Corporate governance refers to the rules, processes, and laws by which companies are operated, controlled, and regulated. It defines the rights and responsibilities of the corporate participants such as the shareholders, board of directors, officers and managers, and other stakeholders, as well as the rules and procedures for making corporate decisions.
A well-defined corporate governance structure is intended to benefit all corporate stakeholders by ensuring that the firm is run in a lawful and ethical fashion, in accordance with best practices, and subject to all corporate regulations.
A firm’s corporate governance is influenced by both internal factors such as the shareholders, board of directors, and officers as well as external forces such as clients, creditors, suppliers, competitors, and government regulations. In particular, the stockholders elect a board of directors, who in turn hire officers or managers to operate the firm in a manner consistent with the goals, plans, and policies established and monitored by the board on behalf of the shareholders.
Individual versus Institutional Investors
To better understand the role that shareholders play in shaping a firm’s corporate governance, it is helpful to differentiate between the two broad classes of owners—individuals and institutions. Generally, individual investors own relatively small quantities of shares and as a result do not typically have sufficient means to directly influence a firm’s corporate governance.
In order to influence the firm, individual investors often find it necessary to act as a group by voting collectively on corporate matters. The most important corporate matter individual investors vote on is the election of the firm’s board of directors.
The corporate board’s first responsibility is to the shareholders. The board not only sets policies that specify ethical practices and provide for the protection of stakeholder interests, but it also monitors managerial decision making on behalf of investors.
Although they also benefit from the presence of the board of directors, institutional investors have advantages over individual investors when it comes to influencing the corporate governance of a firm. Institutional investors are investment professionals that are paid to manage and hold large quantities of securities on behalf of individuals, businesses, and governments.
Institutional investors include banks, insurance companies, mutual funds, and pension funds. Unlike individual investors, institutional investors often monitor and directly influence a firm’s corporate governance by exerting pressure on management to perform or communicating their concerns to the firm’s board.
These large investors can also threaten to exercise their voting rights or liquidate their holdings if the board does not respond positively to their concerns. Because individual and institutional investors share the same goal, individual investors benefit from the shareholder activism of institutional investors.
Government Regulation
Unlike the impact that clients, creditors, suppliers, or competitors can have on a particular firm’s corporate governance, government regulation generally shapes the corporate governance of all firms. During the past decade, corporate governance has received increased attention due to several high-profile corporate scandals involving abuse of corporate power and, in some cases, alleged criminal activity by corporate officers.
The misdeeds derived from two main types of issues: (1) false disclosures in financial reporting and other material information releases and (2) undisclosed conflicts of interest between corporations and their analysts, auditors, and attorneys and between corporate directors, officers, and shareholders.
Asserting that an integral part of an effective corporate governance regime is provisions for civil or criminal prosecution of individuals who conduct unethical or illegal acts in the name of the firm, in July 2002 the U.S. Congress passed the Sarbanes-Oxley Act of 2002 (commonly called SOX). Sarbanes-Oxley is intended to eliminate many of the disclosure and conflict of interest problems that can arise when corporate managers are not held personally accountable for their firm’s financial decisions and disclosures.
SOX accomplished the following: established an oversight board to monitor the accounting industry; tightened audit regulations and controls; toughened penalties against executives who commit corporate fraud; strengthened accounting disclosure requirements and ethical guidelines for corporate officers; established corporate board structure and membership guidelines; established guidelines with regard to analyst conflicts of interest; mandated instant disclosure of stock sales by corporate executives; and increased securities regulation authority and budgets for auditors and investigators.
No comments:
Post a Comment