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What is Corporate Governance?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 02 September 2014
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Corporate governance is a broad term that has to do with the manner in which the rights and responsibilities are shared among owners, managers and shareholders of a given company. In essence, the exact structure of the corporate governance will determine what rights, responsibilities, and privileges are extended to each of the corporate participants, and to what degree each participant may enjoy those rights. Generally, the foundation for any system of corporate governance will be determined by several factors, all of which help to form the final form of governing the company.

Within any corporation, the structure of corporate governance begins with laws that impact the operation of any company within the area of jurisdiction. Companies cannot legally operate without a corporate structure that meets the minimum requirements set by the appropriate government jurisdiction. All founding documents of the company must comply with these laws in order to be granted the privilege of incorporation. In many jurisdictions, these documents are required by law to contain at least the seeds of how the company will be structured to allow the creation of a balance of power within the corporation.

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Much of the basis for corporate governance is found in the documents that must be prepared and approved before incorporation can take place. These documents help to form the basis for the final expression of the balance of power between shareholders, stakeholders, management, and the board of directors. The bylaws, articles of incorporation, and the company charter will all include details that determine who has what authority in the decision making process of the company.

Along with the laws of the land and the founding documents, corporate governance is further refined by the drafting of formal policies that not only recognize the assignment of powers in accordance to the bylaws and corporate charter, but also help to further define how those powers may be employed. This helps to allow the company some degree of flexibility in maintaining a balance of power as the company grows, without undermining the rights and privileges inherent in each type of corporate participation.

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Discuss this Article

cruzue
Post 6

Re: Corporate governance in the public sector. I wonder if any of you has a town case to send me an address. I am concluding a post-graduate in CG and I have been working as a kind of state comptroller in Brazil.

MathGeek75
Post 5

@alterego- There is actually corporate governance software that can help a lot of companies. It can guide them in the right direction and help them set up the structure for success. Many smaller companies also choose to look at the corporate governance guidelines of lager companies to model themselves by. For example, the NYSE has their entire corporate governance guideline available to the public. All they would have to do is choose a company that they want to be like and look at how they do things. As long as they are choosing a god company and not something like Enron it can give them a direction to go in.

alterego
Post 4

Aren’t there some kinds of corporate governance guidelines that these companies can follow to help steer them away from the gray areas? Most companies do not want to break the law. There is certification and licensing for everything else in the world it seems, how hard would it be for someone to come up with a general set of guidelines that would help point a company in the right direction, or is it something that varies too much from one company to another to really work out?

g00dquestion
Post 3

@sapphire12- You are absolutely right and many companies could really benefit from some sort of corporate governance training that would help them find ways to meet their goals and still stay within the law. Many times it seems that companies move into countries with no understanding of the government there and it never occurs to them that they may be doing something wrong. I am sure there are some that intentionally break the law as well, but most companies are established to make money and to set out to do that by intentionally flouting the law would not make much sense. If they take the time to do a bit more research it can really save them a lot of trouble in the long term.

sapphire12
Post 2

One problem that has happened to some major companies in recent years is that the corporate board governance either was not aware of the federal business laws or seemed to try to find a way around them; no matter how large a company or how specific its charter is, it still has to work with the government of the nation in which it is kept; if they don't, it's fraud.

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