A QUICK LOOK AT…

AIA is publishing a series of articles designed to take a quick look at key topics in accountancy, management and finance. Bookmark this page to update your knowledge when you can grab a spare five minutes. If you would like to suggest subjects for future articles, please contact us.

A QUICK LOOK AT... CORPORATE GOVERNANCE

Google the term “Corporate Governance” and you will get approximately 59,300,000 results in less than a second. Arguably, no other term is as pervasive when it comes to its relevance for, and influence on, different aspects of business. In terms of an examination syllabus it impacts directly on law, company law, taxation, auditing, and financial management.

Definitions of corporate governance vary from those with a reasonably narrow focus such as “the way in which companies are controlled and directed” (Cadbury Report, 1992) to other definitions that put much more emphasis “on satisfying legitimate expectations of accountability and regulation by interests beyond the corporate boundaries” (Tricker, 1984).

The idea, therefore, is that appropriate corporate governance should endeavour to ensure that companies are well run internally; and that they interact properly with all their stakeholders inasmuch as this is possible. It also considers the need to properly balance the rights and expectations of different groups of stakeholders e.g. shareholders and employees of the company; as against taxpayers in countries where the company operates.

Whilst there can usually be, at least, some agreement on what constitutes a well-run company (e.g. one that treats its employees fairly, pays its suppliers on time etc.) the question of a company’s duty to other stakeholders is much more fraught. For example, does a company ever have a duty to pay taxes it could legally avoid or, on the other hand, is a company justified in hiring armies of accountants and tax lawyers to try to discover wrinkles in countries’ tax legislation that it can seek to exploit?

There is no simple answer to this latter question which can be, and is, endlessly debated. However, principles of corporate governance would suggest that, at least, all companies should engage in the debate; and bring a significant element of outside, independent opinion and influence to bear on it.