Corporate Governance

Corporate governance

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Unformatted text preview: Corporate Governance Corporate governance is a relationship among stakeholders that is used to determine and control the strategic direction and performance of organizations concerned with identifying ways to ensure that strategic decisions are made effectively used in corporations to establish order between the firm’s owners and its top-level managers 1 Scope of Corporate Governance “Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The 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 interest of individuals, corporations and society. The foundation of any structure of corporate governance is disclosure. Openness is the basis of public confidence in the corporate system and funds will flow to centers of economic activity that inspire trust.” -Sir Adrian Cadbury. “Shareholders role in governance is to appoint the directors and the auditors. Poor corporate governance has ruined companies, sent directors to jail, and destroyed a global accounting firm and threatened economies and governments.” e.g., Taj Company Cooperatives scandal Mohib Textile Mills Ltd Corporate Governance Mechanisms Internal Governance Mechanisms Board of Directors Managerial Incentive Compensation Ownership Concentration External Governance Mechanisms Market for Corporate Control 4 Separation of Ownership and Managerial Control Basis of the modern corporation shareholders purchase stock, becoming residual claimants shareholders reduce risk by holding diversified portfolios professional managers are contracted to provide decision-making Modern public corporation form leads to efficient specialization of tasks risk bearing by shareholders strategy development and decision-making by managers 5 Agency Relationship: Owners and Managers Shareholders (Principals) • Firm owners 6 Agency Relationship: Owners and Manager...
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