Managing Fraud Risk: A Practical Guide for Directors and Managers

Governance Overview – Relationships and Agency Risk

Background

The regulation of corporate governance has long been an important part of company law. The importance of the shareholders of a business (the owners or investors) being able to hold their directors and managers to account was a key part of the design of the original joint stock companies. Company law has always provided for various aspects of this accountability relationship: companies must hold general meetings each year and provide their shareholders with certain minimum information, most importantly, the annual report and accounts. Proper financial accounting to shareholders is a critical part of good corporate governance. In most countries today this is underpinned by company law and international accounting standards, the correct application of which is independently verified by the external auditors.

The last 20 years have seen a developing interest in corporate governance in many countries around the world. In particular, there have been efforts to improve the governance standards of companies that seek to raise money from outside investors by being listed on a stock exchange. There have been various initiatives to do so, generally in one of two ways: either by drafting tougher laws and/or by developing codes of best practice. To illustrate this from personal experience, when I started to investigate the situation surrounding the collapse of the public company Polly Peck in 1990 there was not a single corporate ...