Corporate Governance
Definition
Corporate governance is the system of rules, practices, and processes by which a company is directed and controlled. It defines the distribution of rights and responsibilities among the board of directors, management, shareholders, and other stakeholders. Good governance ensures accountability, fairness, transparency, and responsible decision-making.
Why It Matters
Strong corporate governance is the backbone of the ESG governance pillar and underpins investor confidence. Governance failures are frequently the root cause of environmental and social scandals, making it a leading indicator of overall ESG risk.
Related Terms
Board Diversity
Board diversity refers to the composition of a company's board of directors in terms of gender, ethnicity, age, professional background, and other dimensions of difference. Diverse boards bring varied perspectives that improve decision-making, risk oversight, and innovation. Many jurisdictions now mandate or recommend minimum levels of board diversity.
Anti-Corruption
Anti-corruption refers to the policies, procedures, and practices designed to prevent, detect, and address bribery, fraud, and other corrupt activities within an organisation and its business relationships. It encompasses compliance with laws like the UK Bribery Act and US Foreign Corrupt Practices Act, as well as ethical culture and whistleblower protection. Robust anti-corruption programmes are a core governance expectation.
Fiduciary Duty
Fiduciary duty is the legal obligation of one party to act in the best interest of another, particularly in financial and investment contexts. For corporate directors and investment managers, this includes the duty of care, loyalty, and prudence. The modern interpretation of fiduciary duty increasingly incorporates consideration of ESG factors as material to long-term value.
ESG Rating
An ESG rating is an assessment of a company's exposure to and management of environmental, social, and governance risks and opportunities. Provided by agencies such as MSCI, Sustainalytics, and S&P Global, ESG ratings aggregate data from corporate disclosures, news sources, and stakeholder reports. Ratings are used by investors to screen, compare, and evaluate companies on sustainability performance.