Corporate governance is the mechanisms, processes and relations by which corporations are controlled and directed. Governance structures and principles identify the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and includes the rules and procedures for making decisions in corporate affairs. Corporate governance includes the processes through which corporations' objectives are set and pursued in the context of the social, regulatory and market environment. Governance mechanisms include monitoring the actions, policies, practices, and decisions of corporations, their agents, and affected stakeholders (Wikipedia).
A board of directors (board of advisors, board of governors, board of regents, board of trustees) is a group of people who jointly supervise the activities of an organization, which can be either a for-profit business, nonprofit organization, or a government agency. In a stock corporation, non-executive directors are voted for by the shareholders, with the board having ultimate responsibility for the management of the corporation. The board of directors appoints the chief executive officer of the corporation and sets out the overall strategic direction (Wikipedia).
In a publicly held company, directors are elected to represent and are legally obligated as fiduciaries to represent owners of the company—the shareholders/stockholders. In some European and Asian countries, there are two separate boards, an executive board for day-to-day business and a supervisory board (elected by the shareholders and employees) for supervising the executive board. In these countries, the CEO (chief executive or managing director) presides over the executive board and the chairman presides over the supervisory board, and these two roles will always be held by different people.
Inside directors are an employee or someone strongly connected to the organization. They have special knowledge of the firm's inner workings, its financial or market position, et cetera
An outside director is a member of the board who is not employed or engaged with the organization. They bring outside experience and perspectives to the board. They can be objective and have little risk of conflict of interest.
Almost all jurisdictions require or recommend a minimum number or ratio of independent directors. Definitions of independent directors have also been evolving during this period: 80% of jurisdictions now require directors to be independent of significant shareholders in order to be classified as independent, up from 64% in 2015. The recommendation for boards to be composed of at least 50% independent directors is the most prevalent voluntary standard, while two to three board members (or at least 30% of the board) are more commonly subjected to legal requirements for independence (OECD Corporate Governance Factbook 2019).
Research suggests that the optimal size of a governing body is around seven members. Limits on the maximum size for boards are rare, existing in only 10 jurisdictions. Most jurisdictions impose minimum limits on board size of three to five members. Ten jurisdictions set forth a maximum board size, with eight of those setting the maximum size between 15 to 21 members. Three-year terms for board members are most common practice, while annual re- election for all board members is required or recommended in seven jurisdictions.
Average board sizes by country (SpencerStuart.com):
Nearly all jurisdictions require an independent audit committee. Nomination and remuneration committees are not mandatory in most jurisdictions, although more than 80% of jurisdictions at least recommend these committees to be established and often to be comprised wholly or largely of independent directors.
Requirements or recommendations to assign a risk management role to board level committees (87% of jurisdictions) and to implement internal control and risk management systems (90%) have grown sharply in recent years (OECD Corporate Governance Factbook 2019).
Four main categories of investors dominate ownership of today’s publicly listed companies (OECD Corporate Governance Factbook 2019). These are:
Nearly half of surveyed jurisdictions (49%) have established requirements to disclose gender composition of boards, compared to 22% with regards to senior management. Nine jurisdictions have mandatory quotas requiring a certain percentage of board seats to be filled by either gender. Eight rely on more flexible mechanisms such as voluntary goals or targets, while three resort to a combination of both. The proportion of senior management positions held by women is reported to be significantly higher than the proportion of board seats held by women (OECD Corporate Governance Factbook 2019).
Approximately 80% of jurisdictions establish deadlines of up to 60 days for convening special meetings at the request of shareholders, subject to specific ownership thresholds. This is an increase from 73% in 2015. Compared to the threshold for requesting a shareholder meeting, many jurisdictions set lower thresholds for placing items on the agenda of the general meeting.
Almost all jurisdictions allow companies to issue shares with limited voting rights. In many cases, such shares come with a preference with respect to the receipt of the firm’s profits.
The principal–agent problem, in political science and economics (also known as agency dilemma or the agency problem) occurs when one person or entity (the "agent"), is able to make decisions and/or take actions on behalf of, or that impact, another person or entity: the "principal". This dilemma exists in circumstances where agents are motivated to act in their own best interests, which are contrary to those of their principals, and is an example of moral hazard (Wikipedia).