Corporate governance is a nebulous area of practice, policy and ethics that involves many stakeholders. It covers the systems and structures that ensure accountability, transparency and probity in the company’s operations and reporting. It encompasses the way boards supervise the executive management of a company, and the selection, monitoring and evaluation of the CEO’s performance. It also entails the way in which directors make financial decisions, and how they report on these to shareholders.
In the 1990s, corporate governance became a hot topic due to the implementation of structural reforms that aimed at creating markets in former Soviet states and the Asian Financial Crisis. The 2002 Enron debacle, which was followed by a flurry of institutional shareholder activism and the 2008 financial crisis, heightened scrutiny. Corporate governance is still an issue of great interest today, with new pressures and new ideas constantly emerging.
The prevailing school of thought, commonly referred to as the “shareholder primacy” view or Anglo-Saxon approach, places priority on shareholders. Shareholders elect a board directors who direct management and establishes the corporate goals. The board has the responsibility to select and evaluate the CEO, establish and monitor enterprise policies on risk management and oversee the operation of the company. They also submit reports on their management to shareholders.
Effective corporate governance focuses on four pillars such as integrity, transparency accountability and fairness. Integrity is the method by the way that board members make decisions. Transparency refers to transparency and honesty, as well as full disclosure of information material to all stakeholders. Fairness is the way boards deal with employees, suppliers and clients. Responsibility is the way a board deals with its members and the community as a whole.