The article analyzes the concept of corporate governance law in the United States.
Corporate governance is the system of rules, practices, and processes by which a firm is directed, controlled and operated. Corporate governance is a collection of mechanisms by which corporations are controlled and operated. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the company. Corporate governance also includes the rules and procedures of taking decisions in the corporate affairs.
Essentially, corporate governance provides the legal and administrative framework of a corporation. Through this framework the corporation is able to reach the company’s objectives. Corporate governance law encompasses the managerial aspect of a corporation, from external action plans to internal controls of performance measurement and corporate disclosure. The key to a successful corporation is a good corporate governance.
Corporate governance law is vital in combating the risk of conflicts of interests between stakeholders, and primarily between main shareholders and management and even between shareholders. Corporate governance includes the processes through which corporations’ objectives are set and pursued in the context of the social, regulatory and market environment.
A list of what corporate governance focuses on includes:
- How a company resolves issues and makes decisions;
- The involvement, contribution, and communication between management, shareholders, and workers;
- The ways in which rights and responsibilities are shared between the company’s workers, management, and shareholders;
- Policies and procedures for decision making on company affairs;
- Checks and balances designed to eliminate wholesale fraud or abuse of the office;
- Policies that try to reduce or eliminate the principal–agent problems;
- The relationship between the company and its shareholders;
- Business decisions, ideally made with everyone’s best interest in mind, such as mergers and acquisitions, litigation, arbitration and mediation, intellectual property;
- Other key decisions made by the corporation.
The United States has the “Anglo-American model” approach of corporate governance
This emphasizes the interests of shareholders and it relies on a single-tiered board of directors that is normally dominated by non-executive directors elected by the shareholders. This system is also known as the “unitary system”.
Some of the boards can include executives from the company who are ex officio members of the board. The non-executive directors are expected to outnumber the executive directors and they are supposed to occupy key functions. It is sometimes colloquially stated that in the US and the UK “the shareholders own the company.” On the other hand, the corporate governance model adopted in Continental Europe and Japan emphasizes the interest of workers, managers, suppliers, customers and the community.
Having a well-established corporate governance is a key component of the relationship between the corporation and the investors. For instance, on many big corporations’ websites, the firms mention the corporate governance policies and the executive team and board of directors. Most companies strive to have a high level of corporate governance.
For many investors it is not enough for the company to be profitable and have a good economic history. Many of them often look for a good corporate governance that can include environmental awareness, ethical behavior and other mechanisms put in place by the board of directors. A good corporate governance law also includes transparent set of rules and clear mechanisms.
In the United States, there are two primary sources of law and regulation relating to corporate governance – state corporate laws and federal securities law
State corporate laws are both statutory and judicial and govern the formation of closely held and publicly traded companies and the fiduciary duties of directors. Corporation and securities laws are set out at both federal and state level. Many US states have adopted the Model Business Corporation Act and the dominant state law for publicly traded corporations is Delaware General Corporation Law. Delaware state continues to be the favorite place of incorporation due to the business-friendly legislation. The rules of the corporation are specified in the articles of incorporation and in the bylaws.
On the federal level, the primary source of corporate governance related legislation are the Securities Act of 1933 (Securities Act) and the Securities Exchange Act of 1934 (the Exchange Act), as amended. The Securities Act regulates all private and public offerings and sales of securities. The Exchange Act addresses issues including the organization of financial market, the activities of brokers, dealers and other financial market participants and, as to corporate governance, requirements relating to the periodic disclosure of information by publicly traded companies.
Corporate governance law became an issue of public interest after the collapse of a number of large corporations in 2001-2002. After these incidents state legislators tried to restore public confidence in publicly traded corporations by passing a certain number of laws that required corporations to be accountable for reporting, transparency and accounting practice. Today, corporate governance is based upon the principles of responsibility, transparency, fairness, leadership and accountability.
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