Markets have shown that good corporate governance leads to better results for companies and investors by avoiding companies with the most questionable corporate governance practices.
Corporate governance is the system of internal controls and procedures by which individual companies are managed. It provides a framework that defines the rights, roles, and responsibilities of various groups including management, the board, controlling shareowners, and minority or noncontrolling shareowners within an organization.
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Investors in both developed and developing markets have historically placed corporate governance premiums on companies with low corporate governance related risks and corporate governance discounts on companies with poor governance. Policies and practices like opaque or limited disclosure, unqualified boards, limited shareowner rights, poor executive pay practices, and other governance red flags are seen by investors and factored into their analysis
The board and its committees often need specialized and independent advice as they consider various corporate issues and risks, such as compensation; proposed M&A; legal, regulatory, and financial matters; and reputational concerns. The ability to hire external consultants without first having to seek management’s approval provides the board with an independent means of receiving advice that is not influenced by management’s interests.
Companies that prevent shareowners from approving or rejecting board members on an annual basis limit shareowners’ ability to change the board’s composition when, for example, board members fail to act on an issue of importance to shareowners and also limit shareowners’ ability to elect individuals with needed expertise in response to a change in company strategy.
Executive compensation is linked to the long-term profitability of the company and long-term increases in share value relative to competitors and comparable companies. Shareowners should determine whether incentive structures encourage management to take excessive risks in the short term that may prove detrimental to the company’s long-term viability
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