Corporate Gov­ernance: The Business Man­age­ment Prin­ciples

Corporate gov­ernance is one of the core terms of business man­age­ment. It en­cap­su­lates a variety of reg­u­la­tions and legal re­quire­ments which obligate a business to operate on the market suc­cess­fully and in com­pli­ance with the law.

We provide an overview of which prin­ciples and ob­ject­ives are as­so­ci­ated with corporate gov­ernance, how the prin­ciples are reflected in corporate practice, and which sets of rules apply in­ter­na­tion­ally.

Corporate gov­ernance refers to the entirety of all reg­u­la­tions, laws and pro­ced­ures that define and govern the conduct of busi­nesses. The legal and reg­u­lat­ory framework for corporate gov­ernance comprises not only a company’s internal reg­u­la­tions (e.g. corporate con­sti­tu­tion), but also pro­vi­sions that affect the company’s external re­la­tion­ships with the capital market. In this way both business man­age­ment and le­gis­lat­ors shape the struc­tur­ing of corporate gov­ernance within a company.

Most im­port­antly, corporate gov­ernance plays a role in market-listed companies, as its struc­tures serve the purpose of co­ordin­at­ing the diverse interests of share­hold­ers and man­age­ment in order to avoid conflicts between both parties or within re­spect­ive groups. In the meantime, however, other business forms and medium-sized busi­nesses will also be in­creas­ingly viewed from the per­spect­ive of corporate gov­ernance.

The ob­ject­ives of corporate gov­ernance struc­tures vary according to the company. What is common to all struc­tures, however, is that they provide business man­age­ment with a framework, and fur­ther­more con­trib­ute to stability within the market. Both have a positive impact on the company’s success and create economic op­por­tun­it­ies and more jobs.

Important ob­ject­ives of corporate gov­ernance are:

• Oversight
• Trans­par­ency
• Ef­fi­ciency
• Adequate risk man­age­ment
• Process im­prove­ment
• Equal treatment and pro­tec­tion of diverse interests

The terms “corporate gov­ernance” and “com­pli­ance” are often used in the same context, and not se­lect­ively. In fact, some sources use both terms syn­onym­ously. In both cases, reg­u­la­tions and laws that a company has to comply with are con­sidered.

The dif­fer­ence between the two terms lies in their per­spect­ives: Corporate gov­ernance focuses on re­la­tion­ships – it aims to create trans­par­ency and trust between share­hold­ers and business man­age­ment, and for investors and the capital market. Com­pli­ance, from the per­spect­ive of the company, focuses on the measures that are required in order to comply with the pro­vi­sions needed for organised and suc­cess­ful business man­age­ment.

Corporate gov­ernance and com­pli­ance, along with risk man­age­ment, are often regarded summarily as one set of issues: “gov­ernance, risk and com­pli­ance”.

In order to comply with legally ob­lig­at­ory and voluntary re­quire­ments, companies must establish corporate gov­ernance struc­tures. How such struc­tures are organised varies according to the country in which the company is located. There are fun­da­ment­al dif­fer­ences between the USA and con­tin­ent­al Europe.

In the USA and United Kingdom, the share­hold­er approach, which focuses on the re­la­tion­ship with actors in the market, is used. This is why the board of directors is dominated by non-executive members elected by share­hold­ers.

In Europe the stake­hold­er approach, which includes all the groups affected by business activ­it­ies, is paramount. Here the su­per­vis­ory board has an important role in de­term­in­ing which employee rep­res­ent­at­ives and rep­res­ent­at­ives from other stake­hold­ers, such as customers or suppliers, monitor business man­age­ment.

According to which approach you look at, the processes to be im­ple­men­ted will vary, as will the su­per­vis­ory bodies. In­de­pend­ently of the chosen system, however, it is necessary in the vast majority of cases to establish a corporate gov­ernance division, as com­pli­ance with all gov­ernance pro­vi­sions involves a sub­stan­tial amount of work.

The origins of corporate gov­ernance can be traced back to the 1930s, when the first relevant prin­ciples were published by US sci­ent­ists in the aftermath of the great stock market crash of 1929. These observed a di­ver­gence between share­hold­er and man­age­ment interests.

With the emergence of in­ter­na­tion­al cor­por­a­tions following the Second World War, the ideas of corporate gov­ernance continued to spread within the USA and the number of pub­lic­a­tions increased. Starting in the 1970s, business ex­ec­ut­ives then also committed them­selves to these prin­ciples with greater zeal, going beyond legally binding reg­u­la­tions.

In­ter­na­tion­ally, however, the term first became well-known in the 1990s, as cor­por­a­tions used it in order to report about their practical im­ple­ment­a­tion of good business man­age­ment.

Different codes and guidelines exist for each country. In the European Union various dir­ect­ives and guidelines apply. A corporate gov­ernance code for banks and in­vest­ment companies is specified in European corporate law. In the US, state corporate laws such as the Delaware General Cor­por­a­tion Law (DGCL) and federal se­cur­it­ies laws can regulate corporate gov­ernance. On the federal level, the main sources are the Se­cur­it­ies Act of 1933 (Se­cur­it­ies Act) and the Se­cur­it­ies Exchange Act of 1934 (the Exchange Act). In 2002, the Sarbanes-Oxley Act was enacted in response to corporate scandals which cost investors billions of dollars, and in 2010 following the financial crisis of 2008-2009 the Dodd-Frank act re­struc­tured financial reg­u­la­tion. There is also a number of corporate gov­ernance guidelines and codes of best practice.

The Or­gan­isa­tion for Economic Co­oper­a­tion and De­vel­op­ment (OECD) has also es­tab­lished standards for corporate gov­ernance. The OECD prin­ciples were first published in 1999 and most recently updated in 2015. The prin­ciples aim to maintain economic ef­fi­ciency, sus­tain­able growth and financial stability as well as the fair handling of share­hold­ers and stake­hold­ers.

Please note the legal dis­claim­er relating to this article.