process of corporate_governance

May 29th, 2015
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From the Chicago school of economics, Ronald Coase's "The Nature of the Firm" (1937) introduced the notion of transaction costs into the understanding of why firms are founded and how they continue to behave. Fifty years later, Eugene Fama and Michael Jensen's "The Separation of Ownership and Control" (1983, Journal of Law and Economics) firmly established agency theory as a way of understanding corporate governance: the firm is seen as a series of contracts. Agency theory's dominance was highlighted in a 1989 article by Kathleen Eisenhardt (Academy of Management Review).

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corporate governanceEver wondered about the role car brakes play in giving confidence to the person in the driver's seat? If it is not for this confidence, the driver would never put his foot on the gas pedal to speed up the car. If it is not for this confidence, he may not drive at all. Think of the car as a corporate entity and the brakes as corporate governance. Corporate Governance provides similar confidence to investors. Without this confidence companies cannot flourish. If it is not for this confidence, the investors (shareholders) will not buy shares in companies. The aim of corporate governance principles is to ensure that company is governed and run in the interest of shareholders (the investors). This assurance is important due to the separation of ownership of a company from its control; the company is owned by the shareholders, but run and controlled by the management (directors). Without corporate governance principles there is a risk that the directors may run the company in their own interest instead of shareholders, for instance by paying themselves high salaries, or by manipulating financial performance and paying themselves high bonuses, by hiring "Yes-men" who act as rubber stamps to their decisions.Before we move on to corporate governance principles, let us first understand the composition of the board of directors of a company. What does the board of directors look like?This is how the composition of board looks like:In the eyes of law, a person

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