Accounting for Managers: Interpreting Accounting Information for Decision Making, 4th Edition

Chapter 2

Accounting and its Relationship to Shareholder Value and Corporate Governance

This chapter relates the role of accounting in terms of shareholder value and strategy. The reader is introduced to the difference between capital and product markets and the importance of shareholder value. This is then developed through the relationship between shareholder value, strategy and accounting. The regulation of companies and corporate governance is explained as the context in which accounting operates, including the role of directors, audit, the audit committee and Stock Exchange listing rules. A brief coverage of risk, internal control and accounting is followed by a critical perspective, introducing a concern with stakeholder compared to shareholder value, and highlighting potential weaknesses in the dominance of strategy.

Capital and product markets

Since the seventeenth century, companies have been formed by shareholders in order to consolidate resources and invest in opportunities. Shareholders had limited liability through which their personal liability in the event of business failure was limited to their investment in the company’s share capital. Shareholders appointed directors to direct and control the business, and the directors in turn employed managers. Shareholders have few direct rights in relation to the conduct of the business. Their main powers are to elect the directors, approve the directors’ recommendation of a dividend and appoint the auditors in an annual ...