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Governance and


What is corporate governance?

the system by which companies are directed and
controlled (Cadbury Report 1992)
The system by which companies are directed and
controlled in the interests of shareholders and other
Companies are controlled and directed from inside and
outside of company

Benefits of corporate
Increases accountability of management and maximizes
sustainable wealth creation
More attractive to institutional shareholders
governance dividend: share price to rise
socially responsibility dividend: socially responsible
company may attract more customers and investors and
thus lead to increase in share price

Purposes of corporate
Monitor those parties within a company who

controlled resources owned by investors

Ensure balance of power on the BOD
Ensure executive directors remunerated fairly
Make BOD responsible for monitoring and managing risks
Ensure external auditors remain independence
Address other issues such as CSR, business ethics and
protection for whistleblowers

Objectives of corporate
Contribute to improved corporate performance and

accountability in creating long-term shareholders value

Control the controllers by increasing amount of disclosure to
all stakeholders
Increase the level of confidence and transparency in
company activities
Ensure the company is run in a legal and ethical manner
Build in control at the top that will cascade down the

Key concepts: fairness

Sense of equality in dealing with internal stakeholders
Even-handedness in dealing with external stakeholders
An ability to reach an equitable judgement in a given
ethical situation

Key concepts:
One of the building blocks that underpin the sound
corporate governance
Transparency is required in agency relationship,
transparency means lack of withholding or relevant
information unless necessary
Information provision vs. information concealment

Key concepts: Innovation

transforms knowledge and ideas into new products,
processes or systems for the benefit of firm and its
In terms of corporate governance; innovation and
experimentation in reporting, move away from rigid
compliance, towards better communication
Much knowledge from which innovation stems is tacit @
unique to the company and environment
The capacity of a firm to integrate external knowledge is

Key concepts: Skepticism

An attitude which includes a questioning mind, being alert
to conditions which may indicate possible misstatement
Provide critical assessment of evidence
The UK Corporate Governance Code encourages nonexecutive to apply skepticism in order to challenge and
scrutinize management effectively

Key concepts: Independence

A quality possessed by individuals referring to avoidance

of being unduly influenced by vested interests

Enables a more objective position to be taken on issues
Independence from personal influence of senior
Independence of the BOD from operational involvement
Independence of directorship from personal motivation

Key concepts: Probity/honesty

A foundation of ethical stance in both principles and rules
based system
Honesty in financial reporting
Perception of honesty from internal and external

Key concepts: Accountability

The obligation of an individual or organisation to account
for its actions
Accounting for business position as a result of acceptance
of responsibility
Providing clarity in communication channels with internal
and external stakeholders

Key concepts: Reputation

Developing and maintaining personal reputation through
other moral virtues
Developing and maintaining the moral stance of the
Developing and maintaining the moral stance of the
accounting profession

Key concepts: Judgement

The ability to reach and communicate meaningful
The ability to weigh numerous issues and give each due

Key concepts: Integrity

A steadfast adherance to strict ethical standards despite
any other pressures to act otherwise
Integrity describes the personal ethical position of the
highest standard of professionalism and probity
It is an underlying and underpinning principle of
corporate governance and it is required that all those
representing shareholders interests in agency relationship
both possess and exercise absolute integrity at all times

Case Study
Fred is a certified accountant. He runs his own accountancy practice from home,
where he prepares personal taxation and small business accounts for about 75
clients. Fred believes that he provides a good service and his clients generally seem
happy with the work that Fred provides.
At work, Fred tends to give priority to his business friends that he plays golf with.
Charges made to these clients to be lower than others although Fred tends to
guess how much each client should be charged as this is quicker than keeping
detailed time-records.
Fred is also careful not to ask to many questions about clients affairs when preparing
personal and company taxation returns. His clients are grateful that Fred does not
pry to far of their affairs, although the taxation authorities have found some
irregularities in some tax returns submitted by Fred. Fortunately the client has
always accepted responsibility for errors and Fred has kindly provided his services
free of charge for the next year to assist the client with any financial penalties.
Discuss whether the moral stance taken by Fred is appropriate