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Although
corporate governance is considered to be a relatively new topic,
corporate governance practices are well established.
Governance issues arise whenever an enterprise acquires a
life of its own ie, whenever ownership of an entity is separated
from its management. Adam Smith demonstrates that the concept of
corporate governance was understood in the eighteenth century, even
though the phrase was not in use:
“The
directors of companies, being managers of other people’s money
than 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.”
-
Adam
Smith, The Wealth of Nations, 1776.
So
what is corporate governance? There are many different definitions,
but a useful one is that set out in the Principles of Corporate
Governance developed by the Organisation for Economic Co-operation
and Development (OECD) in 1999.
“Corporate
governance is the system by which business corporations are directed
and controlled. The corporate governance structure specifies the
distribution of rights and responsibilities among different
participants in the corporation ... and spells out the rules and
procedures for making decisions on corporate affairs. By doing this
it provides the structure through which the company objectives are
set, and the means of attaining those objectives and monitoring
performance.”
-
OECD,
OECD Principles of Corporate Governance, 1999.
Put
simply, corporate governance is the umbrella that covers the way in
which companies are directed and controlled.
There
are five major governance topics that deal with the following key
issues:
1.
Board effectiveness (composition, committees, and
compensation)
What
is the fiduciary responsibility of the board?
What does "good governance practices" imply about the
structure of the board?
What is the evidence on the link between board composition and
firm performance?
How should boards be ranked?
What key characteristics distinguish startup boards from the
boards of large publicly traded companies?
What is unique about nonprofit boards?
How should the board members, as well as the CEO, be compensated?
What constitutes an effective succession policy?
What should be the role of the board when the firm is in distress
or bankruptcy?
2.
Corporate restructuring (takeovers, M&As, LBOs,
recapitalization, and bankruptcy
What
constitutes an optimal bidding strategy?
What are the gains and losses from merger and acquisition
(M&A) activity?
How should the board react to a hostile takeover bid, and what are
the value implications of corporate defensive tactics, such as
poison pills and break-up fees?
What are the governance characteristics of leveraged buyouts (LBOs)
and highly leveraged transactions (HLTs)?
What is the governance role of vulture funds?
What are the governance implications of alternative bankruptcy
codes?
3.
Global governance (governance systems and convergence)
What
defines a corporate governance system, and how do governance
practices differ across countries?
How do you identify a governance system failure?
What are the main forces leading to international system
convergence?
What are the counterforces?
What are the key governance issues facing developing economies?
How does a country's governance structure affect its economic
development?
4.
Governance investing (active owners and their impact on
performance
What does an active owner do?
What are the potential conflicts between active and passive
owners, and how are they resolved?
What prompted institutional investors to become active owners, and
what have been the legal and economic consequences?
What are the governance policies and approaches of the large,
active pension funds?
What is the risk/return tradeoff for governance investing in
either equity or debt instruments?
5.
Raising capital (financial contracts, VCs and IPOs)
What characterizes financial
contracts issued by startup firms?
What is the governance landscape when a venture capitalist (VC) is
involved, and what changes occur following the VC's exit?
What are the typical governance provisions in the charters of
firms going public?
What are the governance implications of "money left on the
table," implied by the well-known underpricing of IPO firms?
How do firms float new securities, and what are the governance
implications the floatation method of choice?
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