Corporate governance has existed for centuries. In 1776, Adam Smith stated that directors acting as agents of shareholders could not be expected to be as diligent shareholders, thereby separating interests of shareholders from those of directors.
Shareholders are owners of the business and risk takers therefore more interested in good governance while directors do not own the business and hence do not bear a lot of risk.
Corporate governance adopts company law as its foundational law and therefore developments in company law over the years have had a direct impact on corporate governance.
The modern concept of a company comes from laws developed from the 19th century whose key objective was to have a legal entity separate from its owners but also having the rights of a legal person.
One definition of corporate governance has been the relationship between directors and shareholders. Good governance therefore is the management of the relationship between shareholders and the board so as to minimise conflict.
On the one hand, shareholders should understand the board’s mandate and allow it to exercise its duties for effectiveness while on the other hand the board should understand the genuine interest of shareholders in securing their investments.
A second definition of corporate governance is the interrelation between management, the board of directors, and shareholders. Corporate governance is deemed to be management and balancing of all the interests above so as to maintain an optimum relationship.
Corporate governance has also been defined in terms of the structure and framework.
One school of thought defines it as the structure through which a company’s objectives are achieved, while another states that it is a framework through which the relationship between players is managed, while yet another states that it dictates corporate behavior as it includes disclosures and management controls.
It’s the structure through which players can pursue most effectively the goals of the corporation. In this school of thought corporate governance is defined as a system, a structure or a framework.
It is important for every company to have in place sound corporate governance practices so as to cater for the various interests represented.
In Kenya corporate governance is contained in the Companies Act while governance of other associations such as partnerships and NGOs is contained in the mother laws. A business with good governance will report higher profitability.
The business will also have a good reputation and attract investors and other stakeholders.
It will also reduce risks such as non-compliance with statutory provisions. A soundly governed company will take into account third-party interests such as employees, therefore attracting a pool of talented staff. When setting up a business think through its governance structure.