Meaning and Concept of Corporate Governance

Corporate governance refers to the system of rules, practices and processes by which a company is directed and controlled — specifically, the framework of relationships and accountability between a company's Board of Directors, its management, its shareholders and its other stakeholders.

The need for corporate governance arises most sharply in a modern joint stock company, where ownership (shareholders, often numerous and widely dispersed) is separated from management (the Board and executive managers who actually run the company day to day). This separation creates the risk that managers may pursue their own interests — excessive compensation, empire-building, or self-dealing — at the expense of the shareholders who actually own the company, and that a company's Board may fail to properly oversee management on shareholders' behalf. Corporate governance is the set of mechanisms designed to reduce this risk and align management's actions with the genuine long-term interests of shareholders and other stakeholders. …