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CHAPTER 1
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1. INTRODUCTION
WHAT IS CORPORATE GOVERNANCE?
Corporate governance is the system of principles, policies, procedures, and
clearly defined responsibilities and accountabilities used by stakeholders to
overcome the conflicts of interest inherent in the corporate form.
Hence, the importance of understanding the different forms of business.
Corporate governance affects the operational risk and, hence, sustainability of
a corporation.
The quality of a corporations corporate of governance affects the risks and
value of the corporation.
Effective, strong corporate governance is essential for the efficient
functioning of markets.
Delineation of rights
of shareholders and
other stakeholders
Legal requirements and Few; entity easily Few; entity easily Numerous legal
regulation formed formed requirements
Legal distinction between None None Legal separation
owner and business between owners and
business
Liability Unlimited Unlimited but shared Limited
among partners
Ability to raise capital Very limited Limited Nearly unlimited
ManagementShareholder conflicts
Board of
Managers Shareholders
directors
DirectorShareholder conflicts
Risks of weak
corporate governance
Strategic
Accounting risk Asset risk Liability risk
policy risk
The risk that a The risk that the The risk that The risk that
companys firms assets management managers may
financial may be will enter into enter into
statement misappropriated excessive transactions or
recognition and by managers or obligations that incur other
related directors. destroy the business risks
disclosures are value of that are self-
incomplete, shareholders serving and may
misleading, or equity. not be in the
materially best long-term
misstated. interest of
shareholders.