply establishing a clear relationship between shareholders and managers. The presence of strong governance standards provides better access to capital and aids economic growth. Corporate governance also has broader social and institutional dimensions. Properly designed rules of governance should focus on implementing the values of fairness, transparency, accountability, and responsibility to both shareholders and stakeholders. In order to be effectively and ethically governed, businesses need not only good internal governance, but also must operate in a sound institutional environment. Therefore, elements such as secure private property rights, functioning judiciary, and free press are necessary to translate corporate governance laws and regulations into on-the-ground practice. Good corporate governance ensures that the business environment is fair and transparent and that companies can be held accountable for their actions. Conversely, weak corporate governance leads to waste, mismanagement, and corruption. It is also important to remember that although corporate governance has emerged as a way to manage modern joint stock corporations it is equally significant in state-owned enterprises, cooperatives, and family businesses. Regardless of the type of venture, only good governance can deliver sustainable good business performance

Accountability and Responsibility in Corporate Governance

Larry E. Ribstein, University of Illinois

Abstract
Managers accountability to shareholders and corporations responsibility to society are two important objectives of corporate governance. Some scholars argue that managers who are accountable to shareholders must neglect societys interest. But loosening this accountability leaves managers free to serve themselves, thereby increasing agency costs. This article makes three main contributions to the debate on the appropriate roles of accountability and responsibility. First, it shows how modern markets cause managers who are accountable to shareholders also to attend to societys interests. Second, it shows that the debate is actually less important than it might first appear because the logistics of publicly held corporations substantially free managers from accountability to shareholders irrespective of whether societys needs should compel that freedom. Third, the paper shows that the debate may be joined over whether partnership-type devices compelling distributions and allowing owner cash-out should be imported into publicly held firms. These devices would provide for more managerial accountability to shareholders, and therefore less flexibility to serve societys interests, than standard corporate governance mechanisms. The main impediment to use of these devices is the double corporate tax, which provides tax benefits for earnings retention and thereby encourages managerial control over corporate earnings. The future of the corporate tax may depend at least in part on the debate over accountability and responsibility in corporate governance.

The Board of Directors Contact: Mike Volker, Tel:(604)644-1926, Email: mike@volker.org

"We must all hang together, or assuredly we shall all hang separately!" (Benjamin Franklin) The Team There are many sayings like the one quoted above to remind managers and entrepreneurs that it takes a team to build a successful venture. A company's board of directors is the ultimate team that accepts the overall responsibility for the firm. Unfortunately, even if you hang together, and something goes wrong, each director may be held singularly accountable both to the shareholders and to the general public. The Ideal Board An ideal board is one which works closely with the Chief Executive Officer (the "CEO") of the company to give not only support and direction to him or her, but one which also challenges the CEO to make sure that s/he leads the

company in accordance with the company's plans. Many boards are "puppet" boards and often play along with the CEO and management. These are useless. The board should be the pillar which holds the company up. The board is responsible for the success or failure of the company. Furthermore, it is the soul and conscience of the enterprise. If management is not doing its job that is because the board is not doing its job in the first instance. The mandate of the CEO, guided by an active board, is to drive the value of the company. A board serves the company - not specific shareholders or groups. When companies first begin, the shareholders, managers, and board members are all one and the same. For example, if a few people launch a new business, they will all be the initial shareholders, managers, and directors. As they evolve, these three groupings of company participants may diverge with respect to the people involved in each category. The shareholders own the company and they appoint the directors who in turn appoint the managers. When companies raise capital by attracting new investors, these new shareholders will, with the current shareholders, want to make sure that their interests are served by a competant board of directors. Many private companies operate like partnerships, i.e. the people who run the company also own it and govern it without involving any outsiders. On the other hand, there is a trend by shareholders - regardless of number - to attract external, independent people to serve as corporate directors - thereby copntributing expertise and oversight and a "big picture" perspective. In larger, public corporations, the only manager on the board is the company's CEO. Directors are generally also shareholders in the company - this aligns their interests with other shareholders whom they serve. Corporate Governance What is "corporate governance"? In the wake of recent corporate scandals in the U.S., this term is being heard more often. Some people view it as more rules and regulations while others see it as an opportunity to build better businesses. In searching for various definitions, I came across one offered by the OECD in April 1999 that is generally consistent with many others: "Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders, and spells out

the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance." Increasingly, many of the rules and procedures are being dictated by government regulators (for example, the American's Sarbanes-Oxley Act passed in the summer of 2002) trying to ensure that, at least in the public markets, the various stakeholders interests are fairly protected. In these days of excessive litigation, the words corporate governance take on new meaning. In the past, directors may only have paid lip service to the notion of protecting the interests of all shareholders and other stakeholders (i.e. clients, suppliers, governments) but today, they are taking their role far more seriously. Class action lawsuits, which have been very popular in the USA are now becoming more common in Canada. Such class action suits permit aggressive lawyers to sue negligent corporate directors on behalf of a class of litigants, e.g. shareholders. It is a common misconception that because companies are incorporated they, and persons associated with them, have limited liabilities. Not so. Not only are directors accountable to the company, but they are also the "real people" against which other parties may make claims of a financial, or even criminal, nature. Although corporations generally indemnify their directors against legal actions and often take out directors' liability insurance as a hedge against such actions, directors may nonetheless not be fully protected. This personal legal exposure or risk is not reduced for directors who may simply be serving as directors on behalf of a shareholder. This situation may arise when, for example, a corporate shareholder (e.g. a parent company or major investor) appoints individuals to serve on the board of an affiliated or subsidiary enterprise. Remember that shareholders have no liability or responsibility other than appointing the directors who then assume all the responsibility. Good corporate governance begins with a board charter, i.e. a document that spells out, for a particular company, exactly how it is going to be run. It will spell out the board's responsibilities and mandate so that all parties know what is expected. Such a charter will evolve as a company grows and matures.
Thats unfortunate because getting governance right is essential to the safe, sound and successful operation of a financial institution. Its the framework the people

in charge of a company use to ensure accountability and transparency; its how they balance the varying demands of shareholders, customers, employees and regulators. Without solid corporate governance, a bank is rudderless in a sea of competing interests, so efforts to improve it are central to reforming our financial system