ECG revision (SY)(1).docx - 1 Code of corporate governance...

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1. Code of corporate governance, the purposes of such a code for listed companies and the role of the agency principle in corporate governance. Code of corporate governance A code (of corporate governance) is a document that specifies certain standards, principles, norms of behavior or specific instructions over matters of corporate governance. Some have evolved over time as different previous reports were written for different aspects of governance, which were then brought together in combined codes. Others have borrowed from existing codes, perhaps amended slightly to account for national differences. Codes of corporate governance are issued by regulatory authorities (such as stock exchanges, governments or semi-autonomous government bodies) and are statements of general principles and detailed guidelines on many matters of corporate governance. They can be implemented either as listing rules (in principles-based jurisdictions) or in law (in rules-based jurisdictions). They typically cover all relevant aspects of corporate governance including the roles of the board, risk management, internal controls, executive remuneration and contracts, reporting issues and similar relevant themes. The purpose is to ensure that companies are well- run and in line with shareholders’ interests. The purposes of such codes are as follows. First, they guide and specify behavior in matters of governance, internal control and risk management with the objective that by complying with the code, corporate governance will be improved and enhanced. Second, they aim to encourage best practice and to improve management performance by preventing practice that might reduce value added or shareholder value. Third, codes aim to underpin investor confidence in that high levels of compliance tend to be appreciated by shareholders and poor levels of compliance are sometimes punished. It enables boards to demonstrate the value they place upon the agency relationship and to more adequately discharge the agency responsibilities placed upon them. Fourth, codes aim to reduce fraud, waste or inefficiency. One of the main causes of the development of codes (for example in the UK and in the USA) was in response to high profile frauds, and it was hoped at the time that codes would address this. Fifth, in principles-based jurisdictions, the implementation of codes is thought to be a way of reducing the chances of governmental legislation being implemented. Governments are more likely to legislate where other regulatory failure is evident and so an effective code applied as listing rules should (many hope and believe) reduce the likelihood of having inflexible laws applied.
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What is the role of agency theory in corporate governance? Agency theory is used to understand the relationships between agents and principals. The agent represents the principal in a particular business transaction and is expected to represent the best interests of the principal without regard for self-interest. The different interests of principals
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  • Summer '17
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