A corporation is a legal entity comprised of a board of directors, shareholders (sometimes called partners), and creditors elected or appointed by the members of the corporation. At common law, corporations are deemed to be separate legal entities from the individuals who own and control them. In recent years, most jurisdictions have allowed the formation of new corporations by simple certificate of incorporation. However, many jurisdictions have also become more restrictive with respect to the authority of corporations and their ability to engage in interstate business relationships. The Canadian Corporations Act is one example of a highly developed corporate law system.
A corporation’s shareholders are the individuals who own and control the corporation. The number of shareholders is usually limited to a number that constitutes a majority of the voting power at Board meetings. The number of directors required to constitute a quorum at Board meetings is generally held at the discretion of the Board. The Board may authorize officers of a corporation to conduct its business and make decisions on behalf of the shareholders. The Board must always have a majority of members present at Board meetings in order to make corporate decisions.
The primary objective of corporate governance is to ensure that the interests of the stakeholders are protected in the ownership and management of the firm. It is believed that a firm’s value derives from its ability to deliver value to the shareholder, the manager, and the other stakeholders over time. A corporate governance system is designed to facilitate capital budgeting, financial reporting, management reporting, and management buy-out opportunities. To maximize the profitability of a firm in the long term, it is important that managers create policies that are intended to mitigate short-term shocks to the business model and that reward stable performance over time. While it may not be possible to specify what policies should be implemented, existing corporate governance systems to reward companies that take consistent and timely actions to mitigate the risks that threaten their existence in the market.