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 oblige 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 to 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 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 organized 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 legal and voluntary re­quire­ments, companies must establish corporate gov­er­nance struc­tures. How such struc­tures are organized varies to 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 Or­ga­ni­za­tion 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.

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