Corporate governance refers to processes within an organization aimed at ensuring control of shareholders over the board of directors. The company’s activities are based on a strict hierarchy, which is why corporate governance rules are meant to ensure protection of the economic interests of the company’s shareholders.
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Issues Related to Corporate Governance
Corporate governance mechanisms are necessary to ensure that the company’s directors & personnel do not derive any illicit benefits that are contradictory to the interests of shareholders. Achieving effective management requires applying corporate standards which are meant to control individuals entrusted with managing the company. Apart from the problem related to vertical corporate relations, there is also an issue of the relationship between majority and minority shareholders.
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Board of Directors (BoD)
The key function of the Board of Directors is to coordinate the interests of shareholders with the actions of the company’s senior management.
For this, the Board of Directors appoints CEO and other senior executives, provides advice & monitors the actions of the company’s senior managers to stop them from engaging in activities that run contrary to corporate standards.
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Assessment of BoD
This term refers to an institutional mechanism that enables to objectively assess functions performed by the BoD.
As a rule, the assessment is carried out on the following indicators:
- quality of monitoring & risk management
- quality of activities related to strategic consulting
- involvement of the BoD in business processes
- independence of board members from other corporate institutions
Today, there are 3 approaches to the legal regulation of evaluating the effectiveness of the board of directors:
- Lack of regulation
- Recommendations-based regulation
- Regulation based on peremptory norms
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Stimulating Shareholder Participation in Company Management
In an attempt to change the existing paradigm of corporate relations, foreign regulators & institutional investors are taking steps to increase participation of shareholders in corporate governance.
Granting General Rights to Shareholders
These rights are a prerequisite for participation in corporate governance and include:
- the right to participate and speak at AGMs
- the right to vote on various issues
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Granting Special Rights to Shareholders
Depending on the number of shares they hold, shareholders may be granted additional corporate rights. For example, they may be vested with the right to convene an extraordinary meeting of shareholders.
Disclosure of Information About Shareholders & Beneficiaries
An important prerequisite for participation of shareholders in corporate governance is to provide them with information on ownership structure. In many jurisdictions, beneficial owners of shares are entitled to have access to information related to the company’s beneficiaries & owners. Most companies are required to maintain a register of beneficial owners, which is publicly available.
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Shareholders’ Participation in BoD Formation
Changes in the executive body are approved by an absolute or qualified majority of shareholders. In some jurisdictions, minority shareholders are entitled to appoint one or more members of the BoD.
Approval of Directors' Remuneration
Shareholders approve the amount of remuneration to members of the Board of Directors, which is an essential tool for influencing the corporate executive body and evaluating the performance of its members.
Granting Institutional Investors a Right to Vote at AGMs
Today, the main challenge large corporations whose shares are traded on the financial markets of the US, EU & other developed countries are facing getting institutional investors to participate in the management of portfolio companies. Increased participation of proxy companies is also a cause for concern among many regulators.
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