Corporate Governance

Is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. An important theme of corporate governance is the nature and extent of accountability of particular individuals in the organization, and mechanisms that try to reduce or eliminate the principal-agent problem.

Importance of corporategovernance
October 2006 -- Good corporate governance helps to prevent corporate scandals, fraud, and potential civil and criminal liability of the organization. It is also good business. A good corporate governance image enhances the reputation of the organization and makes it more attractive to customers, investors, and suppliers and, in the case of nonprofit organizations, contributors.

There is some evidence that good corporate governance produces direct economic benefit to the organization. One study, conducted at Georgia State University and published in December 2004, found that public companies with independent boards of directors have higher returns on equity, higher profit margins, larger dividend yields, and larger stock repurchases.(1) This study was consistent with another study of 250 companies by the MIT Sloan School of Management which concluded that, on average, businesses with superior information technology (IT) governance practices generate 25 percent greater profits than firms with poor governance, given the same strategic objectives. Although the Sarbanes-Oxley Act of 2002 applies almost exclusively to publicly held companies, the corporate scandals that gave rise to that legislation have increased pressure on all organizations (including family-owned businesses and not-for-profit organizations) to have better corporate governance. Private and not-for-profit organizations may feel pressure from lenders, insurance underwriters, regulators, venture capitalists, vendors, customers, and contributors to be Sarbanes-Oxley compliant. In addition, some courts and state legislatures may by analogy apply the enhanced corporate governance practices developed under Sarbanes-Oxley to private and not-for-profit organizations. Finally, a few provisions of Sarbanes-Oxley do affect private and not-forprofit organizations, such as the provisions relating to criminal liability for document destruction and for retaliation against whistleblowers. Private companies that intend to seek capital from financial institutions and institutional investors should also be sensitive to their corporate governance image, since this image is an important factor in the ultimate decision to provide capital to the organization. Familyowned private companies benefit from good corporate governance by avoiding the devastating effects of sibling rivalry and expensive litigation between family members who have different views concerning the business.

Principles of corporate governance

Contemporary discussions of corporate governance tend to refer to principles raised in three documents released since 1990: The Cadbury Report (UK, 1992), the Principals of Corporate Governance (OECD, 1998 and 2004), the Sarbanes-Oxley Act of 2002 (US, 2002). The Cadbury and OECD reports present general principals around which businesses are expected to operate to assure proper governance. The Sarbanes-Oxley Act, informally referred to as Sarbox or Sox, is an attempt by the federal government in the United States to legislate several of the principals recommended in the Cadbury and OECD reports. 5 Rights and equitable treatment of shareholders: Organizations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by openly and effectively communicating information and by encouraging shareholders to participate in general meetings. Interests of other stakeholders: Organizations should recognize that they have legal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers. Role and responsibilities of the board: The board needs sufficient relevant skills and understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment to fulfill its responsibilities and duties.

Uk Corporate Governance history

"Corporate Governance is the system by which companies are directed and controlled" Cadbury report, 1992. Corporate Governance is broadly concerned with the relationships between company boards and the company's shareholders. Good governance should facilitate efficient, effective and entrepreneurial management that can deliver shareholder value over the longer term. The framework for corporate governance in Ireland and the UK comprises 8 9 Company legislation Regulation such as the listing rules for listed companies and

10 Corporate governance code

The UK Corporate Governance Code (2005)

The UK Corporate Governance Code (formerly known as the Combined Code on Corporate Governance) provides principles based framework for corporate governance with a "comply or explain" approach. The Code sets out standards of governance for listed companies. Companies are required either to follow the Code or explain how else they are acting to promote good governance. The UK Corporate Governance Code sets out principles of good governance under the headings of 11 Leadership 12 Effectiveness 13 Accountability - including internal control, audit committees and external auditors 14 Remuneration 15 Relations with Shareholders The UK Corporate Governance Code was published in May 2010 and applies to financial years beginning on or after 29 June 2010. In Ireland the Irish Stock Exchange (ISE) requires Irish listed companies to comply or explain with the UK Corporate Governance Code with effect from 30 September 2010. ISE also requires Irish listed companies to comply or explain against additional corporate governance provisions set out in the Irish Corporate Governance Annex , which supplement the provisions of the UK Corporate Governance Code. Irish listed companies with accounting periods commencing on or after 18 December 2010 are required to comply or explain against the Irish specific corporate governance provisions as well as the UK Corporate Governance Code. The additional provisions are contained in the ISE's Listing Rules. Following a review and consultation by the Financial Reporting Council (FRC) the UK Corporate Governance Code updates and replaces the 2008 edition of the Combined Code. The Combined Code was first publised in 1999 and it brought together and updated earlier reports on corporate governance matters including the Cadbury Report "The Financial Aspects of Corporate Governance (1992)" and the Greenbury Report in 1995 on remuneration of directors. The Combined Code was updated in 2006 and again in 2008. Other influential reports on corporate governance in the UK include Rutteman Report 1994, Hampel Report 1998, Myners Report 2001.