Definitions of Corporate Governance

The concept of corporate governance is poorly defined because it covers various economics aspects.  As a result of this different people have come up with different definitions on corporate governance. It is hard to point on any one definition as the ultimate definition on corporate governance.  So the best way to define the concept is to provide a list of the definitions given by some noteworthy people.

Various definitions of corporate governance:

1. According to Sir Adrian Cadbury.

The system by which companies are directed and controlled

Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society”

2. According to Mathiesen (2002)

“Corporate Governance is a field in economics that investigates how to secure/motivate efficient management of corporations by the use of incentive mechanisms, such as contracts, organizational designs and legislation.  This is often limited to the question of improving financial performance, for example, how the corporate owners can secure/motivate that the corporate managers will deliver a competitive rate of return.”

The definition given by Mathiesen means that corporate governance is a method which tries to find out the different incentives which would motivate the managers of a corporate to give a good return to the owners of the corporation.

3. According to the Journal of Finance written by Shleifer and Vishnv (1997),

“Corporate governance deals with the way in which suppliers of finance to corporate assure themselves of getting a return on their investment”

The definition here means that corporate governance is basically a technique where people who give money (lenders of the money) promise themselves or comfort themselves about getting a return on their investment.

4. According to J. Wolfensohn, president of the World Bank, (in 1999)

“Corporate governance is about promoting corporate fairness, transparency and accountability”

5. According to OECD (Organisation for Economic Co-operation and Development)

“Corporate governance is the system by which business corporations are directed and controlled.  The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs.  By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance.”

The definition given by OECD means that corporate governance is an arrangement which manages the corporations.  The configuration of corporate governance defines the duties and obligations of all the members of the corporation, gives the structure of setting the objectives and the method of attaining the set

In short all the definitions stated above implies that corporate governance is a mode by which the management is motivated to work for the betterment of the real owners of the corporation i.e. the shareholders.

In other words corporate governance can be defined as the relationship of a company to its shareholders or more broadly the relationship of the company to the society.

Corporate governance thus refers to the manner in which a company is managed and states the rules, laws and regulation that affect the management of the firm.  It also includes laws relating to the formation of the firm, establishment of the firm and the structure of the firm.  The most important concern of corporate governance is to ensure that the managers and directors act in the interest of the firm and for the shareholders.

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