Good corporate governance is an important step in building market confidence and encouraging more stable, long-term international investment flows. The business corporation is an increasingly important engine for wealth creation worldwide, and how companies are run will influence welfare in society as a whole. In order to serve this wealth creating function, companies must operate within a framework that keeps them focused on their objectives and accountable for their actions. Many countries see better corporate governance practices as a way to improve economic dynamism and thus enhance overall economic performance.corporate governance, ownership, shareholders, top management

Bocean Claudiu

English

Research Papers in Economics

65
Management – Marketing - Tourism 
DEVELOPING A GOOD CORPORATE GOVERNANCE 
Assist. Ph.D. student Bocean Claudiu 
University of Craiova 
Faculty of Economics and Business 
Administration 
Craiova, Romania 
Abstract: Good corporate governance is an important step in building 
market confidence and encouraging more stable, long-term international 
investment flows. The business corporation is an increasingly important 
engine for wealth creation worldwide, and how companies are run will 
influence welfare in society as a whole. In order to serve this wealth 
creating function, companies must operate within a framework that keeps 
them focused on their objectives and accountable for their actions. Many 
countries see better corporate governance practices as a way to improve 
economic dynamism and thus enhance overall economic performance.  
Key words: corporate governance, ownership, shareholders, top management 
1. Concept of corporate governance 
The compatibility of corporate governance practices with global standards has 
also become an important part of corporate success. The practice of good corporate 
governance has therefore become a necessary prerequisite for any corporation to 
manage effectively in the globalized market. 
The term “corporate governance” is a relatively new one both in the public and 
academic debates, although the issues it addresses have been around for much longer, at 
least since Berle and Means (1932) and the even earlier Smith (1776). 
In the last two decades, however, corporate governance issues have become 
important not only in the academic literature, but also in public policy debates. During 
this period, corporate governance has been identified with takeovers, financial 
restructuring, and institutional investors' activism. One can talk about the governance of 
a transaction, of a club, and, in general, of any economic organization. In a narrow 
sense, corporate governance is simply the governance of a particular organizational 
form - a corporation. 
Viewing the corporation as a nexus of explicit and implicit contracts, Garvey 
and Swan (1994) assert that governance determines how the firm’s top decision makers 
actually administer such contracts.  
Shleifer and Vishny (1997) define corporate governance by stating that it deals 
with the ways in which suppliers of finance to corporations assure themselves of getting 
a return on their investment. A similar concept is suggested by Caramanolis-Cötelli 
(1995), who regards corporate governance as being determined by the equity allocation 
among insiders and outside investors. 
John and Senbet (1998) propose the more comprehensive definition that 
corporate governance deals with mechanisms by which stakeholders of a corporation 
exercise control over corporate insiders and management such that their interests are 66
Revista Tinerilor Economi ti
protected. They include as stakeholders not just shareholders, but also debt holders and 
even non-financial stakeholders such as employees, suppliers, customers, and other 
interested parties. Hart (1995) closely shares this view as he suggests that corporate 
governance issues arise in an organization whenever two conditions are present. First, 
there is an agency problem, or conflict of interest, involving members of the 
organization – these might be owners, managers, workers or consumers. Second, 
transaction costs are such that this agency problem cannot be dealt with through a 
contract.
Zingales (1997) defines corporate governance as the complex set of constraints 
that shape the ex-post bargaining over the quasi-rents generated by a firm. All the 
governance mechanisms discussed in the literature can be reinterpreted in light of this 
definition.  
An OECD study (1999) considers that corporate governance is the system by 
which business corporations are directed and controlled. The corporate governance 
structure specifies the distribution of rights and responsibilities among different 
participants in the corporation, such as, the board, managers, shareholders and other 
stakeholders, and spells out the rules and procedures for making decisions on corporate 
affairs. By doing this, it also provides the structure through which the company 
objectives are set, and the means of attaining those objectives and monitoring 
performance. 
A few studies have examined corporate governance in emerging markets, 
although none has estimated the link between CEO turnover and corporate 
performance. Researchers (La Porta, Lopez-de-Silanes, and Shleifer, 1999; Claessens, 
Djankov, Fan and Lang, 1999; Lins, 2000) have studied the implications of the 
concentrated corporate ownership that is common in many emerging and developed 
markets and conclude that the principal agency problem in large corporations around 
the world is that of restricting expropriation of minority shareholders by the controlling 
shareholders.
2. Importance of corporate governance 
Corporate governance matters for distribution of rents. Zingales (1997) 
considers that are three main channels through which the conditions that affect the 
division of quasi-rents also affect the total surplus produced: 
1. Ex-ante incentive effects. The process through which surplus is divided ex-
post affects the ex-ante incentives to undertake some actions, which can create or 
destroy some value, in two main ways. First, rational agents will not spend the optimal 
amount of resources in value enhancing activities that are not properly rewarded by the 
governance system. Second, rational agents will spend resources in inefficient 
activities, whose only (or main) purpose is to alter the outcome of the ex-post 
bargaining in their favor. 
2. Inefficient bargaining. A second channel through which a governance system 
affects total value is by altering ex-post bargaining efficiency. A governance system, 
therefore, can affect the degree of information asymmetry between the parties, the level 
of coordination costs, or the extent to which a party is liquidity constrained. 
3. Risk aversion. Finally, a governance system might affect the ex-ante value of 
the total surplus by determining the level and the distribution of risk. If the different 
parties have different degrees of risk aversion (or different opportunities to diversify or 67
Management – Marketing - Tourism 
hedge risk), then the efficiency of a governance system is also measured by how 
effectively it allocates risk to the most risk-tolerant party. 
3. Principles for corporate governance 
Corporate governance is only part of the larger economic context in which 
firms operate, which includes, for example, macroeconomic policies and the degree of 
competition in product and factor markets. The corporate governance framework also 
depends on the legal, regulatory, and institutional environment. In addition, factors such 
as business ethics and corporate awareness of the environmental and societal interests 
of the communities in which it operates can also have an impact on the reputation and 
the long term success of a company. 
OECD have assembled a system of principles that are intended to assist 
member and non-member governments in their efforts to evaluate and improve the 
legal, institutional and regulatory framework for corporate governance in their 
countries, and to provide guidance and suggestions for stock exchanges, investors, 
corporations, and other parties that have a role in the process of developing good 
corporate governance. The principles cover five areas:  
I) The rights of shareholders;  
II) The equitable treatment of shareholders;  
III) The role of stakeholders;
IV) Disclosure and transparency;  
V) The responsibilities of the board. 
Briefly those principles are: 
I) The corporate governance framework should protect shareholders’ rights. 
II) The corporate governance framework should ensure the equitable treatment 
of all shareholders, including minority and foreign shareholders. All shareholders 
should have the opportunity to obtain effective redress for violation of their rights. 
III) The corporate governance framework should recognize the rights of 
stakeholders as established by law and encourage active co-operation between 
corporations and stakeholders in creating wealth, jobs, and the sustainability of 
financially sound enterprises. 
IV) The corporate governance framework should ensure that timely and 
accurate disclosure is made on all material matters regarding the corporation, including 
the financial situation, performance, ownership, and governance of the company. 
V) The corporate governance framework should ensure the strategic guidance 
of the company, the effective monitoring of management by the board, and the board’s 
accountability to the company and the shareholders. 
The principles are primarily intended to provide assistance to governments. 
They also provide guidance and direction for stock-exchanges, investors, corporations 
and other parties that have a role in developing good corporate governance. They can 
indeed be a useful point of reference for many emerging markets and economies in 
transition. Not only do the principles provide a benchmark for internationally accepted 
standards, they also offer a solid platform for analysis and practices in individual 
countries taking into account country specific circumstances, such as legal and cultural 
traditions.68
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4. The institutions of corporate governance 
Mark Roe define corporate governance as the relationships at the top of the 
firm - the board of directors, the senior managers, and the stockholders. In his opinion 
institutions of corporate governance are those repeated mechanisms that allocate 
authority among the three and that affect, modulate and control the decisions made at 
the top of the firm. 
Core corporate governance institutions respond to two distinct problems, one of 
vertical governance (between distant shareholders and managers) and another of 
horizontal governance (between a close, controlling shareholder and distant 
shareholders). 
The principal institutions are about ten: the market, the board, gate-keeping, 
coalescing (via takeovers, proxy fights, and shareholder voice), incentive compensation, 
professionalism, lawsuits, capital structure, and bankruptcy. Some institutions deal well 
with vertical corporate governance but do less well with horizontal governance. The 
institutions interact as complements and substitutes, and many can be seen as 
developing out of a “primitive” of contract law. Arguably a system must get contract 
enforcement, as well as basic property rights, satisfactory before it embarks on more 
sophisticated corporate governance institutions. 
5. The search for good corporate governance practices 
Corporate governance affects the development and functioning of capital 
markets and exerts a strong influence on resource allocation. In an era of increasing 
capital mobility and globalization, it has also become an important framework 
condition affecting the industrial competitiveness and economies.  
Corporate governance mechanisms vary depending on industry sectors and type 
of productive activity. Corporate governance framework can influence upon the 
development of equity markets, R&D and innovative activity, and the development of 
an active SME sector, and thus influence upon economic growth. 
Identifying what constitutes good corporate governance practice, and under 
what circumstances, is a difficult task. This is partly because the effectiveness of 
corporate governance systems is influenced by differences in countries’ legal and 
regulatory frameworks, and historical and cultural factors, in addition to the structure of 
product and factor markets. The challenge, therefore, is not only to identify the 
strengths and weaknesses in each individual system or group of systems, but also to 
identify what are the underlying conditions upon which these strengths and weaknesses 
depend.
One of the main challenges facing policy makers is how to develop a good 
corporate governance framework which can secure the benefits associated with 
controlling shareholders acting as direct monitors, while at the same time, ensuring that 
they do not expropriate excessive rents at the expense of other stakeholders. The search 
for good corporate governance practices should be based on an identification of what 
works in defined countries, to discern what broad principles can be derived from these 
experiences, and to examine the conditions for transferability of these practices to other 
countries.
6. Corporate governance in Romania 
Emerging Romanian system of corporate governance is characterized by the 
big issue of the presence of major shareholders (who act as block holders) as a result of 69
Management – Marketing - Tourism 
privatization with strategic investors. Consequently, the problem of responsibility and 
accountability of the senior management does not seem to be a fundamental issue in 
this case, rather the main problem that affects the Romanian corporate governance may 
be identified in the weakness of the minority shareholders. In fact, due to the strength of 
the block holder, the senior management is usually effectively monitored, so that it does 
not run the company according to its own interest. However, this fact does not lead to 
the conclusion that the interests of all the shareholders are pursued, since the block 
holder seems to be able to make the senior management pursue his or her interest, 
which often differs from the interest of the minority shareholders. 
Corporate governance in Romania tends to benchmark other system, especially 
of the European Union country, where it seems likely that the potential future corporate 
governance system will take more into account the stakes of the employees, due to the 
relevance of the Germanic reality. 
7. Conclusions 
Corporate governance is a concern of great importance to owners of common 
stocks, because stockholder wealth depends in large part upon the goals of the people 
who set the strategy of the corporation. The objectives of corporate managers often 
conflict with those of the shareholders who own their companies.  
The objectives of a good corporate governance system should be:  
1) to maximize the incentives for value enhancing investments, while 
minimizing inefficient power seeking; 
2) to minimize inefficiency in ex-post bargaining;  
3) to minimize any governance risk and allocate the residual risk to the least 
risk-averse parties. 
Mechanisms for controlling the dimension of corporate costs are necessary and 
they include external and internal disciplining devices. It was observed that due to 
important theoretical and practical limitations, external disciplining devices including 
takeover threat, the managerial labor market, and mutual monitoring by managers, 
reputation, competition in product factor markets and financial analysts cannot alone 
solve the corporate governance problem, although they may be important in some 
particular circumstances. Firms therefore have to adopt complementary internal 
disciplining devices in order to minimize their total agency costs. These internal devices 
include the composition of the board of directors, insider ownership, large shareholders, 
compensation packages and financial policies (dividends and debt). 
Events of the last two decades indicate that even corporate internal control 
systems have failed to deal effectively with these changes, especially excess capacity 
and the requirement for exit. Making the internal control systems of corporations work 
is the major challenge of our time. 
REFERENCES 
1. Berle Jr., A., 
Means, G. 
The Modern Corporation and Private Property, Macmillan, 
New York, 1932 
2. Caramanolis-
Cötelli, B. 
External and Internal Corporate Control Mechanisms and 
the Role of the Board of Directors: A Review of the 
Literature, Working Paper No  9606, Institute of Banking 
and Financial Management, 1995 70
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3. Claessens, S., 
Djankov, S., 
Lang, L. 
Who controls East Asian corporations?, World Bank Policy 
Research Paper 2054, February 1999 
4. Farinha,  J.  Corporate Governance: a Survey of The Literature,
November, 2003, accessed at www.ssrn.com, 22.09.2006 
5. Garvey, G., 
Swan, P. 
The Economics of Corporate Governance: Beyond the 
Marshallian Firm, Journal of Corporate Finance 1, 1994, p. 
139-174 
6. Hart, O.  Corporate Governance, Some Theory and Applications, The 
Economic Journal 105, 1995, p. 687-689 
7. John, K., 
Senbet, L. 
Corporate Governance and Board Effectiveness, Journal of 
Banking and Finance 22, 1998, p. 371-403 
8. La Porta, R., 
Lopez-de-
Silanes, F.,
Shleifer, A. 
Corporate ownership around the world, Journal of Finance
54:2, April 1999, p. 471-517 
9. Lins,  K.  Equity ownership and firm value in emerging markets, 
working paper, Kenan-Flagler Business School, University 
of North Carolina at Chapel Hill January 2000 
10. OECD Study  OECD Principles of Corporate Governance, Paris, 1999 
11. Roe, M.  The Institutions of Corporate Governance, Discussion Paper 
No. 488, Harvard Law School, 08/2004 
12. Shleifer, A., 
Vishny, R. 
A Survey of Corporate Governance, Journal of Finance 52, 
1997, p. 737-783 
13. Zingales,  L.  Corporate Governance, University of Chicago, NBER & 
CEPR, 1997 

A Survey of Corporate Governance,

Corporate Governance and Board Effectiveness,

Corporate Governance,

Corporate Governance, Some Theory and Applications,

Corporate Governance: a Survey of The Literature,

Corporate ownership around the world,

Equity ownership and firm value in emerging markets, working paper,

External and Internal Corporate Control Mechanisms and the Role of the Board of Directors: A Review of the Literature, Working Paper No 9606, Institute of Banking and Financial Management,

The Economics of Corporate Governance: Beyond the Marshallian Firm,

The Institutions of Corporate Governance,

Who controls East Asian corporations?, World Bank Policy Research Paper

DEVELOPING A GOOD CORPORATE GOVERNANCE

DEVELOPING A GOOD CORPORATE GOVERNANCE

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