Corporate Governance

Abstract

Corporate governance, which refers to the process and structure for overseeing top managers so that they effectively fulfil the mandate of the firm, is not a new topic. Actually, the recognition of the incentive problems that arise when decisions are taken by managers who are not owners of the firm dates back to the work of Adam Smith (1776), while modern interest in the field is usually associated with the work of Berle and Means (1932). The studies of Jensen and Meckling (1976), Fama (1980) and Fama and Jensen (1983) are also considered classic in the field. While the board of directors is generally seen as the ultimate corporate control mechanism, recent reports on governance highlight the importance of board committees such as audit, remuneration and nomination committees, as well as additional monitoring controls. In any case, the accounting scandals in the early 2000s (e.g., Enron and Worldcom) and the recent financial crisis have generated a new round of discussions about the effectiveness of existing corporate governance mechanisms.