Describe Corporate Governance

Corporate governance may be defined as the system of internal controls, processes, and procedures by which a company is managed, directed, or controlled. Weak corporate governance practices have resulted in the failures of many companies.

The corporate governance practices tend to vary from country to country, and it is also not strange for different corporate governance systems to coexist within a single country.

Corporate governance systems generally reflect the influences of either shareholder theory, stakeholder theory, or a convergence of the two. Current trends, however, point to an increase in convergence.

Shareholder theory posits that the most important responsibility of a company’s management is to maximize shareholder returns. On the other hand, stakeholder theory emphasizes on the need for a company to consider the needs of all its stakeholders and not just its shareholders. This includes the company’s customers, suppliers, creditors, employees, and essentially anyone who has an interest in the company.

Question

At a recent conference, the following statements were made about corporate governance.

• Countries tend to have similar corporate governance practices.
• According to Shareholder theory, the most important responsibility of a company’s management is its customers.
• There is a current trend towards convergence of shareholder and stakeholder theories.
• Corporate governance is the system of internal controls and procedures by which individual companies are managed.

Which of these statements regarding corporate governance is or are accurate?

A. I and II only

B. II only

C. III and IV only

Solution

The correct answer is C.

Statements III & IV are correct.

Statement I is incorrect. Corporate governance practices can be different from country to country.

Statement II is incorrect. According to Shareholder theory, the most important responsibility of a company’s management is its shareholders.

Reading 31 LOS 31a: 

Describe corporate governance