LOS A requires us to:
Describe corporate governance
Corporate governance is the code of conduct or the practices that control or directs a company. The system of internal controls defines the rights and responsibilities of different groups within the entity.
The companies are actually owned by their shareholders but are generally managed by the group of representatives appointed by them, usually the management or the board of directors. Since it is controlled by the board of directors, there are, at times, conflicts of interest between these two parties. Therefore, there is a need for certain checks, balances, and incentives to minimize and manage these conflicting interests. Corporate governance provides mechanisms to control this conflict of interest between external shareholders and insiders.
The concept of corporate governance, thus, introduces us to two important theories:
a. The shareholder theory. According to this theory, the most important responsibility of the management is to maximize the return and value to the shareholders.
b. The stakeholder theory. This theory is a step forward to the shareholder theory. According to this theory, the focus should not only be on the shareholders or the owners. It should be the duty of the management to maximize the benefits of all the stakeholders, including the customers, suppliers, employees, and society at large.
The main objectives of the process of corporate governance are:
1. to ensure that the board of directors work in the best interest of not just the shareholders, but also stakeholders at large;
2. to ensure that the company acts lawfully and ethically in all its dealings;
3. to ensure that all the rights of its stakeholders are preserved and active;
4. to ensure that appropriate procedures and controls are in place for day-to-day operations of the company; and
5. to ensure that there is fair reporting of all the activities of the company to its stakeholders.