What is Corporate Governance? - Definition & Key Players

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  • 0:04 Corporate Governance
  • 0:59 Shares, Shareholders, & Voting
  • 2:10 Key Players in…
  • 4:17 Balancing of Corporate Power
  • 6:56 Lesson Summary
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Lesson Transcript
Instructor: Tiffany Spencer

Tiffany has taught ESL online and has a master's degree in business administration.

This lesson defines and discusses the concept of corporate governance, the key players involved in corporate governance, the roles of these key players, and the primary types of issues faced with regard to corporate governance.

Corporate Governance

Imagine somebody gives you an apple. No, not that type of apple: an AAPL, one share of stock in Apple, Inc. Congratulations! You now own a small piece of a well-known corporation, called a share of stock. You're a shareholder, sometimes also called a stockholder, since you're someone who owns a share of a company's stock. As a shareholder, you're now a key player in the world of corporate governance.

But what is corporate governance? Corporate governance refers to the structure and method by which a company manages its decision-making process. The primary goal of corporate governance is to achieve an effective and efficient balance among corporate considerations, such as shareholder earnings and managerial decision-making power. A secondary goal of corporate governance is to provide a method for making decisions when there's conflict. Let's explore this in more detail.

Shares, Shareholders, & Voting

When the first U.S. corporations were created, the general rule was that one shareholder got to cast one vote. However, this rule was a problem because voting was disproportionate to ownership. In other words, shareholders with one share had the same decision-making power in the corporation as shareholders with many shares. Over time, the rule changed to one vote per share, allowing shareholders to vote proportionately to ownership. However, the new rule has some problems of its own.

Now, shareholders with many shares are often very involved and vote regularly on corporate issues. However, shareholders like you with a small number of shares (in this case, your AAPL stock) aren't very involved and vote rarely, if at all. For this reason, shareholders with many shares often make the most important decisions without any input from the other, smaller shareholders. These decisions are not always in the best interests of individual small shareholders, like you, or other key players. Additionally, these decisions may not be truly representative of ownership, because small shareholders, as a group, may own more than larger shareholders but may not have the same goals or interests.

Key Players in Corporate Governance

A corporation's decisions and actions affect many people and entities, known as stakeholders, who include shareholders, directors, employees, creditors, suppliers, and other interested parties. As noted, corporate governance involves the way a corporation's stakeholders interact with one another to make corporate decisions. However, not all stakeholders have an opportunity to participate in corporate governance.

Within corporate governance, there are typically three key groups of stakeholders involved: shareholders, directors, and officers. In practice, these key players have the most power in corporate governance.

1. Shareholders

You already know that as an owner of an AAPL stock, you are a shareholder, and you can participate in corporate governance by voting on important issues. However, not all shareholders are people like you.

Some shareholders are institutional investors, which are generally commercial or legal entities like mutual funds, insurance companies, trusts, investment banks, etc. They often invest in large quantities of stock in strong corporations on behalf of others. As noted previously, a shareholder with many shares often has more power than a shareholder with few shares.

2. Directors

Directors, often referred to as the board of directors, are often appointed or elected by the shareholders. These stakeholders are legally accountable for many actions of the corporation. The board of directors decides important issues and develops the long-term strategies of a corporation.

3. Officers

Officers are employees who serve the directors as top-level management, such as the CEO, CFO, and COO. These stakeholders often make the day-to-day decisions for the corporation. These decisions are intended to carry out the will of the shareholders and the directives of the board of directors.

It isn't uncommon for officers to also be members of the board of directors. It's crucial to the corporation's health that the officers and board of directors work together.

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