The Importance of Corporate Governance

So far, there is no worldwide recognized definition or understanding of what ‘Corporate Governance’ is. The German company ThyssenKrupp (ThyssenKrupp AG, 2014) defines it very well:
"The term corporate governance stands for responsible management geared to long-term value creation and control of companies. Efficient cooperation between the Executive Board and supervisory board, respect for shareholder interests, openness and transparency of corporate communications are key aspects of good corporate governance."
Generally it can be said that Corporate Governance is the aggregate of shareholder interest-oriented principles, which strive for transparency and a balance of management and control while maintaining decision-making capacity and efficiency at the highest corporate level (v. Werder, n.d.). In general spoken Corporate Governance is the manner in which companies are led, managed and controlled (Solomon & Solomon, 2004, p. 1). Since dealing with Corporate Governance in Europe for a long time was a primarily academic discipline, Corporate Governance is highly topical on the European continent at the latest since Enron and Vivendi Universal. International capital market-related conditions were set with the publication of the OECD’s ‘Principles of Corporate Governance’ in 1999, which are essential for the pursuit of good governance in the corporate sector. An intense debate is also still required to meet the micro - and macro-economic importance of the issue. In the following, four issues will be discussed which may be considered the core elements to realize the importance of Corporate Governance:

  • Integrity
  • The regulatory framework
  • Bonus culture
  • Directors' training


The perception is in the eye of the beholder, and while corporate governance is rather a technical term for accountants, lawyers and the like, buzzwords such as honesty, decency, and fairness are well-known among the readers of the popular newspapers. What the professional in this field would call questionable practice the public would rather name with critical words like rip-off or scam. The central question today in the area of corporate governance is not whether the big companies comply with various provisions of the Combined Code, Sarbanes-Oxley, King, etc. The point is rather whether the top management of large companies especially, but actually the business world in general is considered ethically in the eyes of the public (McDonough, 2002). The policies, procedures and standards of ethics, honesty and integrity throughout the company, promoted and adopted by the management, should be designed to follow the ethical tenor set by the organization’s board (Deloitte Risk Journal, 2013). And it is exactly this integrity – the perceived and the real one – which emphasize the importance of Corporate Governance, because it represents the tool with which integrity can be encouraged, measured and projected (Applied-Corporate-Governance, 2014).

The Regulatory Framework

One can certainly debate if the ‘The Importance of Corporate Governance’ may be rephrased as ‘The Importance of Good Management’. But in simple words, one could just say good governance is good management and failures in governance just reflect bad management (Lipman & Lipman, 2006, pp. 3-8). The regulatory framework, consisting of mandatory laws and rules, such as in Ireland, the Companies Acts 1963 to 2003, and non-mandatory codes, policies and procedures is the base on which organizations operate their corporate governance. In the face of the recent financial crisis it still seems that reforms are necessary although it is quite clear that more regulation does not automatically mean better regulation. The excellent legislation that is already in place, which forced companies to generally act in a fair manner, disclose information and reduce costs and charges should be utilized to build upon instead of inventing more legislation which can simply be checked off (Aggarwal & Williamson, 2006).

Bonus Culture

Director’s remuneration and bonus culture are often discussed in the media and again the perception is in the eye of the beholder. While a normal workman will never understand how a single person can get a year’s end bonus in a dimension of what he would never be able to earn in all his life time of hard labour, in a well-run organization good performance has to be rewarded to attract talent, high performance and people dedicated to improving performance. The OECD also recognizes in its Principles of Corporate Governance (OECD, 2004, p. 11) that “(. . .) proper incentives for the board and management [should be provided] to pursue objectives that are in the interests of the company and its shareholders (. . .)”. So it is not about the principle which needs to be discussed but the execution and realization. While a board, management and perhaps even shareholders may feel that remunerations in two-digit millions height may sound appropriate it is quite obvious that such corporate policies may not be in accordance with the public judgement.

Director's Training

Following the OECD’s Principles of Corporate Governance “Board members should act on a fully informed basis (. . .)” (OECD, 2004, p. 59). This requires at least a basic level of competence and experience which certainly varies on the size of the company, the type of business and the complexity of the organization. The required competency to be ‘fully informed’ therefore should comprise basic financial literacy, a comprehension of the strategic planning process and an insight of human resource formation. Some Asian countries require director training to support the fulfilment of such requirement. Such Training and education should not be limited to director’s basic legal and governance duties but also include the fields of developing business strategies, budgets, risk policies and the understanding and monitoring of internal control systems (OECD, 2011, p. 39). In Europe there has never been a formal requirement for a qualification to run a company or to be a director although in the recent past qualifications like the ‘Chartered Director’ have been introduced. It may seem obvious that the ‘Importance of Corporate Governance’ will have a major influence on developments like this. Corporate Governance is very well accentuated by the ‘Institute of Directors in Ireland’ as a significant element in their qualifications (IoD, 2014). Corporate Governance is a highly complex issue and although there is still the need for a clear and precise definition the principles and those who are the responsible for its operational execution are clear (Anand, 2008). All of the above points to one central point in the discussion about the importance of corporate governance. Christine Mallin expresses brief but accurately, proper corporate governance “therefore helps a firm to be sustainable in the longer term” (Mallin, 2006, p. 3).


Aggarwal, R. & Williamson, R., 2006. Did New Regulations Target the Relevant Corporate Governance Attributes?.

Available at:

Anand, S., 2008. Essentials of corporate governance. 1st ed. Hoboken(NJ): John Wiley & Sons, Inc..

Applied-Corporate-Governance, 2014. Applied Corporate Governance.

Available at:

Deloitte Risk Journal, 2013. The Role and Benefits of a Corporate Governance Framework.

Available at:

IoD, 2014. Bespoke Board Training in Corporate Governance.

Available at:

Lipman, F. D. & Lipman, L., 2006. Corporate Governance Best Practices: Strategies for Public, Private, and Not-For-Profit Organizations. 1st ed. Hoboken(NJ): John Wiley & Sons, Inc.

Mallin, C. A., 2006. Handbook on International Corporate Governance - Country Analyses. 1st ed. Cheltenham: Edward Elgar Publishing Ltd.

McDonough, W. J., 2002. Issues in Corporate Governance. Current Issues in Economics and Finance, 09, 8(8).

OECD, 2004. OECD Principles of Corporate Governance.

Available at:

OECD, 2011. Reform Priorities in Asia: Taking Corporate Governance to a Higher Level.

Available at:

Solomon, J. & Solomon, A., 2004. Corporate Governance and Accountability. 1st ed. Chichester: John Wiley & Sons Ltd.

ThyssenKrupp AG, 2014. Corporate Governance.

Available at:

v. Werder, A., n.d. Corporate Governance.

Available at: