Mechanisms and controls Of Corporate governance

Corporate governance mechanisms and controls are designed to decrease the inefficiencies that arise from moral hazard and unfavorable selection. For example, to monitor managers' behavior, an independent third party attests the accurateness of information provided by management to investors. An ideal control system should regulate both motivation and capability.
Internal corporate governance controls: Internal corporate governance controls monitor activities and then take corrective action to achieve organizational goals.

• Monitoring by the board of directors: The board of directors, with its legal authority to hire, fire and compensate top management, safeguards invested capital. Regular board meetings allow possible problems to be identified, discussed and avoided. Whilst non-executive directors are thinking to be more independent, they may not always result in more efficient corporate governance and may not boost performance. Different board structures are optimal for different firms. Moreover, the ability of the board to monitor the firm's executives is a function of its access to information. Executive directors have superior knowledge of the decision-making process and therefore assess top management on the basis of the quality of its decisions that lead to financial performance outcomes, ex ante. It could be argued, therefore, that executive directors look beyond the financial criteria.
• Remuneration: Performance-based remuneration is intended to relate some proportion of salary to individual performance. It may be in the form of cash or non-cash payments such as shares and share options, superannuation or other benefits. Such incentive schemes, however, are reactive in the sense that they offer no mechanism for preventing mistakes or opportunistic behavior, and can elicit myopic behavior.

External corporate governance controls: External corporate governance controls encompass the controls external stakeholders exercise over the organization.

• demand for and assessment of performance
• debt covenants
• government regulations
• media pressure
• takeovers
• competition
• managerial labor market
• telephone tapping