CIMA E1 Syllabus A. Role of the finance function - Corporate Governance - Notes ^{4 / 8}

Corporate governance

is the system by which organisations are directed and controlled.

It includes the appropriate role of the board of directors and the auditors of the company.

• A sound system of corporate governance is capable of reducing company failures in a number of ways:

  1. It addresses issues of management

     This reduces the agency problem and makes it less likely that management will promote their own self-interests above those of shareholders.

  2. It helps to identify and manage the wide range of risks

     These might arise from changes in the internal or external environments

  3. it specifies a range of effective internal controls

     that will ensure the effective use of resources and the minimisation of waste, fraud, and the misuse of company assets. 

     Internal controls are necessary for maintaining the efficient and effective operation of a business

  4. It encourages reliable and complete external reporting of financial data

     By using this information, investors can establish what is going on in the company and will have advanced warning of any problems

  5. It underpins investor confidence

     gives shareholders a belief that their investments are being responsibly managed

  6. It encourages and attract new investment

     make it more likely that lenders will extend credit and provide increased loan capital if needed