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1. Introduction
Corporate governance (CG) has been in practice in one way or other since the emergence of limited liability corporations from early nineteenth century (Vinten, 2001). However, the phenomenon was not truly recognized until the firm establishment of agency theory (Fama and Jensen, 1983b), which is based on the separation of corporate ownership from control (Berle and Means, 1932). Moreover, the term “Corporate Governance” itself could not appear until mid-1970s (Cheffins, 2011). The separation thus led the corporate management (control) as vicegerent of the shareholders (owners) having fiduciary duty to uphold the trust, protect the owners’ interest and maximize shareholders’ value. One of the much-debated and basic issues in contemporary CG has been agency problem, which arises due to separation of ownership from control. The major reason behind the issue is based on conflict of interest between principals (shareholders) and agents (management) as identified by Fama and Jensen (1983a).
Contemporary concept of CG is broader and multi-disciplinary in nature, and incorporates several organizational functions such as management, finance, accounting, business law, business ethics and economics simultaneously. It also deals with other corporate aspects like accountability, transparency, disclosure, social responsibility, fairness and relationship among board of directors, shareholders and stakeholders (Al Saleh, 2012). Moreover, it defines the regulations, policies, methods and structure to direct and control the organization effectively (Alsanosi, 2012; OECD, 2004). Thus, due to its multi-facet orientation, a single unanimously agreed upon definition does not exist as yet. However, Organization for Economic Co-operation and Development (OECD, 2004) defines it in simple words as “A system by which organizations are directed and controlled”. A more specific and generally agreed upon definition of CG was provided by the World Bank (2013) as:
Corporate governance refers to the set of rules and incentives by which the management of a company is directed and controlled. It refers to the way rights and responsibilities are distributed among the board, company management, shareholders and other stakeholders. However, while policies and documentation are of undeniable importance, these are not enough to ensure good governance. The actions of companies toward promoting corporate transparency and accountability speak louder than words.
This definition better explains the internal and external mechanisms of CG by identifying the responsibilities of the board toward internal...