Page 9 - Microsoft Word - 00 P1 IW Prelims.docx

The theory of governance

Corporate Governance

1.1 What is corporate governance?

 ‘The system by which companies are directed and controlled in the
interest of shareholders and others stakeholders.'

1.2 Importance of corporate governance:

 In most countries listed companies are required to comply.

 It is often built into stock exchange listing rules.

 Major influence on, and key part of, a company’s risk management strategy.

1.3 Limitations of corporate governance:

 It does not prevent company failure or collapse.

 It cannot prevent companies failing to achieve their objectives.

1.4 Principles-based or rules-based

 Principles-based approach – e.g. UK Corporate Governance Code (2010):

– Comply or explain.

 Rules-based approach – e.g. US Sarbanes-Oxley (SOX):

– Enforcement and documentation

Illustrations and further practice

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