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Corporate Governance – Meaning & Objectives

Corporate Governance is the system of rules, practices, and processes by which a firm is directed and controlled. It involves balancing the interests of a company's many stakeholders (shareholders, management, customers, suppliers, financiers, government, and the community).

Meaning

  • Simple Definition: It is about how a company is run.
  • Formal Definition (Cadbury Committee, UK): "Corporate Governance is the system by which companies are directed and controlled."

The 4 Pillars of CG (FACT)

  1. Fairness: Analyzing equally the rights of all shareholders (minority vs majority).
  2. Accountability: Management is accountable to the Board; the Board is accountable to shareholders.
  3. Commitment/Responsibility: To fulfill duties.
  4. Transparency: Timely and accurate disclosure on all material matters (financials, performance, ownership).

Objectives

  1. Protect Shareholders: Prevent the CEO from stealing the money or taking insane risks.
  2. Strategic Management: Ensure the company has a long-term vision.
  3. Minimize Corruption: Reduce conflicts of interest.
  4. Availability of Capital: Good governance attracts global investors (FDI/FII).
Note

Agency Problem: CG exists primarily to solve the Agency Problem—the conflict of interest between the Principals (Shareholders) and the Agents (Managers). Managers might want private jets; Shareholders want dividends. CG rules restrain the Agents.

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