Corporate Governance
Corporate Governance
Corporate Governance
Corporate Governance deals with the way the investors make sure they get
a fair return on their investment. In Corporate Governance, there is a clear
distinction between the role of the owners of a company (the shareholders)
and the managers (the executive board of directors) when it comes to
making effective strategic decisions.
“Broadly, agency theory is about the relationship between two parties, the
principal (owner) and the agent (manager). More specifically, it examines
this relationship from a behavioral and a structural perspective. The theory
suggests that given the chance, agents will behave in a self-interested
manner, behavior which may conflict with the principal’s interest. As such,
principals will enact structural mechanisms that monitor the agent in order
to curb the opportunistic behavior and better align the parties’ interests.”
This old but recent excerpt from a paper written in 1991 by Lex Donaldson
and James H. Davis provides a holistic view of this theory. Using business
vocabulary, this theory means that pursuing the interests of the
shareholders (that own a company) may not be of the best interest of the
board of directors managing it.
In these countries, fewer companies are publicly traded and people tend to
invest their savings on an individual basis, instead of betting on the capital
market. This means that in this model there is a high concentration of
capital in a few shareholders that made big investments and took big risks
too.
Boards – and directors – are not all the same. In fact, they face different
challenges and their structure is shaped by different factors. A KMPG
report synthesized some of the variables that can affect the foundations of a
board:
There is no doubt that sustainable development has entered our lives and
the way business is done. Indeed, because of it, management boards are
rethinking the way they think and work, caring not only for the return rates
of the companies’ shares and dividends or other issues that are
commonly addressed by corporate governance but considering the society
and the planet as well. For different reasons, they are integrating into their
policies the 3 dimensions of sustainable development and most companies
nowadays have corporate social responsibility strategies and
communication plans to share their goals within its employees and other
stakeholders in the outside world.