Corporate governance refers to the way in which a company is governed, how it makes decision, its processes and policies and how it deals with the various interests of its many stakeholders including shareholders, customers, employees and the broader community.
Corporate governance has developed overtime stemming form the biggest corporate scandals which helped in the introduction of corporate governance norms as corporations observed and learnt from these scandals. In a nutshell these scandals shaped the dynamics of corporate governance. Due to this different corporate governance trends have been applied namely; the rules-based approach and the compliance explain based approach.
The latter basically is more like a flexibility approach wherein the company is mandated to comply with the legal framework and policies of corporate governance and where the company does fail, it should justify why so with explanations hence the compliance explain based approach. The former on the other hand provides no room for explanation. A company must either comply with the legal framework and policies of corporate governance or be punished for not doing so. The rules-based approach is majorly enshrined in the Sarbanes Oxley Act of the United states of America.
Considering the dynamics of corporate governance, the compliance explain based approach would be most recommendable on grounds that what would work as a corporate governance mechanism for one company may not in the same manner work for another hence it is imperative that companies are encouraged to use that works best while in compliance with the corporate governance legal frameworks and policies
Corporate governance globally has been natured by the OECD principle, the King Reports, the Cadbury Report also known as the Financial Aspects of Corporate Governance. The OECD principles originate from the Organization for Economic Co-operation and Development (OECD) which is an international organization that works to build better policies for better lives.
The king reports are majorly booklets setting out guidelines for the governance structures and operation of companies in South Africa which have equally gained global recognition and are applied worldwide.
The Cadbury Report was issued by a committee chaired by Adrian Cadbury that sets out recommendations on the arrangement of company boards and accounting systems to mitigate corporate governance risks and failures.
In conclusion, a great compliance with the corporate governance legal framework and policies by a company, yields great company performance.