Corporate governance— the system by which companies are directed and controlled. The objective of corporate governance may be considered as the reduction of agency costs to a level acceptable to shareholders.
1 Principles of Good Governance
Various countries have developed their own codes on corporate governance. Although detailed knowledge of specific codes is not required, candidates should have an awareness of the main principles that underlie these codes:
Every company should be headed by an effective board which should lead and control the company.
There should be a clear division of responsibilities at the head of the company between running the board (chairman) and running the business (CEO); no single individual should dominate.
The board should have a balance of executive and independent non-executive directors.
All directors should be required to submit themselves for reelection on a regular basis.
Remuneration committees should be comprised of independent non-executive directors.
Remuneration committees should provide the packages needed to attract, retain and motivate executive directors and avoid paying more.
No director should be involved in setting his own remuneration.
The board should maintain a solid system of internal control to safeguard shareholders' investment and the company's assets.
2 Government Regulations
The UK Combined Code is included in the Listing Rules of the London Stock Exchange. Although compliance is not obligatory, any listed company which does not comply with the Combined
Code must explain its reasons for non-compliance.
The US Sarbanes–Oxley Act applies to all companies listed on a US stock market, including their foreign subsidiaries. Compliance is mandatory.
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