In today’s society, ownership and control of the assets of a business especially a corporation is usually separate. This separation of ownership and management may bring a conflict of interest between shareholders and managers and other stakeholders.
In order to minimise this conflict of interest, corporate governance principles have to be introduced. Corporate governance according to the book Corporate Finance for the CFA programme, is the system of principles, policies and procedures and clearly defined responsibilities and accountabilities used by stakeholders to overcome the conflicts of interest inherent in the corporate form.
A company that does not have an effective system of corporate governance presents a major operational risk to the company and its investors. Operational risk is the risk arising from inadequate controls in a company.
There are many companies that have collapsed due to inadequate corporate governance structures. Enron, Parmalat, Tyco and Barings Bank are all examples where lack of proper structures brought down the company.
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