Describe Corporate Governance

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.


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


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

Shop CFA® Exam Prep

Offered by AnalystPrep

Featured Shop FRM® Exam Prep Learn with Us

    Subscribe to our newsletter and keep up with the latest and greatest tips for success
    Shop Actuarial Exams Prep Shop Graduate Admission Exam Prep

    Sergio Torrico
    Sergio Torrico
    Excelente para el FRM 2 Escribo esta revisión en español para los hispanohablantes, soy de Bolivia, y utilicé AnalystPrep para dudas y consultas sobre mi preparación para el FRM nivel 2 (lo tomé una sola vez y aprobé muy bien), siempre tuve un soporte claro, directo y rápido, el material sale rápido cuando hay cambios en el temario de GARP, y los ejercicios y exámenes son muy útiles para practicar.
    So helpful. I have been using the videos to prepare for the CFA Level II exam. The videos signpost the reading contents, explain the concepts and provide additional context for specific concepts. The fun light-hearted analogies are also a welcome break to some very dry content. I usually watch the videos before going into more in-depth reading and they are a good way to avoid being overwhelmed by the sheer volume of content when you look at the readings.
    Kriti Dhawan
    Kriti Dhawan
    A great curriculum provider. James sir explains the concept so well that rather than memorising it, you tend to intuitively understand and absorb them. Thank you ! Grateful I saw this at the right time for my CFA prep.
    nikhil kumar
    nikhil kumar
    Very well explained and gives a great insight about topics in a very short time. Glad to have found Professor Forjan's lectures.
    Great support throughout the course by the team, did not feel neglected
    Benjamin anonymous
    Benjamin anonymous
    I loved using AnalystPrep for FRM. QBank is huge, videos are great. Would recommend to a friend
    Daniel Glyn
    Daniel Glyn
    I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
    michael walshe
    michael walshe
    Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.