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August 30th 2013 / BY: Wisteria

What is corporate governance and is it relevant to my company?

Corporate governance is a broad term which can be used to refer to a large number of different areas within business, however it is generally the rules and policies of a company that enable it to be governed effectively and correctly. Governance is separated from the management of the company as it is largely decided by the board of directors of the company in their capacity as directors rather than their capacity as managers if they have this dual role. The need for corporate governance derives from the fact that due to the nature of companies, in some cases the ownership and management of companies relate to different individuals. The role of corporate governance is therefore to ensure that the directors of the company do not solely act in their own interest and that the interest of the shareholders are adequately represented.

Corporate Governance for Private Limited Companies

As the majority of private limited companies are owner-managed businesses the problem that corporate governance seeks to manage is less distinct. As the owners and managers of the company are the same people, they automatically act in the interests of both the shareholders and directors. However, issues can still arise, particularly if a private company has a minority shareholder who is not involved in the day to day management of the company. Corporate governance can be used to ensure that their interests are also included within any internal decisions made. Due to the nature of private businesses the rules for governing them derive mainly from law. For example the Companies Act 2006 guides how directors should act to legally fulfil their duties.

Corporate Governance for Public Limited Companies 

The issue of corporate governance for public limited companies is taken more seriously. Particularly within the UK, the UK Corporate Governance Code 2010 has been developed to ensure that all relevant companies consider standards of good practice in relation particularly to board leadership, effectiveness, remuneration and accountability, as well as shareholder relations. Listed public limited companies can have a significant effect on their surroundings and relevant stakeholders, meaning that effective corporate governance is needed to help regulate this. The code works on a ‘comply or explain’ basis, whereby companies can choose not to follow the guidelines laid out in the code, but must explain their reasons against following the guides to their shareholders and the governing authority.

Publicly unquoted companies and large private limited companies are not regulated as stringently as quoted companies despite the fact that they can have a large effect on the environment and community that they operate within.

If you are unsure about how corporate governance may be relevant to your company or have any questions regarding the topic please contact us.