Corporate governance

The question at the heart of corporate governance is this: What's the best way to run a public corporation? Some people define the question narrowly in terms of a corporation's responsibility to its shareholders, while others define it broadly to include the corporation's responsibility to the larger society.

Corporate governance touches on many different aspects of corporate structure and processes, but especially upon the relationship of ownership and management. One of the central issues of governance is how to ensure that the people who run a company act in the interests of the people who own it. The issues of executive compensation, honesty in accounting, the responsibilities of the board of directors, and shareholder rights all relate to this fundamental goal.

Good governance, bad governance

When corporate governance works, as it does in most cases, boards and management work to further the interests of shareholders. Good governance also benefits employees, customers, and the government, which uses corporate tax revenues to serve the public.

But on the occasions when corporate governance fails, the resulting scandals often cause share prices to drop. Employees may lose jobs or pensions. And as the public loses faith in corporations, investors may avoid the markets, which may contribute to a general economic downturn.