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Home > Corporate Governance Checklists > Defining Corporate Governance: Its Aims, Goals, and Responsibilities

Corporate Governance Checklists

Defining Corporate Governance: Its Aims, Goals, and Responsibilities


Checklist Description

This checklist explains what the phrase “corporate governance” encompasses.

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Definition

In order for a company to exist, it has to be set up and registered with the appropriate company authority. Once registered, the company is regarded as a legal person, with legal rights and obligations. A company’s existence and organization are continuously scrutinized through a well-established set of rules, laws, and policies that govern the way in which the company is run and controlled. This is known as corporate governance.

Companies can be private or public. Public companies, under certain circumstances, can choose to list their shares on a stock exchange or alternative investment markets. The corporate governance rules apply to every company, whether private or public. However, the larger and more complex a company is, the more closely its decisions are scrutinized. For multinational companies corporate governance has extended internationally, with rules and regulations that cooperate at cross-border levels.

Corporate governance exists to protect the shareholders of a company. It also aims to preserve the reputation of a company and its business against any fraudulent acts committed by its directors and officers. The directors of a company must always make decisions objectively, in the best interests of the company’s business and its shareholders. They have the responsibility to run the company successfully and bring in profits for the shareholders. They have to do this ethically, within the framework of laws and regulations that govern the running of a company.

Companies must file yearly accounts that are subject to public notice. Accounts and the auditing of accounts by independent auditors are important aspects of corporate governance. They ensure the smooth running of the business and its good reputation.

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Advantages

  • A system of corporate governance gives the shareholders confidence that a company is well monitored and that its directors are acting in the best interests of the company and its shareholders.

  • Corporate governance guards against defrauding of shareholders and the company’s business.

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Disadvantages

  • The bigger the company, the more it will be scrutinized. The need to comply with numerous corporate governance requirements is expensive and can deter the directors from their main priority, which should be running the business in the best interests of the shareholders.

  • Too much supervision could restrict the independence of a company in the way it runs its business.

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Action Checklist

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Dos and Don’ts

Do

  • Obtain advice from your legal advisers and accountants regarding the best system of auditing and risk management to put in place and the consequences of a breach of the rules.

Don’t

  • Don’t ignore compliance with the rules of corporate governance. The consequences could be not only financial penalties for the company but also criminal responsibility for the directors.

  • Don’t overlook the importance of setting up proper procedures to deal with the consequences of a breach.

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Further reading

Books:

  • Keasey, Kevin, Steve Thompson, and Michael Wright. Corporate Governance: Accountability, Enterprise and International Comparisons. Chichester, UK: Wiley, 2005.
  • Solomon, Jill. Corporate Governance and Accountability. 3rd ed. Chichester, UK: Wiley, 2010.

Article:

  • Lee, Soo Hee, Jonathan Michie, and Christine Oughton. “Comparative corporate governance: Beyond ‘shareholder value’.” Journal of Interdisciplinary Economics 14:2 (June 2003): 81–111.

Websites:

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