Corporate governance is the system of rules, practices, and processes by which a company is directed and controlled. It involves balancing the interests of various stakeholders, including shareholders, management, customers, suppliers, financiers, government, and the community.

Key takeaways

• Ensures accountability, fairness, and transparency in a company's relationship with stakeholders
• Involves the board of directors, management, shareholders, and other stakeholders
• Encompasses both internal factors (e.g., corporate policies) and external factors (e.g., laws and regulations)
• Aims to mitigate conflicts of interest, particularly between management and shareholders
• Critical for maintaining investor confidence and long-term economic stability

Corporate governance provides the framework for attaining a company's objectives and encompasses every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure. Key components include:

1. Board of directors: Responsible for overseeing management and representing shareholder interests.
2. Shareholder rights: Ensuring fair treatment and voting rights for all shareholders.
3. Transparency and disclosure: Providing accurate and timely information about the company's financial situation and performance.
4. Ethical behaviour: Maintaining integrity and ethical standards throughout the organisation.
5. Risk management: Identifying and managing potential risks to the company.
6. Compliance: Adhering to relevant laws, regulations, and industry standards.

Good corporate governance is essential for:

• Building trust with investors and the public
• Reducing the risk of corporate scandals and fraud
• Improving decision-making processes
• Enhancing a company's reputation and brand value
• Facilitating access to capital

Real-world examples

1. Enron scandal (2001)

   The collapse of Enron due to fraudulent accounting practices highlighted the importance of strong corporate governance. This led to the Sarbanes-Oxley Act in the US, which set new standards for corporate accountability.

2. Volkswagen emissions scandal (2015)

   Volkswagen's deliberate cheating on emissions tests revealed failures in ethical governance and oversight, resulting in massive fines and damage to its reputation.

3. Toshiba accounting scandal (2015)

   Toshiba overstated its profits by $1.2 billion over seven years, exposing weaknesses in its corporate governance structure and leading to significant reforms within the company.

4. Disney's CEO succession (2020)

   Disney's smooth transition from Bob Iger to Bob Chapek demonstrated effective succession planning, a key aspect of good corporate governance.

5. BlackRock's focus on ESG (2021)

   Investment firm BlackRock has emphasised the importance of environmental, social, and governance (ESG) factors in its investment decisions, influencing corporate governance practices globally.