Corporate Governance and Ethics
Why governance exists
Governance is the system by which companies are directed and controlled. It exists because ownership is separated from control: shareholders (principals) delegate to directors (agents), creating agency risk - information asymmetry, divergent interests and monitoring costs. Candidates must be able to contrast agency theory with stewardship theory (managers as trustworthy custodians) and stakeholder theory (the board balances shareholders, employees, creditors, government and community).
What the board must do
Know the four pillars - accountability, transparency, fairness and responsibility - and the board's dual role: set strategy and monitor performance. Understand board composition (executive vs non-executive directors, independent NEDs, separation of chair and CEO), and the committee structure: audit, risk, nomination and remuneration. Be able to discuss the Cadbury legacy, the OECD Principles, King IV and, locally, the Companies Act and the capital-markets code. On the ethics side, cover codes of conduct, conflict-of-interest registers, whistleblowing channels, insider dealing and sustainability reporting.
Traps examiners use
- "Comply or explain" vs "comply or else": the first is principles-based with disclosure of reasons for departure; the second imposes mandatory rules with sanctions.
- Non-executive ≠ independent. Independence also requires no material business, employment, family or cross-directorship link, and no unduly long tenure.
- Governance vs management: the board oversees; management executes.
- CSR ≠ philanthropy: CSR is about impact on stakeholders and sustainability, not donations.
Rule of thumb
When asked whether a director is independent, apply a four-question screen: (1) any material business relationship? (2) employed by the company within the last five years? (3) close family tie to an executive? (4) significant shareholding or long tenure? A yes to any fails independence. So a non-executive who is a partner in the firm supplying the company's legal services is not independent, even though he holds no executive office.