Internal and External Corporate Governance

Rating

Internal and External Corporate Governance

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

1. Internal Corporate Governance
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.

Examples of internal corporate governance mechanisms:

• The Corporate Charter of the firm (also called: Articles of Association , Articles of Association)(voting rights and restrictions, preferred stock, anti-takeover mechanisms, staggered board of directors, etc.)
• Board of Directors
• Supervisory Board (if two-tier board). Roles: employer of management, supervising management, advising management), Structure, Remuneration)
• Special Committees (Audit Committee, Compensation Committee, Nominating Committee, Governance Committee)
• (Other) internal control procedures (Sarbanes-Oxley Act 404, COSO, Code of Conduct, whistle-blowers, etc.)
• Executive compensation (fixed/variable, money/shares/options, short/long term targets)
• The capital structure of the firm (equity, debt)
• Employee participation
• Etc.

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

Examples of external corporate governance mechanisms:

• Markets:
  • Labour market (for executives and for employees)
  • Product / services markets in which the firm operates, competition
  • Capital market (debt, equity)(opinions of investment analysts, credit rating agencies, financial media, institutional investors)
  • Market for corporate control (hedge funds)
• Legal and Supervision
  • National laws and regulations
  • Supranational laws and regulations
  • Corporate governance codes (SOX, OECD)(voluntary or required)
  • Supervisory authorities (central banks)
• Service Providers
  • Independent auditors, external accountants (annual reports, financial statements)
  • Investment banks (credit facilities, flotation, prospectus)
  • Private equity
  • M&A (takeovers)
  • Legal advice, insurance (Directors and Officers liability)
• Media (watchdog, guard dog)
• Relationship with unions

Notes:
1. Some aspects can be considered internal, external or even both, depending on the organization, governance type and jurisdiction.
2. Depending on the country, the focus on the two mechanisms can differ, for example:

• In the US and other Anglo-Saxon countries we can generally see a bigger trust in markets/shareholders (shareholder value perspective) with a resulting focus on external corporate governance.
• Europe and Japan generally rely more on relations/networks/stakeholders (stakeholder value perspective) and consider internal CG-mechanisms as more important.

.

		Comments by date▼ Comments by rating Rating
		2 Ashok Asthana Consultant, India
	Corporate Governance - The Role of the Customer I feel customers play a very important role in influencing internal governance, since a company, without a customer is nothing. As per the old dictum "the customer is king", he plays a major role in framing internal governance. Editor: In corporate governance, the customers are indicated with the "Market" for Product or Services. This is one of the 4 'markets' that are all part of external CG. All external CG mechanisms by definition influence the firm and its CG mechanisms.

		4 Hazem Yassin Manager, Saudi Arabia
	Keep Corporate Governance as Simple as Possible Dear Jaap your article was very good, concentrated and short with clear idea. In our company we already have a CG manual in place, but unfortuntily we have no specific controller for this one expect so we have hired an external party to audit the CG complaince. We discovered that the mechanisms that are established in the company are too big for our current size and business activities, so we decides to revise this CG manual with another simpler one. Editor: Thanks for your interesting CG case. CG is complex because so many interests, issues and legal requirements have to be taken care of. On then other hand I agree we should not make it more complex than necessary (especially in small/medium size companies). That was also the background of my article.

		1 D P BABU Strategy Consultant, India
	Internal and External Corporate Governance The effectiveness in counterbalancing internal and external corporate governance mainly rests with the disclosure philosophy of the company (corporate transparency) about its indoor management such th...

		1 alim sale Strategy Consultant, Kenya
	Corporate Governance Mechanisms (Intern and Extern) Thanks for the interesting analysis of all elements that influence good corporate practices. Good CG practices within our organisations are crucial. The triple bottom line is now more important than...

		2 Greenhow, Sweden
	Are Sub-consulting Firms part of Internal Governance? Your examples of external governance mechanisms seem to be external actors who influence the behaviour of the firm. Am not sure where to put sub-contracting firms in which "my" firm demands/expects th...

		0 Adam Mohammed Baba Director, Ghana
	Corporate Governance and Local Government Service As an employee of local government (LG) service, your article has made me see what I will call internal and external CG in the Ghana LGs. - Some of the internal CG is the law makers (assembly member...

		0 Madan Gopal Agarwal Business Consultant, India
	Corporate Governance Excellent articulation and perspective, Jaap. The key is self-realisation and willingness of the board/company/owners etc. that they are accountable to others. Accountability is the key denominator i...

		2 Douglas Ferguson Consultant
	Corporate Governance and Joint Ventures How might this structure be applied in joint ventures where there is a 50-50 ownership stake between the partners? In addition, the jv is designed to leverage the resources of both countries when purs...

		0 Adam Mohammed Baba Director, Ghana
	Corporate Governance and Local Government Service @Adam Mohammed Baba : Thank you Jaap for the excellent comment on my submission. You have added more insight into my understanding of cg as far as regional, local and national governments are concerne...

		2 Greenhow, Sweden
	External Influences and CG Mechanisms I'd appreciate clarification of some of the external "mechanisms". Are you using mechanism as synonymous with influence? I can see how legislation with its control institutions is a mechanism imposing...

		0 AIDA ACUBA, Philippines
	Transparency in Internal and External CG @D P Babu: I agree with your opinion... I believe there must be transparency in good corporate government. With that outsiders will have no doubt and suspicion in the way the company operates and lead...

		5 Suleiman C. Muttani Consultant, Tanzania
	Corporate Governance is More of Internal Value Than for External Control I would thank the Mr de Jonge for this interesting topic. I simply define governance as a striking balance between internal performance and external relationship. A company or organization with its se...

		0 Kumsha Student (MBA), Sao Tome and Principe
	Good Ethics in Internal and External Corporate Governance @Madan Gopal Agarwal: I agree with you Madan, I also believe that ethics and ethical leadership play a central role in the realization of good corporate governance. When leaders and employees understa...