Corporate governance has attracted a large amount of attention in recent years, although measures to promote good corporate governance vary substantially between different countries. The initial demand for better corporate governance occurred as a result of several ‘corporate scandals’, with major companies either collapsing or coming close to collapse.
There are several key issues in corporate governance, although their perceived importance varies between different countries:
(1) There should be an effective board of directors. The directors should be independent-minded and should collectively have a wide range of skills, knowledge and experience. The board of directors should not be under the control or influence of an ‘all-powerful’ chairman and/or chief executive officer, who is able to dictate the board’s decisions.
(2) The board of directors should have clearly-defined responsibilities that it must not delegate, and it should carry out these responsibilities properly.
(3) The directors should govern the company in the best interests of its shareholders (and possibly also other stakeholders); they should not run the company in their own self-interest.
(4) The financial statements of the company should be reliable. (In many cases of corporate collapse, the financial statements were proved to have been misleading and unreliable.)
(5) Risks should be controlled, and the directors should provide assurance to the shareholders about the systems of controls and risk management.
(6) The remuneration of directors should be fair. Directors should not fix their own remuneration, and their remuneration package should provide them with incentives to achieve the objectives of the company that are in the best interests of the shareholders. Directors should not be rewarded for failure.
(7) There should be active, open and constructive dialogue between the company’s directors and its shareholders, in particular its major shareholders. As far as audit and assurance are concerned, the main relevant aspects of corporate governance are items (4) and (5) above.
(1) There should be an effective board of directors. The directors should be independent-minded and should collectively have a wide range of skills, knowledge and experience. The board of directors should not be under the control or influence of an ‘all-powerful’ chairman and/or chief executive officer, who is able to dictate the board’s decisions.
(2) The board of directors should have clearly-defined responsibilities that it must not delegate, and it should carry out these responsibilities properly.
(3) The directors should govern the company in the best interests of its shareholders (and possibly also other stakeholders); they should not run the company in their own self-interest.
(4) The financial statements of the company should be reliable. (In many cases of corporate collapse, the financial statements were proved to have been misleading and unreliable.)
(5) Risks should be controlled, and the directors should provide assurance to the shareholders about the systems of controls and risk management.
(6) The remuneration of directors should be fair. Directors should not fix their own remuneration, and their remuneration package should provide them with incentives to achieve the objectives of the company that are in the best interests of the shareholders. Directors should not be rewarded for failure.
(7) There should be active, open and constructive dialogue between the company’s directors and its shareholders, in particular its major shareholders. As far as audit and assurance are concerned, the main relevant aspects of corporate governance are items (4) and (5) above.