The annual financial reports commonly contain a statement on corporate governance, so it is useful to have an awareness of what this involves. This has important implications for interpreting the financial statements: a company with a weak system of corporate governance will provide greater opportunities for the manipulation of financial statements, with adverse consequences for users.
Go to the OECD website and download its 2004 principles of corporate governance. What are the main principles identified by the OECD?
Spend some time reflecting on these guidelines in the light of your own experience. Have you come across examples of the effect of the presence or absence of these principles?
The OECD guidelines cover six main principles:
The corporate governance framework (of a company) should promote transparent and efficient markets, be consistent with the rule of law, and articulate the division of responsibilities among different supervisory, regulatory and enforcement bodies.
The corporate governance framework should protect and facilitate the exercise of shareholders' rights.
The framework should ensure the equitable treatment of all shareholders and all shareholders should have the opportunity to obtain redress for any violation of their rights.
The framework should recognise the rights of other stakeholders granted by law or mutual agreement and encourage active cooperation between the corporation and other stakeholders in creating wealth, jobs and the sustainability of financially sound business.
The framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership and governance of the company.
Corporate governance should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board's accountability to the company and the shareholders.
Your own experience of corporate governance will vary, but you should be able to draw on it as you work through this course. You may benefit from sharing your experiences with other people studying this course. You may wish to use the Comments section below to share your ideas. Section 2 provides some examples of cases where poor corporate governance contributed to financial irregularities and corporate failure.