Corporate Governance

Definition: Corporate governance refers to the entire framework of rules, practices, and processes that direct and control companies. It determines how decision-making authority is distributed among key stakeholders—such as shareholders, managers, employees, and others—and how conflicts of interest are managed.

At its core, corporate governance answers the question: Who controls the company, and in whose interests is it run?

Key Approaches

1. Shareholder Value Approach

Traditionally, the focus has been on the relationship between owners (shareholders) and managers. According to Shleifer and Vishny (1997), the separation of ownership and control creates the risk that managers pursue personal goals—such as preserving status or minimizing effort—at the expense of shareholder interests.

In this model, the goal of corporate governance is to:

• Limit managerial discretion

• Align executive decisions with investor interests

• Create incentives and oversight mechanisms such as:

  • Performance-based compensation

  • Board supervision

  • Disclosure and transparency requirements

2. Stakeholder Approach

This broader perspective, advocated by scholars like Blair and Roe (1999), emphasizes the inclusion of non-shareholder stakeholders, including:

• Employees

• Customers

• Suppliers

• Local communities

Stakeholder-based governance acknowledges that corporate decisions (e.g., layoffs, restructuring) have significant consequences beyond financial returns, especially when employees have invested in firm-specific skills or long-term development.

Impact on Company Performance

Corporate governance influences:

• Decision-making efficiency: Centralized systems allow for faster decisions, but risk ignoring important stakeholder input. Inclusive models enhance information richness but may slow down processes.

• Risk distribution: Governance mechanisms determine how risks and returns are shared among executives, employees, and other parties.

• Transparency and trust: Effective governance builds credibility with investors, regulators, and the public.

Summary

Strong corporate governance structures balance accountability, transparency, and fair stakeholder participation. Whether following a shareholder- or stakeholder-centric model, the overarching goal is to align interests, reduce agency problems, and enhance long-term value creation.