Corporate governance refers to the system by which corporations are managed and controlled. It encompasses the relationships among a company's shareholders, board of directors, and senior management. These relationships provide the framework within which corporate objectives are set and performance is monitored. Three categories of individuals are, thus, key to corporate governance success: first, the common shareholders, who elect the board of directors; second, the company's board of directors themselves; and, third, the top executive officers led by the chief executive officer (CEO).
The board of directors - the critical link between shareholders and managers - is potentially the most effective instrument of good governance. The oversight of the company is ultimately their responsibility. The board, when operating properly, is also an independent check on corporate management to ensure that management acts in the shareholders' best interests.
The Ro[e of the Board of Directors
The board of directors sets company-wide policy and advises the CEO and other senior executives, who manage the company's day-to-day activities. In fact, one of the board's most important tasks is hiring, firing, and setting of compensation for the CEO. Boards review and approve strategy, significant investments, and acquisitions. The board also oversees operating plans, capital budgets, and the company's financial reports to common shareholders.
In the United States, boards tlpically have 10 or 11 members, with the company's CEO often serving as chairman of the board. In Britain, it is common for the roles of chairman and CEO to be kept separate, and this idea is gaining support in the United States.
Act of 2002 There has been renewed interest in corporate governance in this last decade caused by major governance breakdowns, which led to failures to prevent a series ofrecent corporate scandals involving Enron, WorldCom, Global Crossing, Tyco, and numerous others. Governments and regulatory bodies around the world continue to focus on the issue of corporate governance reform. In the United States, one sign of the seriousness of this concern was that Congress enacted the Sarbanes-Oxley Act of 2002 (SOX).
Sarbanes-Oxley mandates reforms to combat corporate and accounting fraud, and imposes new penalties for violations of securities laws. It also calls for a variety of higher standards for corporate governance, and establishes the Public Company Accounting Oversight Board (PCAOB). The Securities and Exchange Commission (SEC) appoints the chairman and the members of the PCAOB. The PCAOB has been given the power to adopt auditing, quality control, ethics, and disclosure standards for public companies and their auditors as well as investigate and discipline those involved.