Corporate governance is the means by which a company is operated and controlled.
It concerns such matters as:
It concerns such matters as:
Corporate governance is about ensuring that companies are run well in the interests of their shareholders and the wider community.
• the responsibilities of directors
• the appropriate composition of the board of directors
• the necessity for good internal control the necessity for an audit committee
• relationships with the external auditors.
• The need to improve corporate governance came to prominence in the UK in the 1980s, following the high profile collapses of a number of large companies.
• Poor standards of corporate governance had led to insufficient controls being in place to prevent wrongdoing in the US in the 1990s, as demonstrated by the collapses at Enron and WorldCom.
• The authorities internationally have now been working for a number of years to tighten up standards of corporate governance.
• Good corporate governance is particularly important for publicly traded companies because large amounts of money are invested in them, either by ‘small’ shareholders, or from pension schemes and other financial institutions.
• The well publicised scandals mentioned above are examples of abuse of the trust placed in the management of publicly traded companies by investors. This abuse of trust usually takes one of two forms (although both can happen at the same time in the same company):
– the direct extraction from the company of excessive benefits by management, e.g. large salaries, pension entitlements, share options, use of company assets (jets, apartments etc)
– manipulation of the share price by misrepresenting the company’s profitability, usually so that shares in the company can be sold or options ‘cashed in’.