What do we mean by corporate governance?

A theoretical examination of corporate governance yields three distinct – but overlapping – approaches which will be discussed in detail and used as the basis for an analysis of the way in which the European Community (EC) regulates the Member States' systems of corporate governance.

The Cadbury Report defined corporate governance as ‘the system by which companies are directed and controlled’. Sir Adrian Cadbury emphasises that the origins of the word governance lie in the latin word ‘gubernare’, meaning ‘to steer’. The conventional approach to corporate governance builds on the Cadbury definition, and focuses on mechanisms of managerial accountability, assuming for the most part that this refers to managerial accountability to shareholders. It encompasses both the legal framework surrounding the managerialist core of company law and the broader institutional context in which corporate decision-making takes place. Company law regulates and facilitates the internal operations of companies. By making managerial decision-making the main mechanism by which corporate entities exercise strategic control and operational oversight over businesses, it provides the legal foundations for corporate governance. It may then affect the way in which managerial discretion is discharged by subjecting it to a number of constraints, by entitling or enabling the shareholders (and perhaps also creditors and employees) to take certain decisions, have input into them or receive information about them so that they can adapt their actions accordingly.