Corporate governance is the system of rules, practices, relations, and processes by which corporations are directed and controlled. The concept of corporate governance is relatively new compared to the entire history of free trade and business formation. There was likely some “code of honor” followed by businesses in the past, but it wasn’t until the 21st century that greater attention was paid to how companies operate and how the operation impacts employees and the communities in which they serve.
Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the community. Since corporate governance also provides the framework for attaining a company’s objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.
According to the Ethics and Compliance Initiative, which is comprised of organizations that are committed to creating best practices in ethics, each decade has been influenced by external factors, such as war or economic turmoil, combined with major ethical focal areas, and the result has been the development of ethics and compliance programs.
For example, in the mid-1980s, the United States was thrust into a recessionary period. During this period, government contractors were billing outrageous amounts for equipment and services, further increasing the government’s deficit. At the same time, larger companies began downsizing to cut costs, which eroded the trust that employees once had. People felt the need to look out for themselves. Greed appeared to be everywhere, from political bribes to the earliest financial schemers. As a result, General Dynamics established the first business ethics office in 1985 to crack down on this kind of activity, and other companies created ombudsman positions to help ethics officers identify and prosecute corporate ethics violators.
Corporate governance systems
Corporations can choose between three different governance systems: ordinary, monistic, and dualistic.
The ordinary system (typical of the Italian tradition) is characterized by the fact that the assembly (the representative body of the company’s shareholders) appoints both the administrative body (board of directors or sole director) and the board of statutory auditors that carries out control activities on the work of the administrative body; this corporate governance choice is applied in the absence of a different statutory choice.
The monistic system typical of the Anglo-Saxon tradition is so-called because it provides for the presence of only one management body, namely the board of directors, which appoints the control committee within it. The following rules apply to the control committee:
- its members are designated by the board of directors (at least three if the company makes use of the venture capital market);
- they must have particular professionalism and independence requirements;
- the chairman is appointed by the majority of the control committee;
- the rules of the board of statutory auditors are applicable.
The dualistic system (typical of the German tradition) is so-called because the administration of the company is divided between two different bodies: the management board and the supervisory board. The members of the management board:
- they must be at least two, even non-members and are appointed by the supervisory board for no more than three years;
- they can be revoked at any time by the supervisory board;
- they are subject to the same responsibility as the directors.
The members of the supervisory board:
- they must be at least three and are appointed by the assembly for three financial years (renewable); the assembly also appoints the president;
- they can be revoked at any time by the assembly;
- they are subject to the grounds for revocation envisaged for the statutory auditors.