Tuesday, February 25, 2014

Internal Corporate Governance and External Corporate Governance

Corporate Governance (CG) can be viewed as the system by which companies are directed and controlled. Companies can also be held accountable by CG, limiting managerial discretion in order to protect the interests of outsiders in the corporation.

Such 'outsiders' can be shareholders, stakeholders, other interested parties or even society as a whole.

Any CG 'system' consist of a large number of mechanisms. We can broadly categorize CG mechanisms into two groups:

Internal corporate governance encompasses the controlling mechanisms between various actors inside the firm: the company’s management, its board and the shareholders.
In this form, the shareholders and other constituents 'delegate' the controlling function to internal entities or mechanisms, such as the Supervisory Board (in case of two-tier board) or the Board of Directors (one-tier) and/or special committees

External governance encompasses the influences from outside the firm on the governance of the firm. These can originate from a number of external sources.

For more information and examples, see the interesting discussion at 12manage on internal and external corporate governance.