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The Significance of Corporate Governance

Governance has proved an issue since people began to organise themselves for a common purpose. How to ensure the power of organisation is harnessed for the agreed purpose, rather than diverted to some other purpose, is a constant theme. The institutions of governance provide a framework within which the social and economic life of countries is conducted. Corporate governance concerns the exercise of power in corporate entities. The OECD provides the most authoritative functional definition of corporate governance:

"Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance."

However corporate governance has wider implications and is critical to economic and social well being, firstly in providing the incentives and performance measures to achieve business success, and secondly in providing the accountability and transparency to ensure the equitable distribution of the resulting wealth. The significance of corporate governance for the stability and equity of society is captured in the broader definition of the concept offered by Sir Adrian Cadbury (2002): "Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society."

The current wave of reform of corporate governance commenced with the Cadbury Code of Practice published by the London Stock Exchange in 1992; proceeded with an OECD inquiry in 1997-99, and the publication of OECD guidelines on corporate governance which have been adopted in national codes by all of the industrial countries, and with the assistance of the World Bank and Asian development bank, by many developing countries. The urgency of this endeavour was increased by the Asian financial crisis of 1997-98 that revealed the danger of systemic corporate governance failure. These codes have been reinforced by the influence of the market through investment institutions, and national regulators. Even with the efforts towards comprehensive reform serious weaknesses in corporate governance still occur as with the HIH Insurance and One-Tel collapse in Australia, and the failure of a series of major corporations in the United States in 2001/2002 commencing with Enron and WorldCom. It is likely interest in creating more robust institutions of corporate governance will remain an important social and economic priority for some time to come.