To cure weak corporate governance, new regulations and codes of best practices might be necessary, but they won’t be sufficient. What is also required is the acknowledgment that governance has to continually adapt to changing conditions because a company, its management and business environment are forever evolving. As a result, corporate boards must adopt the right roles to reflect and shape those governance conditions.
In an ideal world comprising competitive markets and transparent information, the legal system and market processes would, by themselves, provide perfectly adequate corporate governance. Specifically, the markets would weed out and penalize — through declining share prices and takeovers — executives who tried to manipulate their companies in any way that was adverse to long-term value creation. Everything affecting value creation (including environmental costs such as pollution) would be priced by the markets and rewarded or punished in line with the contribution to or subtraction from value creation that those factors engendered.
Indeed, if the market could capture everything and no one could manipulate decision making with monopoly power, companies that maximized their economic value (the difference between projected revenues and the market cost of all the resources used) would also maximize the public good.1 The real world, however, is far from ideal. Thus, governance is necessary to deal with the things that fall outside markets as well as... To read the complete article, login or sign-up using the form below.
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