What is Good Corporate Governance ?

Corporate Governance is the art of directing and controlling the organization by balancing the needs of the various stakeholders. This often involves resolving conflicts of interest between the various stakeholders and ensuring that the organization is managed well meaning that the processes, procedures and policies are implemented according to the principles of transparency and accountability.

Whenever one speaks about corporate governance, it has to be borne in mind that the organizations have duties and responsibilities towards their shareholders and stakeholders and hence they need to be governed in accordance with the law and keeping in mind the interests of the stakeholders and shareholders.

The next aspect of corporate governance is that the notion of economic efficiency must be followed when directing, managing and controlling organizations. For instance, it is truism that corporations exist to make profits and hence the profitability and revenue generation ought to be the aim for which the corporates must strive for.

Of course, this does not mean that corporates can cut corners in their pursuit of profit and power and hence taken together with the principles in the previous paragraph, corporate governance means that a corporation must strive to generate revenues and make profits in a transparent and accountable manner. What this means is that the way in which corporations are managed and directed have to be done in accordance with standard norms and procedures that apply to ethical and normative conduct.

Corporate Governance has been in the news for the last decade or so following a spate of scandals that engulfed companies like Enron which led to their collapse because of mismanagement. This prompted regulators all over the world to implement various acts and rules to rein in irresponsible corporate behavior that would mar the prospects of the corporations and cause harm to their shareholders and stakeholders.

Acts like the Sarbanes Oxley were passed to enforce greater oversight over corporations and ensure that they did not overreach themselves in their relentless pursuit of profits. Indeed, it can be said that the Enron debacle was a wakeup call for corporate America to set its house in order. It is unfortunate that some of the lessons learnt during the early years of the last decade were forgotten leading to gross abuse of corporate power in the run up to the global financial crisis.

Broadly speaking, corporate governance can be said to encompass the tenets of rights and equitable treatment of the shareholders and the shareholders and following ethical business behavior along with practice of integrity.

Good corporate governance means that the processes of disclosure and transparency are followed so as to provide regulators and shareholders as well as the general public with precise and accurate information about the financial, operational and other aspects of the company. As has been mentioned elsewhere in this article, corporate governance is a term that means many things and the bottom line for good corporate governance is the dual aim of pursuing profits and doing so in a transparent and accountable manner.

The subsequent articles in this module introduce the readers to various aspects of corporate governance and include a discussion of why the ongoing global financial crisis represents a crisis of capitalism that is characterized by poor corporate governance.