Corporate governance is an important part of strategic management that can improve firm performance. Despite its importance, many people are unclear about what corporate governance is precisely. Both managers and investors should understand what corporate governance is and the role that it plays in firms. Being aware of what corporate governance is will allow them to see how it affects their respective businesses.
Corporate governance, in strategic management, refers to the set of internal rules and policies that determine how a company is directed. Corporate governance decides, for example, which strategic decisions can be decided by managers and which decisions must be decided by the board of directors or shareholders.
Corporate governance is a concept that emerged following the growth of corporations in the 20th century. In particular, following the stock market crash in 1929, scholars began to argue for corporate governance mechanisms that would allow shareholders to keep companies in check. In the latter half of the 20th century this continued, with corporate governance structures being introduced to control managers and to ensure that their actions are in line with shareholder interests.
The central purpose of corporate governance is to make managers accountable to shareholders. Without a corporate governance structure, managers would be free to make decisions that are in their own interest, but not necessarily in the interest of the firm. Corporate governance keeps managers in check by limiting their power and, often, by tying their pay to firm performance.
Firms with good corporate governance models perform better because their managers are more inclined to make decisions that favor the business. They also will tend to have higher stock prices because investors are more confident that they can control the firm. Firms with good corporate governance models also will find it easier to attract financing because they are perceived as being more accountable.
- Radford University; Corporate Governance; Dr. Gar Wiggs
- "A History of Corporate Governance Around the World"; Randall K. Morck; 2005