Chapter 43
FINANCIAL MANAGEMENT : Corporate governance
Broadly speaking, corporate governance is the organisation of the control over, and man- agement of, a firm. A narrower definition of corporate governance covers the relationship between the firm’s shareholders and management, mainly involving the functioning of the board of directors or the supervisory board.
Corporate governance is determined, first and foremost, by company law, but there are also a number of reports and best-practice codes that complement the recommendations and guidelines contained in the strictly legal framework.
These recommendations and guidelines deal with subjects such as transparency in the func- tioning of the board of directors, the choice of directors, the role and independence of the board, and the setting up of specialised committees to help the board in its work.
Corporate governance is one of the main means of reducing agency costs arising out of the potentially damaging relationship between shareholders and management.
Studies on corporate governance and value tend to demonstrate that good corporate gover- nance will create value. This is even more the case for large firms based in countries where the legal framework is very loose. For small firms, the cost of introducing a sophisticated system of corporate governance can be prohibitive. Generally, there is less need for such a system in smaller firms where the managers are often the main shareholders (which prevents conflicts of interest) and there are very rarely minority shareholders.