Company Law - Management & Corporate Governance (Part 1)

What is corporate governance?

The term ‘corporate governance’ actually covers a very wide range of issues – essentially, it is concerned with the formal and informal regulation of both the internal and external relations of the company. Despite this, it has been said that it “is a fashionable concept, but like most fashionable ideas it is remarkably imprecise”.

However, over time the concept has become more influential, particularly after a number of large-scale scandals such as the Robert Maxwell scandal in the early 1990s, criticisms of the level of directors’ remuneration in the late 1990s and the more recent collapse of Enron and WorldCom.


It can be said that corporate governance, in the narrower sense, is concerned with ‘alignment’. The shareholders (and often creditors) have contributed assets to the company, and it is important to align the interests of these contributors with those charged with managing the company. There is a danger that, without this, the manager may choose to do anything from putting in only the barest effort required in return for their remuneration to simply stealing the assets.

This is achieved through both ‘internal’ and ‘external’ mechanisms:

The ‘internal’ mechanism is the power of the shareholders to control or influence the board of directors, both through general meetings and the use of litigation to enforce directors’ obligations.

The ‘external’ mechanisms are those regulatory requirements within which the company operates. For example, this can include the detection and prosecution of corporate fraud, and detailed insolvency procedures.

The stock market

It has been suggested that the stock market can play an important part in corporate governance in that the company’s share price can influence the management. For example, if there is little confidence in the company, then its share price will be lower, resulting in criticism at both shareholder meetings and in the financial media. This can be enhanced further by offering share options to the management, offering an additional incentive to enhance the value of the shares.

A low share price may also render the company liable to a hostile take-over bid, which could result in the management being replaced upon take-over.

Stakeholder company law

Corporate governance, in the wider sense, can include stakeholders other than the shareholders and creditors. It has been suggested that as a separate legal person, the company has a duty to be socially responsible. Therefore, it is arguable that ‘corporate social responsibility’ is an aspect which should be built into the corporate governance model. Therefore, it becomes important to consider the interests of, for example, employees, the environment, the locality in which the company operates and so on.
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