Medico Corporation is a public company whose shares are traded in public securities markets. Medico's officers want to set up and maintain a system of "good corporate governance."

Question

What is "corporate governance"? What is its practical significance? What, at a minimum, should a "good" system of corporate governance include?

Answer 1

Corporate governance is the relationship between a corpora-tion and its shareholders: the system by which business corporations are directed and controlled. Corporate governance is the essential purpose of corporation law, which sets out the structure of a corporation. A "good" system of corporate governance involves, at a minimum, (1 ) the audited reporting of financial progress at the firm, so that its managers can be evaluated and (2 ) legal protection for shareholders, so that parties who violate the law to take advantage of shareholders can be punished for their misconduct and their victims can recover damages. Practically, good corporate governance in the form of accountability to investors provides the opportunity to enhance corporate wealth, because firms with expanded shareholder rights-a hallmark of good corporate governance-have been shown to have increased profits, sales growth, company value, and other economic advantages.