Mechanisms and Controls
Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse selection.There are both internal monitoring systems and external monitoring systems.Internal monitoring can be done,for example,by one（or a few)large shareholder（s)in the case of privately held companies or a firm belonging to a business group.Furthermore,the various board mechanisms provide for internal monitoring.External monitoring of managers'behavior,occurs when an independent third party（e.g.the external auditor)attests the accuracy of information provided by management to investors. Stock analysts and debt holders may also conduct such external monitoring.An ideal monitoring and control system should regulate both motivation and ability, while providing incentive alignment toward corporate goals and objectives.Care should be taken that incentives are not so strong that some individuals are tempted to cross lines of ethical behavior,for example by manipulating revenue and profit figures to drive the share price of the company up.
3.1 Internal Corporate Governance Controls
Internal corporate governance controls monitor activities and then take corrective action to accomplish organizational goals.Examples include:
Monitoring by the board of directors
The board of directors,with its legal authority to hire,fire and compensate top management,and safeguards invested capital.Regular board meetings allow potential problems to be identified,discussed and avoided.Whilst non-executive directors are thought to be more independent,they may not always result in more effective corporate governance and may not increase performance.Different board structures are optimal for different firms.Moreover,the ability of the board to monitor the firm's executives is a function of its access to information.Executive directors possess superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes.It could be argued,therefore,that executive directors look beyond the financial criteria.
Internal control procedures and internal auditors
Internal control procedures are policies implemented by an entity's board of directors,audit committee,management,and other personnel to provide reasonable assurance of the entity achieving its objectives related to reliable financial reporting, operating efficiency,and compliance with laws and regulations.Internal auditors are personnel within an organization who test the design and implementation of the entity's internal control procedures and the reliability of its financial reporting.
Balance of power
The simplest balance of power is very common;require that the President be a different person from the Treasurer.This application of separation of power is further developed in companies where separate divisions check and balance each other's actions.One group may propose company-wide administrative changes, another group review and can veto the changes,and a third group check that the interests of people（customers,shareholders,employees)outside the three groups are being met.
Remuneration
Performance-based remuneration is designed to relate some proportion of salary to individual performance.It may be in the form of cash or non-cash payments such as shares and share options,superannuation or other benefits.Such incentive schemes,however,are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behavior,and can elicit myopic behavior.
Monitoring by large shareholders
Given their large investment in the firm,these stakeholders have the incentives,combined with the right degree of control and power,to monitor the management.
In publicly traded U.S.corporations,boards of directors are largely chosen by the President/CEO and the President/CEO often takes the Chair of the Board position for his/herself（which makes it much more difficult for the institutional owners to“fire”him/her).The practice of the CEO also being the Chair of the Board is known as“duality”.While this practice is common in the U.S.,it is relatively rare elsewhere.In the U.K.,successive codes of best practice have recommended against duality.
3.2 External Corporate Governance Controls
External corporate governance controls encompass the controls external stakeholders exercise over the organization.Examples include:competition and debt covenants;demand for and assessment of performance information（especially financial statements)includes government regulations,managerial labor market, media pressure and takeovers.
Financial management
One of the main applications of corporate governance to small businesses is transparency of financial practices and controls placed on how transactions occur.If the business has investors or partners,your governance practices should include preparing and distributing regular financial updates.This might include providing monthly or quarterly reports,or allowing key stakeholders access to view reports such as the business's balance sheet,cash flow statements or profit-and-loss reports. Placing restrictions on how much money an individual can spend on a single transaction,requiring internal and external financial audits and requiring multiple signatures by owners on checks over a certain amount are other examples of corporate governance.
Conflict of interest
Board members,partners,owners and key executives should sign conflict-ofinterest disclosure statements as part of any company's corporate governance.In addition,they should agree to abide by conflict-of-interest policies,such as disclosing outside business relationships with vendors,suppliers,clients and customers and personal or family relationships to these parties or job applicants.
Hiring practices
As part of good public relations,corporate social responsibility and meeting any state or federal hiring guidelines,corporations should write and publicize hiring statements that assert the company's commitment to fair hiring practices and nondiscrimination.This statement should be the basis for providing the company's hiring manager with goals for recruiting,screening and hiring staff.Using guidelines from the Equal Employment Opportunities Commission is a good way to start developing governance policies for hiring practices.
Board role
Board members cannot claim ignorance of illegal behaviors by their employees if they do not exercise reasonable care in the exercise of their duties,which includes monitoring the activities of the company's management and setting policies to limit negative behaviors.Board members should also place limits on their own activities. For these reasons,corporate governance includes specifying the roles and responsibilities of the board of directors.This might include spelling out the duties of individual board members;their role in the day-to-day management of the company or limiting that role;their authority over the company CEO or president; ethics,code-of-conduct and conflict-of-interest rules;and authority to make major strategic decisions,such as acquiring new businesses or closing the business.