Introduction to Corporate Governance


The concept of governance is not a new one but nowadays we hear words as corporate governance, organizational governance or good governance frequently. Actually corporate governance or, as defined in ISO FDIS 26000, organizational governance is the system by which an organization makes and implements decisions in pursuit of its objectives. Simply put "governance" means: the process of decision-making and the process by which decisions are implemented (or not implemented). And according to ISO FDIS 26000, it is the most crucial factor in enabling an organization to take responsibility for the impacts of its decisions and activities and to integrate social responsibility throughout the organization and its relationships.

Communities and their environments are increasingly impacted by any kind of organization including small, medium, large-sized, domestic or multinational, private or governmental enterprises. Some people tend to relate the prominence and importance of social responsibility to issues raised by international organizations although social responsibility has ever been important for the world business long before the emergence of multinational companies. However in this book we are trying to focus on the effects related to international business.


The concept of governance has existed as long as any form of human organisation has existed. The concept itself is merely one to encapsulate the means by which that organisation conducts itself. Recently however the term has come to the forefront of public attention and this is probably because of the problems of governance which have been revealed at both a national level and in the economic sphere at the level of the corporation. These problems have caused there to be a concern with a re-examination of what exactly is meant by governance, and more specifically just what are the features of good governance. It is here therefore that we must start our examination.

When considering national governance then this has been defined by the World Bank as the exercise of political authority and the use of institutional resources to manage society's problems and affairs. This is a view of governance which prevails in the present, with its assumption that governance is a top down process decided by those in power and passed to society at large. In actual fact the concept is originally democratic and consensual, being the process by which any group of people decide to manage their affairs and relate to each other. Such a consensual approach is however problematic for any but the smallest of groups and no nation has actually managed to institute governance as a consensual process. With the current trend for supra-national organisations1 then this seems even more of a remote possibility; nor is it necessarily desirable. Thus a coercive top down form of governance enables a society to accept leadership and to make some difficult decisions which would not otherwise be made2. Equally of course it enables power to be usurped and used dictatorially - possibly beneficially3 but most probably in a way in which most members of that society do not wish4.

This top down, hierarchical form of governance is the form of governance which normally takes place in large monolithic organisations such as the nation state. Conversely the consensual form tends to be the norm in small organisations such as local clubs. There are however other forms of governance which are commonly found. One of these is governance through the market (see Williamson 1975). The free market is the dominant ideology of economic activity, and the argument of course is that transaction costs are lowered through this form of organisation. From a governance perspective however this is problematic as there is no automatic mechanism and negotiation is therefore used. The effect of this is that governance is decided according to power relationships, which tend to be coercive for the less powerful (eg consumers). Consequently there is a need to impose some form of regulation through governments, or supra-national organisations such as the World Trade organisation, which thereby re-imposes the eliminated transaction costs. The argument therefore resolves into an ideological argument rather than an economic one.

An increasing number of firms rely upon informal social systems to govern their relationship with each other, and this is the final form of governance. This form is normally known as network governance (Jones, Hesterly & Borgatti 1997). With this form of governance there is no formal rules - certainly none which are legally binding. Instead social obligations are recognised and governance exists within the networks because the different organisations continue to engage with each other, most probably in the economic arena. This form of governance can therefore be considered to be predicated in mutual self interest. Of course, just as with market governance, power relationships are important and this form of governance is most satisfactory when there are no significant power imbalances to distort the governance relationships.

Although in some respects these different forms of governance are interchangeable they are, in reality, suited to different circumstances. Whichever form of governance is in existence, however, the most important thing is that it can be regarded as good governance by all parties involved - in other words all stakeholders must be satisfied. For this to be so then it is important that the basic principles of good governance are adhered to.

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