(a) Meaning of corporate governance
Corporate governance refers to the system by which companies are directed and controlled. It encompasses the rules, policies, and practices that ensure accountability, transparency, and fairness in a company’s relationship with its stakeholders, including shareholders, employees, customers, and the public. It aims to promote ethical behavior, protect stakeholder interests, and enhance the long-term value of the company.
(b) Roles in corporate governance
(i) The directors
Directors are responsible for the strategic direction and oversight of the company. They set policies, approve major decisions, and ensure the company operates within legal and ethical boundaries. They are accountable to shareholders for the company’s performance and must act in the best interests of the company, maintaining a balance between executive and non-executive perspectives to avoid dominance by any single group.
(ii) The external auditor
The external auditor provides an independent opinion on whether the financial statements present a true and fair view. This enhances the credibility of financial reporting, reassuring stakeholders about the accuracy of the company’s financial position. The external auditor’s role in corporate governance includes identifying material misstatements and assessing the effectiveness of internal controls, although their review is limited to audit requirements.
(iii) The internal auditor
The internal auditor provides assurance on the effectiveness of the company’s internal controls, risk management, and governance processes. Reporting to the audit committee, they conduct independent evaluations to identify weaknesses and recommend improvements. Their work supports the board in maintaining robust systems and ensuring compliance with policies and regulations.
(iv) The audit committee
The audit committee, typically composed of a majority of non-executive directors, oversees the financial reporting process, internal controls, and audit functions. It monitors the work of both external and internal auditors, ensuring their independence and effectiveness. The committee ensures that audit findings are addressed and that the board takes appropriate action to strengthen governance.
