corporate governance

The ways in which an organization is controlled and regulated, and the manner in which an organization conducts its activities. It has been suggested that the "basic corporate governance issues are those of power and *accountability. They involve where power lies in the corporate system, and what degree of accountability there is for its exercise" (Cadbury, 2002, 3). Corporate governance frameworks are molded by many influences, including legislation, custom, *ethics, *stakeholder pressure, public opinion, and professional and academic literature. In classical economic theory, *profit-seeking firms seek to maximize revenues above all other considerations (Friedman, 1982). While corporate governance theory does not necessarily seek to contradict or undermine this objective, it attempts to establish socially accepted rules for the pursuit of profit. In addition, corporate governance is applicable to *public sector and *not-for-profit organizations, for which the alternative term Organizational governance is frequently used. Governance tends to be differentiated from the management of an organization: Governance is concerned with strategy and overall oversight, while management is concerned with the day-to-day implementation of governance strategies. The *Organization for Economic Co-operation and Development has described corporate governance as "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. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and shareholders and should facilitate effective monitoring" (OECD, 1999, 1). A former chairperson of the SEC has referred to corporate governance as "the link between a company’s management, directors, and its financial reporting system" and has described it as "indispensable to effective *market discipline" (Arthur Levitt, quoted in Hermanson and Rittenberg, 2003, 26). Some commentators identify two main aspects of corporate governance: (i) an external side with accountability of *stewardship to stakeholders and *external controls; and (ii) an internal side of procedures, *internal controls, and internal auditing. See also *corporate social responsibility and *risk management. Further reading: Cadbury (2002); Cohen et al. (2002); Gugler (2001); Hermanson and Rittenberg (2003); Keasey and Wright (1999); Lipton and Lorsch (1992); OECD (1999); Roussey (2000)