Stilpon Nestor, Takahiro Yasui and Marie-Laurence Guy
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I. Introduction
Corporate governance has recently come to the forefront of policy debates around the world.
Essentially, it relates to the mechanisms and framework for corporate decision-making, but it may
also include a wide range of other issues, mostly concerned with the incentives that drive firm
behaviour. From the perspective of the 1999 OECD Principles on Corporate Governance,
corporate governance has a two-fold meaning. On the one hand it encompasses the relationships
and ensuing patterns of behaviour between different agents in a limited liability corporation. In
other words, corporate governance refers to the way managers and shareholders, but also
employees, creditors, key customers and communities, interact with each other to form the
strategy of the corporation.


II. The importance of corporate governance in the context of transition
A. Institution-building for a market economy
In a market economy, private corporations raise funds from investors and, combining these funds
with other inputs—notably labour and land, conduct business. Their objective is simple: to seek
profits. The recognition of the vital role and superior performance of private sector corporations
in economic growth was a powerful motivator for widespread privatisation in many developed
and developing economies in the last couple of decades. In transition countries, a transfer of
corporate ownership on an unprecedented scale was undertaken in the context of economic
transformation over the last ten years. In order for these countries to develop an efficient and
competitive corporate sector, privatisation is rightly considered an indispensable step. It has been
undertaken in more or less all of them, but its implementation has been uneven.


B. Efficient allocation of capital
Corporate governance is closely related to corporate finance and investment. Under communism,
corporations depended entirely on the government for their investment needs. In contrast, in a
market economy, they have to raise funds from the public directly or indirectly through financial
institutions; and/or generate enough earnings to fund their own development. The public and the
financial institutions provide their money to corporations not as a gift but in expectation of
sufficient financial returns. In seeking maximum returns, fund providers try to discipline
corporate managers to work for their interests.