Pages: 19

This chapter presents the importance and dynamics of relationships between capital markets and businesses as influenced by corporate culture, perceived by stakeholders (including investors), and transformed through business sustainability and corporate governance. Several initiatives and reforms, including the Sarbanes-Oxley Act (SOX) of 2002, the Dodd-Frank Act (DOF) of 2010, and Securities and Exchange Commission (SEC)–related implementation rules and regulations, as well as listing standards of national stock exchanges and best practices of corporate governance, were established to restore investor confidence in public financial information and the financial markets. These reforms and standards are a continuous process of creating new measures and practices for public companies and their directors, officers, accountants, auditors, legal counsel, financial analysts, investing banks, and others to fulfill their responsibilities and discharge their accountability effectively. Effective corporate governance can improve corporate culture, corporate strategic decisions, sustainable performance, reliable financial reports, and prospects and growth. This chapter also examines the role of corporations in our society and financial markets and how corporate governance mechanisms can advance this role.

Pages: 32

Corporate governance has evolved as a central issue for public companies in the aftermath of the 2007–2009 global financial crisis and recent regulatory reforms. Global business organizations have recently undergone a series of corporate governance reforms aimed at improving their governance and financial reports. Effective corporate governance promotes the achievement of goals, improves operational and financial performance, enhances accountability, improves the reliability and quality of financial information, and prevents unsustainable practices. This chapter defines corporate governance, examines the evaluation of corporate governance, explains corporate governance theories, and discusses sources and deliveries of corporate governance, including corporate law, state and federal regulations, listing standards, and best practices. This chapter also: (1) examines the seven corporate governance functions of oversight, managerial, compliance, internal audit, legal and financial advisory, external auditing, and monitoring; and (2) presents a road map for all corporate governance participants, including shareholders, to be attentive in monitoring their investments; boards of directors in providing effective and engaged oversight; executives in diligently implementing short, medium, and long-term sustainable business strategies; and other corporate gatekeepers (auditors, legal counsel, financial analysts) in protecting the interests of all stakeholders.

Pages: 32

The wave of financial scandals at the turn of the twenty-first century, coupled with the 2007–2009 global financial crisis, has reinvigorated interest in corporate governance. These scandals and financial crises, congressional responses, and related regulations have brought corporate governance to the center stage of business. In the post-regulatory reforms, corporate governance has transformed from a compliance process to a strategic imperative for business. Business organizations have recently undergone a series of corporate accountability reforms affecting their corporate governance structure. Corporate governance reflects corporate culture, accountability, and leadership in response to emerging challenges. This chapter presents the fundamentals of corporate governance, including structure consisting of principles, functions, and mechanisms that determine the effectiveness of corporate governance in protecting the interests of all stakeholders, including shareholders, creditors, employees, customers, suppliers, communities, and the environment.

Pages: 107

The oversight function of corporate governance is vested in the company’s board of directors, which its shareholders elect to represent and protect their interests. A vigilant board of directors that proactively oversees strategic decisions, management’s plans, decisions, and actions, as well as compliance with all applicable laws, rules, regulations, standards, and best practices, can be very effective in achieving good governance and protecting stakeholders’ interests. The primary responsibility of the oversight function is the appointment of the chief executive officer (CEO) and concurrence with the CEO’s selection of other senior executives (top management team) to run the company for the benefit of its shareholders. The success of the board in fulfilling its oversight responsibility depends on the ethics, independence, composition, structure, resources, diligence, experience, diversity, and skill sets of the entire board, as well as members’ working relationships with other participants in the corporate governance structure (e.g., management, external auditors, and investors). The new move toward profit-with-purpose corporations may extend the fiduciary duties of the board of directors to not only shareholders but also other identified stakeholders. Public companies are expecting that their boards move beyond traditional roles and expertise and offer more robust leadership and knowledge and guidance in emerging areas of digital, GenAI, and sustainability. This chapter presents the corporate governance oversight function of boards of directors to fulfill their fiduciary duty of protecting the interests of shareholders and other stakeholders.

Pages: 53

The managerial function of corporate governance is delegated to management to manage the organization for the benefit of its shareholders and other stakeholders. The board of directors of public companies, as representative of shareholders, appoints the management team headed by the chief executive officer (CEO) and other members of the management team, including the chief financial officer (CFO), controller, treasurer, and other officers, to manage the company. The board of directors oversees the managerial function to minimize the potential conflicts of interest and information asymmetry between shareholders and management and to align management interests with those of shareholders. Managerial functions consist of achieving operational efficiency; enhancing the quality, reliability, and transparency of financial reports; ensuring compliance with applicable laws, regulations, rules, and standards; and assessing and managing internal controls and related risks. This chapter presents management’s roles, responsibilities, and accountability in achieving operational, financial, and investment performance and creating shareholder value while protecting the interests of other stakeholders.

Pages: 56

The wave of financial scandals at the turn of the twenty-first century and their persistence in recent years has significantly eroded investor confidence. The Sarbanes-Oxley Act (SOX) of 2002 and the Dodd-Frank Act (DOF) of 2010 were enacted to rebuild investor confidence and improve corporate governance and the safety, integrity, and efficiency of the capital markets. Regulation has intended to restore public trust and investor confidence in corporate America, its financial reports, and capital markets pursuant to the occurrences of massive financial scandals. Regulations can generate positive externalities for investors in terms of rebuilding their confidence in public financial information and the capital markets. Regulations create an environment under which public companies can operate effectively in achieving sustainable performance, being held accountable for their activities, and providing protection for their investors. This chapter examines the role of regulatory bodies and standard setters that influence the structure, measures, and mechanisms of corporate governance. Compliance with applicable regulations and best practices is essential to the effectiveness of corporate governance, the reliability of financial reports, and the integrity of the capital markets.

Pages: 56

External auditors are expected to lend more credibility to published financial statements and to mitigate the information asymmetry and the potential conflicts of interest between management and shareholders. External auditors are responsible for auditing the company’s financial statements and providing reasonable assurance that they are presented fairly and in conformity with generally accepted accounting principles (GAAP) and that they reflect a true representation of the company’s financial position and results of operations. Auditors are also required to express an opinion on the effectiveness of the design and operation of internal control over financial reporting (ICFR). The external audit function is intended to lend credibility to financial reports and reduce information risk, such that financial reports are biased, misleading, inaccurate, incomplete, and contain material misstatements that were not prevented or detected by the ICFR system. In recent years, external auditors have provided assurance statements on environmental, social, and governance (ESG) sustainability integrated reports. This chapter presents the external audit function of corporate governance.

Pages: 32

Internal auditing has evolved from a traditional appraisal activity to becoming an integral component of corporate governance in providing an objective, assurance, and consulting activity in the areas of internal control, risk assessment, and corporate governance. Internal auditing is viewed as a value-added service that improves the organization’s operations, risk management, internal controls, and financial reporting. Internal auditors’ roles have changed from merely providing input and objective feedback to management to directly participating in corporate governance and the decision-making function. The chief audit executive (CAE) is primarily responsible for supervising, managing, directing, and overseeing the internal audit function. The company’s audit committee is directly responsible for hiring, compensating, firing, and overseeing the work of the CAE. This chapter discusses the role of internal auditors in corporate governance.

Pages: 22

This chapter presents the legal and advisory function of corporate governance that is typically assumed by professional advisors, including legal counsel, financial analysts, and investment bankers. These corporate governance participants assist companies in evaluating the legal and financial consequences of business transactions. Professional advisors participate in corporate governance by providing advisory services to the company’s board of directors and management. Management has traditionally engaged professional advisors for the structure, measurement, recognition, and disclosure of business transactions. Legal counsel and financial advisors help ensure that the organization operates within the boundaries of the law, makes sound financial decisions, maintains high standards of corporate governance, and mitigates risks associated with non-compliance or unethical behavior to support the organization’s long-term sustainability and success. This chapter presents the role of legal counsel and financial advisors in corporate governance.

Pages: 40

Shareholders, as owners of public companies, are attentive and engaged and play an important role in corporate governance. The monitoring function of corporate governance can be achieved through the direct participation of shareholders in the business and financial affairs of corporations or through intermediaries such as securities analysts, institutional investors, and investment bankers. Institutional investors are regarded as important monitors of public companies, their corporate governance, and their financial disclosures, as they own more than half of all US public securities. Stakeholders, including shareholders and employees, play essential roles in improving corporate governance by providing oversight, accountability, and incentivizing responsible behavior within companies. This chapter presents the important role that shareholders and other stakeholders can play in improving corporate governance effectiveness.

Pages: 42

The effective governance of private and not-for-profit organizations (NPOs) is important to their owners and stakeholders. The primary role of governance in private organizations and NPOs is to ensure that the organization is run and managed effectively and that its resources are safeguarded and used efficiently to benefit stakeholders. There are more similarities than differences between corporate governance measures and practices of for-profit organizations and private organizations and NPOs. The boards of directors of private companies and the boards of trustees of NPOs set an appropriate tone at the top in promoting competency and integrity within the organization. In the context of corporate governance and accountability, private companies and NPOs have the same stewardship responsibilities as business corporations. This chapter presents corporate governance principles, structure, functions, measures, and practices of private and NPOs, including state and local government entities, healthcare, colleges, universities, and other nonprofits.

Pages: 42

Corporate governance has evolved in the past several decades as primarily a compliance process to its integration into the corporate culture and business environment. Good corporate governance also implies the need for a network of monitoring and incentives set up by a company to ensure accountability of the board and management to shareholders and other stakeholders. The strongest form of defense against governance failure comes from an organization’s culture and behaviors. Effective corporate governance demands proper communication among shareholders, the board of directors, management, and other gatekeepers in creating a culture of trust, transparency, integrity, competency, and accountability. This communication is very important in ensuring democracy in the boardroom and transparency of managerial decisions and actions in achieving sustainable performance to create shared value for all stakeholders. For business organizations, the primary role of corporate governance is to align management incentives with investor interests. The effectiveness of all corporate governance functions depends on the quality of support received from the IT function. This chapter presents the integration of information technology into corporate governance, the emerging corporate governance reporting that reflects the effectiveness of corporate governance in creating shareholder value, as well as related corporate governance ratings and indexes established as benchmarks in evaluating corporate governance performance and corporate governance research and education.