Corporate governance connotes the rules, practices and processes by which a company is directed and controlled. The term refers broadly to internal factors defined by the officers, stockholders or constitution of a corporation, as well as to external forces such as consumer groups, clients, and government regulations. It essentially involves balancing the interests of a company's many stakeholder, such as shareholders, management, customers, suppliers, financiers, government and the community. Since corporate governance also provides the framework for attaining a company's objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.
A publicly accessible corporate code of ethics creates a baseline of good corporate governance that helps firms achieve the appropriate balance between smooth corporate operations and safeguarded shareowner interests. It sends an important message to investors, employees, customers, suppliers, and others that the company intends to act ethically.
Non-discriminatory, non-retaliatory disclosures of existing or potential conflicts of interest, relationships, or disagreements may also provide information to investors about the independence — or lack thereof — of firms, allowing investors to make more informed decisions.
Relevant national authorities should help create a set of consistent and universal corporate governance principles and rules for use by listed companies within their jurisdictions, and enforce those principles and rules. Issuers and investors would benefit from a consistent approach among regulators, self-regulatory bodies, and exchanges.
By virtue of their position or holdings, certain parties have access to information that provides them with an advantage over the general investing public. This information should be made available to investors in a timely manner so as to create a level playing field among all market participants.
CFA Institute’s work on corporate ethics is built on the research and principles in The Corporate Governance of Listed Companies: A Manual for Investors (PDF).
Interest in the corporate governance practices, particularly in relation to accountability, increased following the high-profile collapses of a number of large corporations during 2001–2002, most of which involved accounting fraud; and then again after the Financial Crisis.
The corporate governance framework consists of explicit and implicit contracts between the company and the stakeholders for distribution of responsibilities, rights, and rewards, procedures for reconciling the sometimes conflicting interests of stakeholders in accordance with their duties, privileges, and roles, and procedures for proper supervision, control, and information-flows to serve as a system of checks-and-balances.
Conflicts of Interest
Companies and their boards must adopt procedures and take measures to limit, manage, and disclose any conflicts of interest that might affect their decisions and their work on behalf of shareowners. These measures include ensuring that the firm’s external auditors are not conflicted by other non-audit work performed on behalf of management.
A related-party transaction takes place when a deal is entered into by at least two entities — where one has control over the other or where the parties come under the same control of another. The nature and prevalence of such transactions generally vary according to different ownership structures and the investor protection mechanisms which govern them vary by jurisdiction.
Abusive related transactions — also known as connected, interested-person, or intra-company transactions — are particularly prevalent in the Asia-Pacific region because of the concentrated ownership structures and the lack of separation between ownership and control. For example it is very common to have the dominant shareowner (or representative) as the chairman or CEO of the company, and in some cases both. When owners are also managers, minority shareowners’ interests can be easily compromised.
CFA Institute’s work on related-party transactions and corporate governance is based on The Corporate Governance of Listed Companies: A Manual for Investors (PDF).
Relationship with Market Participants
Companies must work with not only investors but also those analysts and investment managers who work on the behalf of investors. As part of this work, companies must have policies and procedures in place to ensure that they treat all market participants fairly.
Communication requires board members to disclose pertinent information in a timely manner. At the same time, boards would benefit from opening lines of communication with investors to ensure that they understand their perspectives.
The Sarbanes-Oxley Act of 2002, is aimed at preventing Enron-style corporate frauds. The Dodd-Frank Act of 2010, and its related “Volcker Rule” laws designed in-part to promote better corporate governance. And The Model Business Corporation Act (MBCA) – a model set of laws followed by twenty-four states. It has been influential in shaping standards for U.S. corporate law.