Issues Regarding Corporate Governance Of Companies

Issues regarding corporate governance of companies are growing in importance. Corporate governance involves ‘the system of rules, practices and processes by which a company is directed and controlled’ (Investopedia, 2014). A company should treat all its stakeholders with respect and integrity. A controversial branch of governance is the extent to which executives gain compensation. This may or may not reflect their performance or be within the best interests of their shareholders; who are the owners of the company. Since the formation of the limited company, whereby management is separated from ownership an agency problem has emerged, as executives and other directors’ aims may not be in line with shareholders’ interests. Different†¦show more content†¦They highlight the arm’s length contracting view, recognising that executives do not automatically serve their shareholders, while directors can be relied on by shareholders. However, t his has not always been so. It was stated that independent directors who were generous with the CEO, might reasonably expect the CEO to use their bully pulpit to support higher director compensation (Bebchuck and Fried, 2002 p30). It seems feasible that agreements which benefit top executives and other directors at the same time could occur; with shareholders ultimately losing out. Psychological factors can also influence independent director’s decisions. Bebchuck and Fried (2002) highlighted that many had some prior connection to the CEO or other senior executives, and even suggested that independent directors that did not know the CEO may begin with a sense of obligation and loyalty (p31). It could therefore be that an independent board members incentives are inclined at the start towards favoring executives. This could overshadow the rewards shareholders gain when the company is performing well or equally when the company is under performing, whereby executives could exploit gains independently of performance. The authors hold strong credentials with Bebchuck being a director of corporate governance program at Harvard Law School, and Freid being a professor of law. Although they are American authors,