Corporate Governance, Ethics and Stakeholder Management
Domain 4 tests board-level governance, ethical judgement and stakeholder prioritisation. Expect scenario questions where a director, controlling shareholder or activist creates a conflict.
Core rules and concepts
- Governance principles: accountability, transparency, fairness and responsibility. The board sets strategy and risk appetite, monitors management and reports to shareholders.
- Board design: separate chair and CEO roles, sufficient independent non-executive directors, and audit, risk and remuneration committees with clear mandates.
- Agency problem: managers (agents) may pursue their own interests rather than shareholders' (principals). Monitoring, disclosure, independent directors and well-designed incentives reduce agency costs.
- Stakeholders: Mendelow's power–interest matrix guides engagement; Mitchell's salience model uses power, legitimacy and urgency. Primary stakeholders have direct contractual or operational stakes.
- Ethics: consequentialist reasoning judges outcomes; deontological reasoning judges duties and rights. Codes of conduct, whistleblowing channels and conflict-of-interest registers make ethics operational.
Worked example
A non-executive director owns 30% of a company that supplies the firm. The related-party transaction is material. Good governance requires disclosure to the board, recusal from the vote, independent review of pricing, and approval under the company's related-party policy (and shareholder approval where law or listing rules require it). Disclosure alone is insufficient because the director retains influence; recusal and independent scrutiny manage the conflict, while minutes evidence the process.
Traps that cost marks
Equating governance with 'maximising shareholder value'; treating CSR as public relations; misreading power and interest; calling a director independent despite family or commercial ties; and failing to document conflicts and decisions.