Business Sustainability, Corporate Governance, and Organizational Ethics

CHAPTER 12Fundamentals of Corporate Governance

1. Introduction

Shareholders who invest capital are usually remote, by distance or knowledge, from those managing the corporation. The wave of financial scandals of the late 1990s and early 2000s and the global financial crises of 2007–2009 were devastating and resulted in billions of dollars in financial losses and the erosion of investor confidence and public trust in financial reports disseminated by public companies. Financial scandals of high-profile companies such as Enron, WorldCom, Global Crossing, and Qwest (better known as the Big-Four scandals) alone cost investors and pensioners more than $460 billion.¹ They also raised a fundamental question: Where were the directors, officers, auditors, outside legal counsel, financial analysts, investment banks, and even standard-setting bodies and regulators? More specifically, questions were raised concerning the lack of ethical, vigilant, and effective corporate governance, which played a major role in these scandals. This chapter presents fundamentals of an effective corporate governance structure including theories, principles, standards, functions, and mechanisms and explains how it should work to improve corporate accountability to all stakeholders and improve the quality of publicly disclosed financial reporting.

Learning Objectives

• Define corporate governance structure and its components of principles, functions, and mechanisms.
• Provide an overview of the corporate governance ...