Corporate governance and its importance

Question

What is corporate governance and why is it important?

Answer

Corporate governance can be briefly summarised as the systems and processes by which companies are controlled and directed. The concept is important in theory and in practice, as businesses have various stakeholders. An effective corporate governance code is able to balance the variety of interests of the different stakeholders of a company, including: management, employees, suppliers, shareholders and its community. The corporate governance code in the UK uses a “comply or explain” approach. This means that companies have to follow the principles in the code or explain why they have used an alternative approach. The key principles of the corporate governance code are: leadership, effectiveness, accountability, remuneration, relations with shareholders (Financial Reporting Council, 2014).

References

Financial Reporting Council (2014). The UK Corporate Governance Code. Available: https://frc.org.uk/Our-Work/Publications/Corporate-Governance/UK-Corporate-Governance-Code-2014.pdf. Accessed: 23/05/16.