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  Governing a Company

Introduction to Governing a Company

Corporate governance

As we described before, that with large companies there tends to be a separation of ownership from everyday control of the business. However a difference of interest can happen between directors and shareholders. There is a danger that directors will follow their own interests than those of shareholders. If this takes place, it is noticeably a problem for the shareholders; though, it may also be a trouble for society as a whole. In which investors feel that their funds are probable to be mismanaged, they will be reluctant to invest. A lack of funds will mean that companies can formulate fewer investments.

Additionally, the costs of finance will rise as companies compete for what funds are available. So, a lack of concern for shareholders can have a profound influence on the performance of individual companies and along with this the health of the economy.

To prevent these problems, most competitive market economies comprise a framework of rules to assist control and monitor the behaviour of directors.

These rules are generally based around three guiding principles:

  • Disclosure

This lies at the center of good corporate governance. An OECD report summed up the advantages of disclosure as follows:

Sufficient and timely information about corporate performance allows investors to make informed buy-and-sell decisions and thus helps the market imitate the value of a corporation (company) within present management. If the market finds out that present management is not performing, a reduction in stock [share] price will sanction failure of management and open the way to management change.

  • Accountability

This includes defining the roles and duties of the directors and establishing a sufficient monitoring process. In the UK (United Kingdom), company law needs that the directors of a company act in the best interests of the shareholders. The meaning of this is that between other things which they must not try to use their position and knowledge to build gains at the expense of the shareholders. The law also needs larger companies to have their yearly financial statements independently audited. The aim of an independent audit is to lend trustworthiness to the financial statements that ready through the directors.

  • Fairness

Directors should not be capable to benefit from access to 'inside' information which is not presented to shareholders. The result both the law and the London Stock Exchange place limits on the capability of directors to buy and sell the shares of the company.

One instance of these limits is that the directors cannot buy or sell shares immediately before the declaration of the annual trading results of the company or before the announcement of an important event, like a planned merger or the loss of the chief executive.                                                      

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Figure: principles underpinning a framework of rules

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