An Overview of Key Corporate Governance Concepts

Abstract

Corporate governance is a set of mechanisms that ensure the controllers (management) of the firm who have the decision-making authority make well informed and prudent decisions that will lead to maximizing the value of the firm and/or the returns for the owners (providers of finance). The literature review of seminal papers in corporate governance in the field of economics and finance has described the important concepts of which a critical understanding is required in approaching the study of the field of corporate governance. In this paper fundamental concepts of corporate governance have been examined relating to agency theory, contracts, management discretion, role of the board of directors, executive compensation, agency costs, private and shared benefits of control, debt versus equity, shareholder and creditor rights, legal protection and investors, concentrated ownership and large investors, consequent ownership and control implications. Corporate governance is fundamentally based on the concept of separation of ownership and control in firms. There are however costs incurred in the monitoring of the agency relationship as management seeks to protect and increase their flow of rewards from private benefits of control. The most effective governance structure for corporations will have to be one which provides sufficient protection of dispersed minority shareholder rights. Further research and refining of the corporate governance mechanisms and the interrelationships between them can lead a firm to devise an optimal firm-specific governance model. This will enable increased investment in value-enhancing projects with a resultant increase in firm valuation and/or the returns to the owners.