Corporate governance can be defined narrowly or comprehensively. In a narrower sense, corporate governance is understood to mean the legal and institutional arrangement that is intended to ensure adequate compensation for the capital employed by external investors.
In a broad sense, corporate governance is understood to mean the totality of legal, cultural and institutional arrangements with which the goal is pursued,
1. the control structure (the relationship between shareholders, employees, the supervisory board, management board and other stakeholders) and
2. to organize the distribution of the income and risks of entrepreneurial activity.
The starting point of corporate governance is that, due to the low observability of behavior and the complex reality, it is not possible to conclude clear and explicit contracts in which every possible case is regulated in detail.
A problem arises in the relationship between investors, management and supervisory bodies Agency theory. The main topic here is the behavior of management as an agent of external stakeholders and its control. There are divergences in goals, willingness to take risks and the choice of time horizon between managers and investors. An attempt is made to harmonize the different interests through a combination of participation, transfer payments and controls.
Against the background of incomplete contracts and in view of the problems of agency theory, it may be correct to grant external investors extensive rights of disposal and control. The classic modern enterprise, however, is characterized by the separation of property and control rights, which is why in practice external investors have less influence.
The criteria for the combination or separation are organization-specific: advantages of risk diversification and management specialization, the need for organization-specific investments and capital as well as the costs of separating decision management and supervision. A distinction must be made here: On the one hand, there are small, generally less complex organizations that have lower capital requirements. Here, the information relevant to corporate policy can be concentrated with a few agents. On the other hand, there are larger and usually more complex organizations. They have higher capital requirements and therefore the group of beneficiaries is often more heterogeneous. Here it is useful to distribute the decision-making powers more decentrally.
In an international comparison, two ideal-typical configurations of corporate governance are discussed:
1. Insider-oriented corporate governance in financial systems with a pronounced importance of banks and mutual company holdings.
2. Outsider-oriented corporate governance in financial systems with a strong focus on capital markets.