Theories of corporate governance

Governance essentially means setting up rules to control policies and behaviors Jin et al. In thecase of corporate governance,it means implementing rules that will control corporate policies and behaviors.

Theories of corporate governance

Corporate governance Corporate governance is primarily the study of the power relations among a corporation's senior executives, its board of directors and those who elect them shareholders in the " general meeting " and employees.

It also concerns other stakeholders, such as creditorsconsumersthe environment and the community at large. One of the main differences between different countries in the internal form of companies is between a two-tier and a one tier board. The United Kingdom, the United States, and most Commonwealth countries have single unified boards of directors.

Theories of corporate governance

In Germany, companies have two tiers, so that shareholders and employees elect a "supervisory board", and then the supervisory board chooses the "management board".

Recent literature, especially from the United States, has begun to discuss corporate governance in the terms of management science. While post-war discourse centred on how to achieve effective "corporate democracy" for shareholders or other stakeholders, many scholars have shifted to discussing the law in terms of principal—agent problems.


On this view, the basic issue of corporate law is that when a "principal" party delegates his property usually the shareholder's capital, but also the employee's labour into the control of an "agent" i.

Reducing the risks of this opportunism, or the "agency cost", is said to be central to the goal of corporate law. Corporate constitution A bond issued by the Dutch East India Companydating from 7 Novemberfor the amount of 2, florins The rules for corporations derive from two sources.

These are the country's statutes: The law will set out which rules are mandatory, and which rules can be derogated from.

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Examples of important rules which cannot be derogated from would usually include how to fire the board of directorswhat duties directors owe to the company or when a company must be dissolved as it approaches bankruptcy. Examples of rules that members of a company would be allowed to change and choose could include, what kind of procedure general meetings should follow, when dividends get paid out, or how many members beyond a minimum set out in the law can amend the constitution.

Usually, the statute will set out model articleswhich the corporation's constitution will be assumed to have if it is silent on a bit of particular procedure. The United States, and a few other common law countries, split the corporate constitution into two separate documents the UK got rid of this in The memorandum of Association or articles of incorporation is the primary document, and will generally regulate the company's activities with the outside world.

It states which objects the company is meant to follow e. The articles of association or by-laws is the secondary document, and will generally regulate the company's internal affairs and management, such as procedures for board meetings, dividend entitlements etc.

In the event of any inconsistency, the memorandum prevails [17] and in the United States only the memorandum is publicised. In civil law jurisdictions, the company's constitution is normally consolidated into a single document, often called the charter.

What is agency theory?

It is quite common for members of a company to supplement the corporate constitution with additional arrangements, such as shareholders' agreementswhereby they agree to exercise their membership rights in a certain way.

Conceptually a shareholders' agreement fulfills many of the same functions as the corporate constitution, but because it is a contract, it will not normally bind new members of the company unless they accede to it somehow.

Another common method of supplementing the corporate constitution is by means of voting trustsalthough these are relatively uncommon outside the United States and certain offshore jurisdictions. Some jurisdictions consider the company seal to be a part of the "constitution" in the loose sense of the word of the company, but the requirement for a seal has been abrogated by legislation in most countries.

Balance of power[ edit ] Adolf Berle in The Modern Corporation and Private Property argued that the separation of control of companies from the investors who were meant to own them endangered the American economy and led to a mal- distribution of wealth. The most important rules for corporate governance are those concerning the balance of power between the board of directors and the members of the company.

Authority is given or "delegated" to the board to manage the company for the success of the investors.

Corporate Governance A Synthesis Of Theory Research And Practice

Certain specific decision rights are often reserved for shareholders, where their interests could be fundamentally affected. There are necessarily rules on when directors can be removed from office and replaced. To do that, meetings need to be called to vote on the issues.Banff Executive Leadership Inc.

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AI GLOBAL GOVERNANCE Commission is an executive body composed of governments, industry and civil society commissioned to deliver the global Convention on AI. '[A] magisterial work. At whatever level corporate governance is being studied and reviewed, there can be no doubt about the value of Professor Clarke's book in bringing together and clarifying the theories which have contributed to, and have relevance for, the development of corporate governance.

Understanding the Company: Corporate Governance and Theory from the manufacturer. What is the purpose of the company and its role in society From their origin in medieval times to their modern incarnation as powerful transnational bodies, companies remain an important part of business and society at large.

Understanding the Company: Corporate Governance and Theory