Corporate governance explains how a corporation is directed, controlled, and held accountable. This lesson introduces the meaning of governance, its core principles, and the conflicts that can arise when decision-making power and ownership are separated.
A broad definition describes corporate governance as the processes, structures, and mechanisms that influence the control and direction of corporations. It covers how power and responsibilities are distributed among boards, managers, shareholders, and other stakeholders; how decisions are made; and how performance is monitored.
All flashcards
What is corporate governance?
The processes, structures, relationships, and mechanisms through which a corporation is directed, controlled, and monitored.
What does the Cadbury definition emphasize?
Corporate governance is the system by which companies are directed and controlled.
What is a principal–agent problem?
A potential conflict when managers act for shareholders but their interests are not fully aligned.
What is a principal–principal problem?
A conflict among shareholders whose interests differ, sometimes made harder to manage by coordination problems.
Name three core corporate governance principles.
Examples include shareholder rights, stakeholder recognition, capable boards, ethical conduct, and transparent disclosure.
Quiz questions
What legal capacity does incorporation generally give a corporation?Answer: It can own property in its own name and exist independently of particular individuals.
What is the role of the Public Company Accounting Oversight Board established under SOX?Answer: To oversee the auditing profession for public companies.
What feature of Germany’s co-determination system embeds worker representation in governance?Answer: Workers receive seats on corporate boards.
What is the difference between cash-flow rights and voting or control rights?Answer: Cash-flow rights concern economic benefits; voting rights concern influence over decisions.
Why might a company with a combined CEO and chair role appoint a lead independent director?Answer: To strengthen independent oversight when one person leads management and the board.