Many US states have adopted the Model Business Corporation Act , but the dominant state law for publicly traded corporations is Delaware General Corporation Law , which continues to be the place of incorporation for the majority of publicly traded corporations.
It is sometimes colloquially stated that in the US and the UK 'the shareholders own the company'. Recent scholarship from the University of Oxford outlines a new theory of corporate governance, founder centrism, which is premised upon a narrowing in the separation between ownership and control.
Corporations are created as legal persons by the laws and regulations of a particular jurisdiction. These may vary in many respects between countries, but a corporation's legal person status is fundamental to all jurisdictions and is conferred by statute. This allows the entity to hold property in its own right without reference to any particular real person.
It also results in the perpetual existence that characterizes the modern corporation. The statutory granting of corporate existence may arise from general purpose legislation which is the general case or from a statute to create a specific corporation, which was the only method prior to the 19th century. In addition to the statutory laws of the relevant jurisdiction, corporations are subject to common law in some countries, and various laws and regulations affecting business practices.
In most jurisdictions, corporations also have a constitution that provides individual rules that govern the corporation and authorize or constrain its decision-makers. This constitution is identified by a variety of terms; in English-speaking jurisdictions, it is usually known as the Corporate Charter or the Memorandum and Articles of Association.
The capacity of shareholders to modify the constitution of their corporation can vary substantially. The U. This law made it illegal to bribe government officials and required corporations to maintain adequate accounting controls. It is enforced by the U. Substantial civil and criminal penalties have been levied on corporations and executives convicted of bribery.
OECD Survey of Corporate Governance Frameworks in the Middle East and North Africa - OECD
The UK passed the Bribery Act in This law made it illegal to bribe either government or private citizens or make facilitating payments i. It also required corporations to establish controls to prevent bribery. The Sarbanes—Oxley Act of was enacted in the wake of a series of high-profile corporate scandals.
It established a series of requirements that affect corporate governance in the U. The law required, along with many other elements, that:. Corporate governance principles and codes have been developed in different countries and issued from stock exchanges, corporations, institutional investors, or associations institutes of directors and managers with the support of governments and international organizations.
As a rule, compliance with these governance recommendations is not mandated by law, although the codes linked to stock exchange listing requirements may have a coercive effect. The investor-led organisation International Corporate Governance Network ICGN was set up by individuals centered around the ten largest pension funds in the world The aim is to promote global corporate governance standards. The network is led by investors that manage 18 trillion dollars, and members are located in fifty different countries.
ICGN has developed a suite of global guidelines ranging from shareholder rights to business ethics. The World Business Council for Sustainable Development WBCSD has done work on corporate governance, particularly on Accounting and Reporting , and in released Issue Management Tool: Strategic challenges for business in the use of corporate responsibility codes, standards, and frameworks.
In , the International Finance Corporation and the UN Global Compact released a report, Corporate Governance - the Foundation for Corporate Citizenship and Sustainable Business , linking the environmental, social and governance responsibilities of a company to its financial performance and long-term sustainability. Most codes are largely voluntary.
An issue raised in the U. For example, the guidelines issued by associations of directors, corporate managers and individual companies tend to be wholly voluntary, but such documents may have a wider effect by prompting other companies to adopt similar practices. The modern practice of corporate governance has its roots in the 17th-century Dutch Republic. Robert E. Wright argues in Corporation Nation that the governance of early U. Means pondered on the changing role of the modern corporation in society.
Chandler, Jr. According to Lorsch and MacIver "many large corporations have dominant control over business affairs without sufficient accountability or monitoring by their board of directors".
In the s, Eugene Fama and Michael Jensen  established the principal—agent problem as a way of understanding corporate governance: the firm is seen as a series of contracts. In the period from to , corporate directors' duties in the U. In the first half of the s, the issue of corporate governance in the U. The California Public Employees' Retirement System CalPERS led a wave of institutional shareholder activism something only very rarely seen before , as a way of ensuring that corporate value would not be destroyed by the now traditionally cozy relationships between the CEO and the board of directors for example, by the unrestrained issuance of stock options, not infrequently back-dated.
Corporate governance and corporate finance
In the early s, the massive bankruptcies and criminal malfeasance of Enron and Worldcom , as well as lesser corporate scandals such as those involving Adelphia Communications , AOL , Arthur Andersen , Global Crossing , and Tyco led to increased political interest in corporate governance. This was reflected in the passage of the Sarbanes-Oxley Act of In the East Asian Financial Crisis severely affected the economies of Thailand , Indonesia , South Korea , Malaysia , and the Philippines through the exit of foreign capital after property assets collapsed.
The lack of corporate governance mechanisms in these countries highlighted the weaknesses of the institutions in their economies. Al-Hussain , A. However, using stock return as a performance measure revealed a weak positive relationship between the efficiency of corporate governance structure and bank performance. This is a list of countries by average overall rating in corporate governance: . Key parties involved in corporate governance include stakeholders such as the board of directors, management and shareholders.
External stakeholders such as creditors, auditors, customers, suppliers, government agencies, and the community at large also exert influence.
The agency view of the corporation posits that the shareholder forgoes decision rights control and entrusts the manager to act in the shareholders' best joint interests. Partly as a result of this separation between the two investors and managers, corporate governance mechanisms include a system of controls intended to help align managers' incentives with those of shareholders.
Agency concerns risk are necessarily lower for a controlling shareholder. In private for-profit corporations, shareholders elect the board of directors to represent their interests. In the case of nonprofits, stakeholders may have some role in recommending or selecting board members, but typically the board itself decides who will serve on the board as a 'self-perpetuating' board. Smale wrote in "The board is responsible for the successful perpetuation of the corporation.
That responsibility cannot be relegated to management. The board has responsibility for: CEO selection and succession; providing feedback to management on the organization's strategy; compensating senior executives; monitoring financial health, performance and risk; and ensuring accountability of the organization to its investors and authorities.
Boards typically have several committees e. All parties to corporate governance have an interest, whether direct or indirect, in the financial performance of the corporation. Directors, workers and management receive salaries, benefits and reputation, while investors expect to receive financial returns. For lenders, it is specified interest payments, while returns to equity investors arise from dividend distributions or capital gains on their stock. Customers are concerned with the certainty of the provision of goods and services of an appropriate quality; suppliers are concerned with compensation for their goods or services, and possible continued trading relationships.
These parties provide value to the corporation in the form of financial, physical, human and other forms of capital. Many parties may also be concerned with corporate social performance.
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A key factor in a party's decision to participate in or engage with a corporation is their confidence that the corporation will deliver the party's expected outcomes. When categories of parties stakeholders do not have sufficient confidence that a corporation is being controlled and directed in a manner consistent with their desired outcomes, they are less likely to engage with the corporation.
When this becomes an endemic system feature, the loss of confidence and participation in markets may affect many other stakeholders, and increases the likelihood of political action. There is substantial interest in how external systems and institutions, including markets, influence corporate governance. Many of the UK's largest pension funds are thus already active stewards of their assets, engaging with corporate boards and speaking up when they think it is necessary.
Control and ownership structure refers to the types and composition of shareholders in a corporation.
In some countries such as most of Continental Europe, ownership is not necessarily equivalent to control due to the existence of e. Some features or types of control and ownership structure involving corporate groups include pyramids, cross-shareholdings , rings, and webs. German "concerns" Konzern are legally recognized corporate groups with complex structures. Cross-shareholding is an essential feature of keiretsu and chaebol groups .
Corporate engagement with shareholders and other stakeholders can differ substantially across different control and ownership structures. Family interests dominate ownership and control structures of some corporations, and it has been suggested that the oversight of family-controlled corporations are superior to corporations "controlled" by institutional investors or with such diverse share ownership that they are controlled by management.
One of the biggest strategic advantages a company can have is blood ties," according to a Business Week study. The significance of institutional investors varies substantially across countries. While the majority of the shares in the Japanese market are held by financial companies and industrial corporations, these are not institutional investors if their holdings are largely with-on group.
The largest pools of invested money such as the mutual fund ' Vanguard ', or the largest investment management firm for corporations, State Street Corp. The idea is this strategy will largely eliminate individual firm financial or other risk. A consequence of this approach is that these investors have relatively little interest in the governance of a particular corporation. It is often assumed that, if institutional investors pressing for changes decide they will likely be costly because of " golden handshakes " or the effort required, they will simply sell out their investment.
Particularly in the United States, proxy access allows shareholders to nominate candidates which appear on the proxy statement , as opposed to restricting that power to the nominating committee. Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse selection.
There are both internal monitoring systems and external monitoring systems. Furthermore, the various board mechanisms provide for internal monitoring. External monitoring of managers' behavior occurs when an independent third party e. Stock analysts and debt holders may also conduct such external monitoring. An ideal monitoring and control system should regulate both motivation and ability, while providing incentive alignment toward corporate goals and objectives.
Care should be taken that incentives are not so strong that some individuals are tempted to cross lines of ethical behavior, for example by manipulating revenue and profit figures to drive the share price of the company up.