Corporate governance is the method by which a corporation is directed, its business practices controlled, and its vision for success communicated to its shareholders. Disadvantages of this method of leadership arise from a lack of oversight, sentimental business decisions by an entrenched board of directors, and the high cost of changing direction once a business path proves to be ineffective.
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Corporate governance works at its best when shareholders and board members are able to make objective decisions that are in the best interest of the company. According to Ibis Associates, a business planning firm, family-run corporations (founding family members own controlling share of the company), such as Ford and Wal Mart, lose objectivity in business making decisions due to the family's financial investment in the business' performance and the emotional ties associated with building a worldwide corporation from the ground up.
Corporate governance needs a certain level of government oversight to avoid increasing levels of corruption. This is certainly true of areas in corporate finance and banking where deregulation of the industry through 2001-2004 contributed to predatory lending practices and created a credit crises for millions of Americans. According to Jonathan Brown, author of "The Separation of Banking and Commerce," the lack of governmental oversight in corporate governance lead to a misallocation of credit that actually worked against competition. Banks stopped competing with one another.
Costs of Monitoring
To effectively govern a publicly traded corporation, shareholders must speak with one voice and have enough votes to allow that voice to have any real weight. This requires individuals that have a collective vision for the company to pour more money into that company to gain a controlling share. This process can be highly political, since controlling shareholders that sense a hostile takeover may attempt to buy up more shares to stay in power and keep the minority party silent. Corporate governance at this level could grind to a halt, driving stock prices lower and hindering a corporation's ability to make smart business decisions.
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