Corporate governance is a nebulous area of policy, practice and ethics that has many stakeholders. It includes the systems and structures that guarantee accountability, probity and transparency in the reporting and operation of companies. It encompasses the way boards oversee the executives of a business, and the selection, monitoring and evaluation of the CEO’s performances. It also includes how directors make financial choices and how they communicate their decisions to shareholders.
Corporate Governance became the subject of intense debate in the 1990s after the introduction of structural reforms that helped build markets in former Soviet countries as well as the Asian financial crisis. The Enron scandal of 2002, followed by the activism of institutional shareholders, and the financial crisis of 2008 brought increased scrutiny. Corporate governance is a hot topic today, with new developments and pressures constantly emerging.
The Anglo-Saxon or “shareholder primacy view” places the focus on shareholders. Shareholders select the board of directors which is responsible for managing the company and sets the strategic goals for the company. The board is accountable for identifying and review the CEO, setting and evaluating enterprise risk management policies, supervising the operations of the company and submitting the shareholders with reports on their stewardship.
Integrity and transparency, fairness, and accountability are the four main principles of effective corporate governance. Integrity is the ethical and responsible way in which board members make decisions. Transparency refers to transparency, honesty, and full disclosure of information material to all stakeholders. Fairness refers to how boards treat their employees, suppliers and customers. The responsibility of a board is how it treats its members as well as the community at large.