What is Corporate Governance? Meaning, Definition, Importance, Models

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what is corporate governance?

Corporate governance is the coordination and maintenance of a set of relations that promote the interest of stockholders and stakeholders of a business corporation. Here in this article, we have discussed what is corp. governance? and its meaning, definition, feature, benefits, importance, principles, and models of corp. governance.

What is Corporate Governance?

Corporate Governance is an open-ended system of government ecosystem where there is a separation between ownership and control.

It is a set relationship between a company’s management, board, shareholders, and stakeholders.

CG is a system of a social institution that influences the process of strategic investment incorporation that revolve around three decisions: return, investment, and control.

◉ Corporate Governance Meaning

Corporate Governance is made up of two words “Corporate” and “Governance”.

  • The word Corporate is used for relating to a business, especially a large business.
  • Governance is the process of formulating decisions and implementing those decisions.

In other words, Corporate Gov. simply means the system by which companies are directed and controlled.

Definition of Corporate Governance

According to Shleifer & Vishny (1997, Journal of Finance),

“Corporate Governance deals with the methods in which suppliers of finance to corporations assure of getting a good return on their investment.”

According to WORLD BANK

Definition 1

  • From a public policy perspective, “it is about boosting an enterprise with accountability in the exercising of power and control over the company”
  • From the perspective of the company, “Corporate governance is relations between owners, management board and stakeholders”.

Definition 2

  • In the eye of the law, a corporation is a legal entity. It is a system or mechanism through which maintaining and promoting the relationship that leads to individual profit without corresponding personal responsibility.

► Feature of Corporate Governance

The features for the C.G. are as follows:

  • Transparency
  • Protection of Shareholders’ Rights
  • More Power to CEO
  • Accountability
  • Based on Ethics
  • Universal Applications
  • Systematic

► Need for Corporate Governance

Some of the needs for the C.G. is as follows:

  • Changing Ownership Structure
  • Importance of Social Responsibility
  • Growing Number of Scams
  • Good corp. governance also minimizes wastage corruption risk and mismanagement
  • Indifference on the part of shareholders
  • Globalization
  • Mergers and Takeovers
  • Brand formation and development

► Parties of Corporate Governance

The following are the parties of corp. governance

  • Board of Directors
  • Managers
  • Workers
  • Shareholders or owners
  • Regulators
  • Customers
  • Suppliers
  • Community

► Benefits of Corporate Governance

The Benefits/Advantages of Corp. Governance is as follows:

  1. Good CG ensures corporate success and economic growth.
  2. Strong C.G. create confidence among investors, and it can raise capital for the company efficiently and effectively.
  3. It lowers the capital cost.
  4. The share price may impact positively.
  5. It facilitates owners and managers to achieve objectives that satisfy the shareholders of the company.
  6. Good C.G. also reduces wastages, risks, corruption, and mismanagement.
  7. It helps in brand formation and development.
  8. CG ensures the work culture of management so that it fits the best interests of all.

► Importance of Corporate Governance

  • Shapes the growth and future of the capital market & economy.
  • Instrument of investor’s protection.
  • Protection of the interest of shareholders and all other stakeholders.
  • Contributes to the efficiency of the business.
  • Creation of wealth.
  • Enables the firm to compete internationally in sustained.
  • Keeps an eye on the issues of insider training.

► Principles of Corporate Governance

C.G. structure may vary from country to country, but most organizations incorporate the following key elements:

  • Principles of accountability
  • Principles of fairness
  • Principles of equity
  • Principles of transparency
  • Principles of discipline
  • Principles of responsibility
  • Principles of social responsibility
  • Principles of honesty
  • Principles of confidentiality
  • Principles of integrity

► Models of Corporate Governance

The following are the model of corporate gov;

  • Anglo-American Model
  • Japanese Model
  • Germany Model
  • Indian Model

Anglo-American Model:

The Anglo-American model is used as the basis of corp. governance in the USA, UK, Canada Australia, and some commonwealth countries.

Japanese Model:

The Japanese model is also known as the business network model, usually, shareholders are banks/ financial institutions, large family shareholders, corporate with cross-shareholding.

Germany Model:

German Model is also called the ‘Two-Tier Board Model’ as there are two boards. The supervisory based and the management board. It is used in countries like Germany, Holland, France, etc.

Indian Model:

The Indian model of corporate gov. is a mixture of the anglo-American and german models. This is because, in India, there are types of corporations viz private companies, public companies, and public sectors.

► Theories of Corporate Governance

Since the 1970s and until now, many theories have been proposed by scholars and specialists in the areas of corp. governance. Basically, these theories look at different perspectives of corp. governance and none of them are holistic. Let us know to see the important competitive theories of corp. governance as follows:

  1. Agency Theory
  2. Stewardship Theory
  3. Stakeholders’ Theory
  4. Transaction Cost Theory
  5. Dependency Theory
  6. Political Theory
  7. Ethical Theory