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Study Notes

Corporate Governance

Level:
A-Level
Board:
AQA

Last updated 22 Mar 2021

Corporate governance is the system by which companies are directed and controlled.

Boards of Directors

It is the Board of directors of each company that is legally responsible for the governance of the company.

The shareholders’ role in corporate governance is to appoint the directors (and the auditors where required) and to satisfy themselves that an appropriate governance structure is in place.

The responsibilities of the board include:

  • Setting the company’s objectives and aims
  • Determining the strategy to achieve those aims and objectives
  • Providing the leadership to put them into effect
  • Supervising the management of the business
  • Reporting to shareholders on their stewardship of the business

Corporate Governance in Public Companies

The need for effective corporate governance is particularly important in quoted (or public) companies. This is because of the "divorce between ownership and control" whereby most shareholders have no involvement in the day-to-day management of the company.

The essential elements of "best practice" corporate governance for such companies are:

  • The CEO and Chairman of companies should be separated
  • Boards should have at least three non-executive directors, two of whom should have no financial or personal ties to executives
  • Each board should have an audit committee composed of non-executive directors

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