Performance Resources

Definition of Corporate Governance

Although Corporate Governance has gained prominence worldwide after the OECD Principles of Corporate Governance (OECD, 1999) were released in 1999, it is not a new concept. The Cadbury Report (Cadbury, 1992) to The London Stock Exchange is one of the earliest documents from the 1990s that defines Corporate Governance. It states:

Corporate governance is the system by which companies are directed and controlled.

However, more than 200 years before, Adam Smith in his monumental work on economy (Smith, 1776, p. 192) made this comment:

The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it.

It is perhaps one of the first thoughts on Corporate Governance in history.

One of the best known, most fundamental and most cited definition of recent times on Corporate Governance comes from the OECD. The OECD defines Corporate Governance as :

…corporate governance … involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined

This resembles and extends the definition of the Cadbury report, and adapted by companies around the world. However it somehow lost the richness of Mueller’s definition (Mueller, 1981). This is another example of how learning can be lost from one era to the other. While the OECD definition is cited by companies from Finland (www.ensto.com) to Venezuela (www.ntn-consultores.com), Mueller’s concept of overseeing and identity creation is less acknowledged.

Having said all this, these definitions highlight the following details:

Corporate governance is a system or framework of several activities;
These activities are high level, direction setting, forward looking;
There are several participants performing the specific activities.

Even though one might say that these definitions seem to be clear, there are different views on each set of the above three details. The CICA (Canadian Institute of Chartered Accountants) emphasises direction and control. Shleifer and Vishny consider it being in the field of finance (Shleifer and Vishny, 1997). Maw describes two views on participants (narrow view: directors’ rule, broad view: shareholders’ rule) in his work on Corporate Governance (Maw et al., 1994), and Mathiesen views Corporate Governance as a field of economics (Mathiesen, 2002). John McFarlane, the CEO of ANZ Bank believes that

Good corporate governance is about making sure stakeholders get what they can reasonably expect. Bad governance is when they get something they never expected

Perhaps these diverse views prompted Maw to make this comment:

Corporate governance is a topic recently conceived, as yet ill-defined, and consequently blurred at the edges…

As it can be seen from the above, even though the area of Corporate Governance is well research and well documented, it is also diverse. It can be suggested however, that due to the nature of such an eclectic and vast field, further research and somewhat tighter definitions could add value and generate new knowledge. Rethinking the meaning of governance and reviewing the best practices in light of that could generate discussions that could advance this interesting field of management science.

The next section discusses the main activities of Corporate Governance. This paves the way to move further down the governance literature hierarchy, and will help us to arrive eventually to the specific field of Information security governance.

References

Cadbury, A., 1992 The Financial Aspects of Corporate Governance, Gee and Co. Ltd., London, UK. p. 14

Hughes, A., 2002, ANZ boss backs tougher corporate regulation, Sydney Morning Herald, 29 Oct. 2002

OECD, 1999, OECD Principles of Corporate Governance, OECD Publications Service, France, viewed 17 May 2004, http://www.ausncp.gov.au/content/docs/19990101_corporate_governance.pdf

Mathiesen, H. 2002, Managerial Ownership and Financial Performance, Ph.D. Thesis, Copenhagen Business School, Denmark

Mueller, R. K., 1981, Changes in the wind of corporate governance, Journal of business strategy, Spring 1981, Vol. 1, No. 4, pp. 8-14

Maw N, Lord Lane of Horsell, and Craig-Cooper, M. (1994) Maw on Corporate Governance ed. by Alsbury, A., Dartmouth Publishing

Shleifer, A. and Vishny, R, 1997, A Survey of Corporate Governance, Journal of Finance, Vol. 52, no. 2 (June 1997), pp. 737-783