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Corporate governance refers to the way a corporation is managed, administered, and controlled by the various stakeholders. The stakeholders such as the shareholders, boards of directors, and managers run the corporation and shape and execute the strategies and day-to-day operations. The other stakeholders such as employees, customers, suppliers, regulators, and society at large are also interested in proper management of the corporation. The objectives of good corporate governance include economic efficiency and maximization of shareholder value and may include other goals as assigned by the regulators and the society.

The term corporate governance appeared in 1981, and the topic has become a subject of intense research, especially in the last decade. However, even with such a focus, no single definition of corporate governance suffices to serve the purposes of all stakeholders. Corporate governance has been in part defined by various regulations and in part by the human element involved in operationalizing the term. In order to achieve the objectives of good corporate governance the shareholders, boards of directors, and managers need to be honest, trustworthy, and respectful of the letter and spirit of the law. Sometimes demands of the various stakeholders can conflict, giving rise to complex and thorny ethical dilemmas. Thus, the topic is of interest to all of us.

To understand the importance of corporate governance, we must first understand the nature of a corporation and the far-reaching influence wielded by today's corporations. The corporate form for conducting business has gained international popularity. Why? The simple reason is that a corporate form of business offers limited liability to the owners of a corporation. For example, if the owners put $100 in the corporation (buy shares) and the corporation goes bankrupt, then the owners lose only $100. However, if the business is run as a sole proprietorship (single owner) or as a partnership, then the owner(s) can be responsible for all debts incurred by the company and may even lose personal assets such as a house or car. This legal protection offered by the limited liability concept results in risk taking and innovation. Today's corporations are owned by thousands of investors who pool their money and delegate the running of the company to professional managers. The people invest and the managers manage, and, if both are successful, everyone reaps the rewards. Some legal scholars have put the idea of corporate form at par with industrialization as a force that helped drive the explosive growth of business and commerce.

However, because owners generally have no direct hand in running a corporation, there is a possibility of mismanagement by the managers; in other words, bad corporate governance can ruin the investors. This is often referred to as an agency problem. What is to stop the managers (agents) from running the company for their own benefit (to the detriment of owners)? This question becomes even more urgent if we scrutinize today's global corporation. Presently, in the United States and across the world, the economic landscape is dominated by global corporations; many of them rival governments in terms of their budgets and power. Any major mistake by the mangers of such a corporation can affect the economies of nations as well as the lives of the common people. The world faced a major economic crisis in 2008-2009 when U.S. banking and investment firms used faulty models in measuring risks in the housing market. As this article is being written, the ecosystem of the Gulf of Mexico is being threatened because of mishaps with off shore oil drilling. The livelihoods of millions of people are at stake.

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