Chapter 42

CORPORATE GOVERNANCE

Or on being politically correct

You may be surprised to find a chapter on corporate governance in a corporate finance textbook. Corporate governance is not, strictly speaking, a financial issue and is based on the legal considerations underlying the framework within which a company is run. However, as you may, by now, have come to expect, we approach the subject mainly from the angle of value. In other words, we attempt to find answers to the question “Will good corporate governance foster the creation of value and will poor corporate governance necessarily destroy value?”

The idea of corporate governance first arose in the 1990s and has been given a boost by the eruption of several major financial scandals in 2001–2003 (Enron, Worldcom, Parmalat). More fundamentally, corporate governance is a natural by-product of the changing economy. For example, a change in the shareholding structure of firms (with a shift away from family-owned firms to a more widely-held shareholding structure made up of institutional and retail investors) leaves management with greater freedom. The issue of shareholder control over management has thus become more pressing. Corporate governance was first introduced at listed companies in the UK and the USA (where firms are generally more widely held) before spreading to countries where the frequent cohabitation of family shareholders and minority shareholders also raises issues of corporate governance.

Section 42.1

WHAT DOES ...

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