IT Governance

A Guide to Corporate Governance Debates

In recent decades, how enterprises govern themselves has become a matter of public interest. Many commentators and experts still debate over issues such as stakeholder and shareholder rights, the corporations’ purpose, and the proper way to measure corporate performance. In this article at The National Law Review, the authors provide real-world legal guidance to directors and their advisors regarding this debate.

Issues and Concepts in Corporate Governance

Issues In Corporate Governance

  • Asymmetry in power
  • Role of owner management
  • Interests of shareholders as residual owners
  • Separation of powers

How to Address Them?

Codes and Guidance

Corporate governance principles and codes have been developed and issued by different institutional investors, corporations, directors, and managers associations. One of the biggest debates among the experts is if boards must follow traditional business corporation models, that includes:

  • The ‘shareholder primacy’ model that focuses on maximizing the profits for shareholders, or
  • An emerging ‘stakeholder governance’ model where each corporation must focus on a broader array of stakeholders that includes employees, customers, and suppliers.

However, “the duties of directors are defined by state corporate laws and by courts interpreting those laws,” explains the author. The individual rules for corporations are based on the corporate charter. Shareholders cannot initiate changes in the corporate charter. However, they can initiate changes in the corporate bylaws.

Monitoring Board of Directors

Different organizations have different board structures. The board of directors has the legal authority to hire, fire, and compensate top management for safeguarding the invested capital. If directors find it challenging to make company decisions, they must justify their actions by asserting that they sought to maximize the enterprise’s value on behalf of its owners.

Investing in Corporate Governance

Enterprises must invest in good corporate governance as it has a direct impact on business performance. Studies have indicated that businesses with good corporate governance practices generate 20% greater profits than other companies.

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