Corporate governance is basically the policies, processes, practises, principles and values that help a company to get to the direction it wants to be at. Shifner and Vishney (1997) state that corporate governance deals with the ways in which suppliers of finance assure themselves of getting a return of interest. This statement is basically saying that suppliers of finance for example banks, use corporate governance to make sure that they will get good return on things such as investments.
The Cadbury report (1992) says that corporate governance is “the system by which companies are directed and controlled. Boards of directors are responsible for the governance of the companies”. The report also says that it is the role of the company shareholders to appoint directors and auditors to ensure and satisfy themselves that a appropriate governance structure is in place. There are two perspective theories on corporate governance; these are the agency theory perspective and the stakeholder theory perspective
The agency theory perspective is when corporate governance is restricted only between a company and the companies’ shareholders. The role of the board is to act as a sort of middle man between the principals, these are usually the people who contribute funds and resources to a company and the agents, these are usually the people use these funds and resources to do tasks within a company. The agency theory is usually a contractual relationship and is usually between two or more people. The relationship is usually between a company manager and the companies shareholders.
Eisenhardt (1985) states that the agency theory explains how best to organize relationships in which one party (principal) determines the work which another party (agent) undertakes. So what the agent theory basically is, is when party being the principal wants to include another party being the agent. The principal party will usually want to use the agent when it is in the best interest of the principal. The problem this can create is that it may not always be in the best interest of the agent.
The stakeholder theory perspective argues that corporate governance does not simply belong to the board of a company. The mangers of a company and the shareholders. The stakeholder theory states that it belongs to a broad range of other stakeholder. This could be anybody who has an input within the company. This could be people such as the company employees, suppliers, lenders, bondholders as well as the shareholders. Therefore under this theory a company usually has a large board of directors.
Solomon and Solomon (2004) state that corporate governance can be seen as a web of relationships, not only between a company and its owners (shareholders) but also between a company and a broad range of other stakeholders such as employees, customers, suppliers, bond-holders, etc. In the year 1992 the first report in which corporate governance best practise was used was publicised. The report was called “The financial aspects of corporate governance” but is better known as the Cadbury report due the name of the chairman Adrian Cadbury.
The main aim of the report was to try and help the country’s economy through efficiency of companies. The committee for this report was setup in 1991, by the financial reporting council. It was setup because they were concerned about the corporate system after many failures of massive major companies. In the report it set out a code of practise, this addressed thee main areas, the board of directors, auditing and shareholders. this was set out to major companies and they were all advised to follow this requirement. More details about this report can be read as there is a link for it in the references section.