Corporate Governance Law
Definition of Corporate Governance Law
“Corporate Governance… provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Good Corporate Governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and shareholders and should facilitate effective monitoring. The presence of an effective corporate governance system helps to provide a degree of confidence that is necessary for the property functioning of a market economy. As a result, the cost of capital is lower and firms are encourages to use resources more efficiently, thereby underpinning growth.” Preamble, Principles of Corporate Governance, OECD (2004)
Corporate Governance is a set of laws that: sets forth requirements for incorporating a company (i.e., business registration); defines and regulates ownership interests of company shareholders; establishes basic principles or rules of corporate governance; sets limits on the liability of company shareholders; and establishes legal personality for the firm created, providing the legal basis for entering into contracts and accessing finance.
Company Law and Corporate Governance Law
A sound Company Law is a prerequisite for sustained private enterprise growth and development because it:
- Creates the framework for how companies are formed and must operate.
- Sets forth requirements for forming a company (including minimum capital required and procedures for registering a business).
- Provides basic principles or rules of corporate governance: the rules that outline the division of roles and responsibilities between stakeholders.
- Establishes transparency requirements regarding the type of information that companies must report to their investors and the public.
- Encourages entrepreneurship by setting limits on the liability of investors.
The existence of a sound Company Law is not an end in itself. Even the strongest law can be rendered ineffective by an overly restrictive licensing or regulatory regime, corrupt practices of state officials, or a failure to enforce restrictions against self-dealing by controlling shareholders. Practitioners generally agree that strengthening domestic investor confidence in a country’s companies and capital markets through a sound and reasonably enforced Company Law contributes to business competitiveness and to the overall growth of a national economy. Sound corporate governance is part of a larger international emphasis on increased transparency, integrity, and the rule of law. The challenge for legal reformers is to apply the principles and standards of corporate governance across a wide variety of legal, economic, ownership, political, and cultural systems in order to achieve lasting economic growth.