What is the definition of corporate governance?

There is no uniform definition as most are based on implicit or explicit assumptions about the main objective of the firm. However, there is no universal agreement as to what this objective should be. Below are several definitions that may help students understand the concept:

  • Larcker and B. Tayan: “a collection of control mechanisms that an organization adopts to prevent potentially self-interested managers from engaging in activities detrimental to the shareholders and stakeholders”.
  • Shleifer and R. Vishny “The ways in which suppliers of finance assure themselves of getting a return on their investment
  • Sir Adrian Cadbury (1999) “Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals….the aim is to align as nearly as possible the interests of individuals, corporations, and society”

So what is corporate governance?

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Agency Model in Corporate Governance

Adam Smith was a Scottish economist and philosopher, also known as ”The Father of Economics”. Smith wrote two classic works,  one of them called The Wealth of Nations, which is considered the first modern work of economics.

“The directors of companies, being the managers of other people’s money rather than their own, cannot well be expected to watch over it with the same anxious vigilance with which (they) watch over their own. ”

– Adam Smith, The Wealth of Nations, 1776.

I use this quote as a segway to talk to my students about the economical framework that underpins corporate governance.  There are numerous theories, but the one I focus on the agency theory.

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