What is Corporate Governance?

In a broad sense, corporate governance can be defined as a set of processes by which corporations are run and administered. These are a collective function of the critical, core decision makers in the organization, such as Directors, CEO, managers, investors, stakeholders, shareholders, creditors, auditors and others. Corporate Governance sets out the methods and rules for making rules that govern corporate entities.

Although business is the main concern and task of an organization, Corporate Governance occupies as important a position, because while the financial aspect of a business is all about profits, the Corporate Governance aspect is primarily about its integrity, values and reputation. Corporate Governance takes into consideration all aspects of the governance of the organization from critical standpoints such as ethics, regulatory aspects, policies and mission, etc.

History of the growth of Corporate Governance

Although Corporate Governance has been around for a number of decades in some or another form, it came to acquire proper shape and direction of late, following the collapse of very big multinationals such as Enron, WorldCom and others. It was felt that their shady dealings, which led to huge losses for their stakeholders and eventually to the businesses collapse, could have been averted if a proper regulatory framework of Corporate Governance were in place. This is the feeling that led to the passing of the Sarbanes Oxley Act, or SOX in the early 2000's. One of the core principles enunciated in SOX related to Corporate Governance.

Elements of Corporate Governance

As a result of the SOX Act and other legislations in other developed countries, such as the Cadbury Report of the UK and other legislations in the OECD nations; Corporate Governance is now administered through a well-defined set of principles. As a result of these legislations, Corporate Governance is now concerned with the following:


Problems areas of Corporate Governance

Despite the well-intended nature of regulations relating to Corporate Governance in various parts of the world, Corporate Governance is yet to resolve a couple of important issues. These relate to:

  • Executive pay:In many businesses, this is a sore area between stakeholders and the organization, since in many cases a fat pay for the CEO is considered a burden to the organization's business
  • Separation of powers in many organizations between the CEO and the Chairman of the Board: In many corporations, these positions are held by one person, because of which there is room for conflict between the organization and the shareholders and stakeholders.