CAT / FIA FBT Syllabus B. Business Organisation Structure, Functions - Contemporary Organisations - Notes ^{2 / 5}

Although shareholders own a company, the responsibility for directing and controlling it rests with the board of directors.

Corporate Governance is the set of processes and policies by which a company is directed, administered and controlled.  It includes the appropriate role of board of directors and of the auditors of a company.

Corporate Social Responsibility refers to the idea that a company should be sensitive to the needs and wants of all the stakeholders in its business operations, not just the shareholders.

A closely linked idea is that of Sustainable Development.  Companies should make decisions based not only on financial factors, but also on the social and environmental consequences of their actions.

Due to extensive abuse and scandals in recent years, corporate governance and an understanding of the social impact have been highlighted with the business community.

Imposing strict corporate governance procedures can vastly improve the way in which an organisation is run.

Poor corporate governance can lead to poor organisational performance.

In May 1991, due to lack of confidence in the financial reporting and the ability of external auditors to provide the assurances required by the users of financial statements, the Cadbury Committee was set up. This led to the 2003 Combined Code of Corporate Governance.

Features of poor corporate governance

1. Domination by a single individual

   Sometimes the single individual may bypass the board to action their own interests.

   The presence of NON-EXECUTIVE directors on the board if felt to be an important safeguard against domination by a single individual.

2. Lack of involvement of board

   Boards that meet irregularly or fail to consider systematically the organisation's risks are weak.

3. Ineffective internal audit function

4. Lack of supervision

   Employees who are not properly supervised can create large losses for the organisation through incompetence, negligence or fraudulent activity.

5. Lack of independent scrutiny

   External auditors may not carry out the necessary questioning of senior management because of fear of losing the audit.

6. Emphasis on short-term profitability

   Emphasis on short-term results can lead to the concealment of problems or errors or manipulation of accounts to achieve desired results.