Page 169 - DMGT401Business Environment

Business Environment

Notes 7.6 Corporate Governance

Corporate governance has in recent years succeeded in attracting a good deal of public interest
because of its apparent importance for the economic health of corporations and society in
general. However, the concept of corporate governance is poorly defined because it potentially
covers a large number of distinct economic phenomenon. As a result, different individuals have
come up with different definitions that basically reflect their special interest in the field.

At its broadest, corporate governance comprehends the framework of rules, relationships,
systems and processes within and by which fiduciary authority is exercised and controlled in
corporations. Relevant rules include applicable laws of the land as well as internal rules of a
corporation. Relationships include those between all related parties, the most important of
which are the owners, managers, directors of the board (when such entity exists), regulatory
authorities and to a lesser extent, employees and the community at large. Systems and processes
deal with matters such as delegation of authority, performance measures, assurance mechanisms,
reporting requirements and accountabilities.
In this way, the corporate governance structure spells out the rules and procedures for making
decisions on corporate affairs. It also provides the structure through which the company objectives
are set, as well as the means of attaining and monitoring the performance of those objectives.
Corporate governance is the method by which a corporation is directed, administered or
controlled. It includes the laws and customs affecting that direction, as well as the goals for
which it is governed. The principal participants are the shareholders, management and the
Board of Directors. Other participants include regulators, employees, suppliers, partners,
customers, constituents (for elected bodies) and the general community.

7.6.1 Scope of Corporate Governance

Corporate governance covers the following functional areas of governance:
1. Preparation of the entity's (Company) financial statements

2. Internal controls and the independence of the entity's auditors
3. Review of the compensation arrangements for the chief executive officer and other senior
executives
4. The way in which individuals are nominated for positions on the board
5. The resources made available to directors in carrying out their duties
6. Oversight and management of risk

7.6.2 Principles of Corporate Governance

Commonly accepted principles of corporate governance include:
1. Rights of, and equitable treatment of shareholders: Organisations should respect the rights
of shareholders and help shareholders exercise those rights.

2. Interests of other stakeholders: Organisations should recognise that they have legal and
other obligations to all legitimate stakeholders.

3. Role and responsibilities of the board: The board needs a range of skills and understanding
to be able to deal with various business issues and to have the ability to review and

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