Why has improved corporate governance become an increasingly important topic in recent years?

Essay by ven April 2006

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Corporate governance has evolved into an important institute within recent years because of the highly visible corrupt and unethical practices of large and global companies such as Enron, WorldCom and Parmalat, the Italian dairy conglomerate. These scandals had left stakeholders and governments in a disorientated state.

It has always attracted attention due to its apparent importance for the economic health of corporations and society in general. The concept is poorly defined as it potentially covers a large number of distinct economic phenomenons. As a result, different definitions that reflect people's special interest in their fields have emerged.

Mathiesen (2002) posits that corporate governance is a field in economics that investigates how to secure/motivate effective management of corporations by the use of incentive mechanisms, such as contracts, organizational designs and legislation, to improve financial performance.

The Organization for Economic Cooperation and Development's (OECD) 1999 definition is consistent with the one presented by Cadbury (1992) who stated that corporate governance is the system by which business corporations are directed and controlled.

The structure specifies the distribution of rights and responsibilities transparently among different participants in the corporation, such as the board, managers, shareholders, employees, bankers, and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company's objectives are set, and the means of attaining those objectives and monitoring performance.

The importance of improved corporate governance may be better appreciated by looking at the key corporate actors. It will be useful to know about the composition, role, organization, operation and evaluation of the Board of Directors, Chief Executive Officer and Management. Their performance have a direct relationship to the stockholders, investors, employees, communities and governments in terms of costs and benefits, and changing the...