Governance (G) Resources

Resources organized by Agency Theory + Stakeholder Theory Framework.

Corporate governance encompasses the systems, principles, and processes by which companies are directed and controlled. The Governance dimension integrates two complementary theoretical frameworks: Agency Theory (Jensen & Meckling, 1976), which focuses on aligning management and shareholder interests, and Stakeholder Theory (Freeman, 1984), which emphasizes balancing interests of all stakeholders.

Primary Framework: Jensen, M. C., & Meckling, W. H. (1976). “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics, 3(4), 305-360.
Complementary Framework: Freeman, R. E. (1984). Strategic Management: A Stakeholder Approach. Boston: Pitman.

Framework Overview

The Governance dimension is organized into five core categories that capture the essential mechanisms for effective corporate oversight and accountability:

Category Primary Focus Theoretical Foundation Key ESG Standards
👔 Board Structure & Composition Board effectiveness Agency Theory, Resource Dependence GRI 2-9 to 2-11, SASB
💼 Executive Leadership & Compensation Management incentives Agency Theory, Stewardship Theory GRI 2-19 to 2-21
📊 Shareholder Rights & Ownership Ownership structure Agency Theory, Stakeholder Theory GRI 2-29
📜 Business Ethics & Compliance Ethical conduct Institutional Theory GRI 2-23 to 2-27, SASB
🔒 Risk Management & Internal Controls Risk oversight Agency Theory GRI 2-12 to 2-13, TCFD

👔 1. Board Structure & Composition

Primary Focus: Board effectiveness, independence, and diversity
Theoretical Foundation: Agency Theory, Resource Dependence Theory

Overview

The board of directors serves as the primary governance mechanism to oversee management on behalf of shareholders and stakeholders. Board structure and composition directly impact oversight quality, strategic guidance, and risk management.

Key Topics

Board Independence

  • Independent vs. non-independent directors
  • Definition of independence (financial, familial, professional ties)
  • Lead independent director role
  • Board independence ratios and thresholds
  • Independence of board committees

Board Diversity

  • Gender Diversity: Women on boards, gender balance targets
  • Racial & Ethnic Diversity: Representation of underrepresented groups
  • Skills & Experience Diversity: Industry expertise, functional backgrounds
  • Age Diversity: Intergenerational perspectives
  • Geographic Diversity: International experience and perspectives
  • Cognitive Diversity: Diverse thinking styles and approaches

Board Size & Structure

  • Optimal board size (typically 7-15 directors)
  • Board committees (audit, risk, compensation, nomination, sustainability)
  • Committee composition and independence requirements
  • Board leadership structure (CEO/Chair separation)
  • Staggered vs. annual board elections

Director Qualifications & Expertise

  • Director skills matrix
  • Industry and functional expertise
  • Financial literacy and audit committee financial experts
  • ESG and sustainability expertise
  • Technology and cybersecurity expertise
  • Crisis management experience

Board Refreshment & Succession

  • Director term limits and mandatory retirement ages
  • Board succession planning
  • Director onboarding and orientation
  • Continuing education and development
  • Board performance evaluations

Board Effectiveness

  • Board meeting frequency and attendance
  • Board evaluation processes
  • Director time commitments and overboarding
  • Board access to information and management
  • Executive sessions without management
  • GRI 2-9: Governance structure and composition
  • GRI 2-10: Nomination and selection of the highest governance body
  • GRI 2-11: Chair of the highest governance body
  • SASB: Board composition and diversity metrics
  • OECD Principles of Corporate Governance
  • ISS (Institutional Shareholder Services): Proxy voting guidelines
  • Glass Lewis: Governance policies

Resources

Simon Mak’s Books

  • ESG Reporting Made Simple: Board governance disclosure

Academic References

  • Fama, E. F., & Jensen, M. C. (1983). “Separation of Ownership and Control.” Journal of Law and Economics, 26(2), 301-325.
  • Adams, R. B., & Ferreira, D. (2009). “Women in the Boardroom and Their Impact on Governance and Performance.” Journal of Financial Economics, 94(2), 291-309.

Explore Board Structure Resources →

💼 2. Executive Leadership & Compensation

Primary Focus: Management incentives and accountability
Theoretical Foundation: Agency Theory, Stewardship Theory

Overview

Executive compensation is a critical governance mechanism to align management interests with long-term shareholder and stakeholder value creation. Effective compensation design balances incentives, performance, and risk.

Key Topics

CEO/Chair Separation

  • Combined vs. separated CEO and Chair roles
  • Arguments for and against separation
  • Lead independent director as alternative
  • Regional and industry practices
  • Transition considerations

Executive Compensation Structure

  • Base salary, annual bonus, long-term incentives
  • Equity compensation (stock options, restricted stock, performance shares)
  • Pension and retirement benefits
  • Perquisites and benefits
  • Severance and change-in-control provisions

Pay-for-Performance Alignment

  • Performance metrics (financial, operational, ESG)
  • Short-term vs. long-term incentive balance
  • Relative vs. absolute performance measures
  • Peer group selection for benchmarking
  • Clawback and malus provisions

Say-on-Pay

  • Shareholder advisory votes on executive compensation
  • Frequency of say-on-pay votes (annual, biennial, triennial)
  • Engagement with shareholders on compensation
  • Response to failed say-on-pay votes

CEO Pay Ratio

  • CEO-to-median employee pay ratio disclosure
  • CEO-to-average employee pay ratio
  • International pay ratio comparisons
  • Pay equity and fairness considerations

ESG-Linked Compensation

  • ESG metrics in executive incentive plans
  • Climate and sustainability targets
  • Diversity and inclusion metrics
  • Safety and employee well-being metrics
  • Weighting of ESG metrics (typically 10-30%)

Clawback Provisions

  • Mandatory clawback policies (SOX, Dodd-Frank)
  • Voluntary clawback provisions
  • Triggering events (restatements, misconduct)
  • Recovery mechanisms and enforcement
  • GRI 2-19: Remuneration policies
  • GRI 2-20: Process to determine remuneration
  • GRI 2-21: Annual total compensation ratio
  • SASB: Executive compensation metrics
  • SEC: Executive compensation disclosure rules (Item 402)
  • Dodd-Frank Act: Say-on-pay, CEO pay ratio, clawback rules

Resources

Simon Mak’s Books

  • ESG Reporting Made Simple: Executive compensation disclosure

Academic References

  • Jensen, M. C., & Murphy, K. J. (1990). “Performance Pay and Top-Management Incentives.” Journal of Political Economy, 98(2), 225-264.
  • Bebchuk, L. A., & Fried, J. M. (2004). Pay without Performance: The Unfulfilled Promise of Executive Compensation. Harvard University Press.

Explore Executive Compensation Resources →

📊 3. Shareholder Rights & Ownership Structure

Primary Focus: Shareholder voice and ownership dynamics
Theoretical Foundation: Agency Theory, Stakeholder Theory

Overview

Shareholder rights and ownership structure determine the balance of power between shareholders and management. Strong shareholder rights enhance accountability, while concentrated ownership can align or entrench interests.

Key Topics

Voting Rights

  • One share, one vote principle
  • Dual-class share structures (supervoting shares)
  • Non-voting shares and preference shares
  • Cumulative voting vs. plurality voting
  • Majority voting for directors

Shareholder Proposals

  • Shareholder proposal rules (SEC Rule 14a-8)
  • ESG-related shareholder proposals
  • Management responses to proposals
  • Shareholder proposal success rates
  • Engagement vs. proposals

Proxy Access

  • Shareholder rights to nominate directors
  • Proxy access thresholds (ownership %, holding period)
  • Proxy access usage and effectiveness
  • Universal proxy cards

Ownership Structure

  • Ownership concentration vs. dispersion
  • Institutional ownership (pension funds, asset managers)
  • Insider ownership (management, founders)
  • Family ownership and control
  • State ownership (SOEs)
  • Foreign ownership restrictions

Anti-Takeover Provisions

  • Poison pills (shareholder rights plans)
  • Staggered boards (classified boards)
  • Supermajority voting requirements
  • Golden parachutes
  • Fair price provisions
  • Greenmail and standstill agreements

Shareholder Engagement

  • Engagement policies and practices
  • Engagement with institutional investors
  • ESG engagement and stewardship
  • Proxy advisors (ISS, Glass Lewis)
  • Investor relations and transparency
  • GRI 2-29: Approach to stakeholder engagement
  • SASB: Ownership structure metrics
  • OECD Principles: Shareholder rights
  • UK Stewardship Code: Investor stewardship
  • SEC: Proxy rules and shareholder rights

Resources

Simon Mak’s Books

  • ESG Reporting Made Simple: Ownership structure disclosure

Academic References

  • Shleifer, A., & Vishny, R. W. (1997). “A Survey of Corporate Governance.” Journal of Finance, 52(2), 737-783.
  • Bebchuk, L. A., Cohen, A., & Ferrell, A. (2009). “What Matters in Corporate Governance?” Review of Financial Studies, 22(2), 783-827.

Explore Shareholder Rights Resources →

📜 4. Business Ethics & Compliance

Primary Focus: Ethical conduct and regulatory compliance
Theoretical Foundation: Institutional Theory, Legitimacy Theory

Overview

Business ethics and compliance encompass the policies, systems, and culture that promote ethical behavior and legal compliance. Strong ethics programs build trust, reduce risk, and enhance reputation.

Key Topics

Code of Conduct

  • Code of conduct content and coverage
  • Employee training and acknowledgment
  • Supplier and partner codes
  • Code enforcement and disciplinary actions
  • Code updates and revisions

Anti-Corruption & Anti-Bribery

  • FCPA (Foreign Corrupt Practices Act) compliance
  • UK Bribery Act compliance
  • Anti-corruption policies and procedures
  • Gifts, hospitality, and entertainment policies
  • Third-party due diligence (agents, intermediaries)
  • Facilitation payments
  • Political contributions and lobbying

Conflicts of Interest

  • Conflict of interest policies
  • Related-party transactions
  • Director and executive conflicts
  • Employee conflicts (outside employment, investments)
  • Disclosure and management of conflicts

Whistleblower Protection

  • Whistleblower hotlines and reporting channels
  • Anonymous reporting mechanisms
  • Non-retaliation policies
  • Investigation procedures
  • Whistleblower case statistics and outcomes

Fair Competition & Antitrust

  • Antitrust and competition law compliance
  • Price fixing and market allocation
  • Bid rigging and collusion
  • Monopolization and market dominance
  • Merger and acquisition reviews

Political Activities & Lobbying

  • Political contribution policies
  • Lobbying disclosure and transparency
  • Trade association memberships
  • Public policy positions
  • Climate lobbying alignment

Tax Transparency

  • Tax strategy and governance
  • Effective tax rate and country-by-country reporting
  • Tax haven usage and transfer pricing
  • Tax incentives and subsidies
  • Responsible tax practices
  • GRI 2-23: Policy commitments
  • GRI 2-24: Embedding policy commitments
  • GRI 2-25: Processes to remediate negative impacts
  • GRI 2-26: Mechanisms for seeking advice and raising concerns
  • GRI 2-27: Compliance with laws and regulations
  • GRI 205: Anti-corruption
  • GRI 206: Anti-competitive Behavior
  • GRI 207: Tax
  • SASB: Business ethics metrics
  • FCPA: Foreign Corrupt Practices Act
  • UK Bribery Act

Resources

Simon Mak’s Books

  • ESG Reporting Made Simple: GRI 205-207 implementation
  • ESG & GRI Reporting Made Simple: Ethics and compliance disclosure

Academic References

  • Treviño, L. K., & Nelson, K. A. (2021). Managing Business Ethics: Straight Talk about How to Do It Right. Wiley.
  • Paine, L. S. (1994). “Managing for Organizational Integrity.” Harvard Business Review, 72(2), 106-117.

Explore Business Ethics Resources →

🔒 5. Risk Management & Internal Controls

Primary Focus: Risk oversight and control systems
Theoretical Foundation: Agency Theory, Resource Dependence Theory

Overview

Risk management and internal controls are essential governance functions to identify, assess, and mitigate risks that could impair value creation. Effective risk governance integrates financial, operational, strategic, and ESG risks.

Key Topics

Enterprise Risk Management (ERM)

  • ERM framework (COSO, ISO 31000)
  • Risk appetite and tolerance
  • Risk identification and assessment
  • Risk mitigation and response strategies
  • Risk monitoring and reporting
  • Board risk oversight

Internal Audit Function

  • Internal audit charter and independence
  • Internal audit scope and coverage
  • Internal audit reporting lines
  • Internal audit effectiveness
  • Coordination with external audit

Cybersecurity Governance

  • Cybersecurity risk oversight
  • Board cybersecurity expertise
  • Cybersecurity policies and procedures
  • Incident response and business continuity
  • Third-party cybersecurity risks
  • Cybersecurity disclosure

Climate Risk Oversight

  • Board oversight of climate risks
  • Climate scenario analysis
  • Physical and transition risk assessment
  • Climate risk integration into ERM
  • TCFD implementation
  • Climate risk disclosure

ESG Risk Integration

  • ESG risk identification and materiality
  • ESG risk metrics and KPIs
  • ESG risk reporting to the board
  • ESG risk management strategies
  • Stakeholder engagement on ESG risks

Crisis Management

  • Crisis management plans and protocols
  • Crisis communication strategies
  • Business continuity and disaster recovery
  • Pandemic preparedness
  • Reputational risk management

Financial Controls

  • Internal controls over financial reporting (ICFR)
  • SOX 404 compliance
  • Financial statement audit
  • Fraud prevention and detection
  • Financial risk management (credit, market, liquidity)
  • GRI 2-12: Role of the highest governance body in overseeing the management of impacts
  • GRI 2-13: Delegation of responsibility for managing impacts
  • GRI 2-16: Communication of critical concerns
  • TCFD: Governance (risk oversight)
  • COSO: Enterprise Risk Management Framework
  • ISO 31000: Risk Management
  • SASB: Risk management metrics
  • SEC: Cybersecurity risk disclosure

Resources

Simon Mak’s Books

  • Climate Risk Quantification in Practice: Climate risk assessment and management
  • ESG Reporting Made Simple: Risk governance disclosure

Academic References

  • Kaplan, R. S., & Mikes, A. (2012). “Managing Risks: A New Framework.” Harvard Business Review, 90(6), 48-60.
  • Gordon, L. A., Loeb, M. P., & Tseng, C. Y. (2009). “Enterprise Risk Management and Firm Performance: A Contingency Perspective.” Journal of Accounting and Public Policy, 28(4), 301-327.

Explore Risk Management Resources →

Theoretical Foundations

Agency Theory (Primary Framework)

Core Problem: Separation of ownership (shareholders) and control (management) creates agency costs.

Governance Mechanisms:

  1. Monitoring: Board oversight, audit, disclosure
  2. Incentives: Executive compensation aligned with performance
  3. Bonding: Management commitments and guarantees
  4. Market Discipline: Takeover threats, managerial labor market

Key Insight: Governance structures exist to align management interests with shareholder interests and minimize agency costs.

Limitations: Narrow focus on shareholder value, neglects stakeholder interests, assumes self-interested behavior.

Stakeholder Theory (Complementary Framework)

Core Principle: Companies must balance interests of all stakeholders, not just shareholders.

Governance Implications:

  1. Stakeholder Representation: Board diversity, stakeholder engagement
  2. Multi-Stakeholder Governance: Worker representation, community voice
  3. Long-Term Value: Balancing stakeholder interests over time
  4. Corporate Purpose: Beyond shareholder primacy

Key Insight: Effective governance requires managing relationships with all stakeholders whose interests are affected by corporate activities.

Strengths: Broader view of corporate responsibility, aligns with ESG principles, reflects stakeholder capitalism.

Stewardship Theory (Complementary Framework)

Core Principle: Managers are stewards of the organization, naturally aligned with organizational interests.

Governance Implications:

  1. Trust-Based Relationships: Board-management collaboration
  2. Long-Term Orientation: Stewardship of resources for future generations
  3. Intrinsic Motivation: Purpose-driven leadership
  4. Organizational Legacy: Building enduring institutions

Key Insight: Not all managers are self-interested; many are motivated by achievement, responsibility, and organizational success.

Integration of Theories

Governance Category Agency Theory Stakeholder Theory Stewardship Theory
Board Structure ✅ Primary ✅ Diversity ⚠️ Collaboration
Executive Compensation ✅ Primary ⚠️ ESG metrics ✅ Long-term focus
Shareholder Rights ✅ Primary ✅ Stakeholder voice ❌ Not applicable
Business Ethics ⚠️ Compliance ✅ Stakeholder trust ✅ Integrity
Risk Management ✅ Primary ✅ ESG risks ⚠️ Long-term risks
Legend: ✅ Primary relevance ⚠️ Partial relevance ❌ Not applicable

Mapping to ESG Standards

Governance Category GRI Standards SASB IFRS S1 TCFD
Board Structure 2-9 to 2-11 Board composition Governance Governance
Executive Compensation 2-19 to 2-21 - Governance -
Shareholder Rights 2-29 - Governance -
Business Ethics 2-23 to 2-27, 205-207 Business ethics Governance -
Risk Management 2-12 to 2-13 Risk management Governance Risk management

Why Agency + Stakeholder Theory?

Complementary Strengths

Agency theory provides the traditional governance foundation (board oversight, executive incentives), while stakeholder theory reflects modern ESG governance (stakeholder engagement, long-term value).

Alignment with Practice

Leading companies integrate both frameworks: strong board oversight (agency) with stakeholder engagement and ESG integration (stakeholder).

Alignment with Standards

Major ESG standards (GRI, SASB, IFRS S1) incorporate both shareholder accountability and stakeholder engagement.

Balanced Approach

Combining theories avoids the limitations of each: agency theory’s narrow focus and stakeholder theory’s potential for stakeholder conflicts.

Academic References

Foundational Works

  1. Jensen, M. C., & Meckling, W. H. (1976). “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics, 3(4), 305-360.

  2. Fama, E. F., & Jensen, M. C. (1983). “Separation of Ownership and Control.” Journal of Law and Economics, 26(2), 301-325.

  3. Freeman, R. E. (1984). Strategic Management: A Stakeholder Approach. Boston: Pitman.

  4. Donaldson, L., & Davis, J. H. (1991). “Stewardship Theory or Agency Theory: CEO Governance and Shareholder Returns.” Australian Journal of Management, 16(1), 49-64.

Governance Research

  1. Shleifer, A., & Vishny, R. W. (1997). “A Survey of Corporate Governance.” Journal of Finance, 52(2), 737-783.

  2. Bebchuk, L., Cohen, A., & Ferrell, A. (2009). “What Matters in Corporate Governance?” Review of Financial Studies, 22(2), 783-827.

  3. Adams, R. B., Hermalin, B. E., & Weisbach, M. S. (2010). “The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey.” Journal of Economic Literature, 48(1), 58-107.

Recent ESG Governance Research

  1. Buchetti, B., et al. (2025). “A Literature Review on Corporate Governance and ESG Performance.” Journal of Corporate Finance (forthcoming).

  2. Gillan, S. L., Koch, A., & Starks, L. T. (2021). “Firms and Social Responsibility: A Review of ESG and CSR Research in Corporate Finance.” Journal of Corporate Finance, 66, 101889.

Disclaimer: The governance frameworks represent current academic understanding and best practices. Governance structures and requirements vary by jurisdiction, industry, and company context.

Sources: Academic literature, ESG standards (GRI, SASB, IFRS), corporate governance codes, securities regulations. </small>