Corporate governance

Corporate governance is the framework of rules, relationships, and processes that determines how a company is directed and controlled. It answers a fundamental question: since the shareholders who own a public company are not the managers who run it, how is management held accountable for acting in the owners' interests?

The central structure is the board of directors, elected by shareholders to oversee management on their behalf. The board hires and evaluates the chief executive, approves strategy and major transactions, sets executive compensation, and oversees financial reporting. Good governance practice typically calls for independent directors — board members with no material ties to management — and specialized committees, such as an audit committee that supervises the external auditors and internal controls.

Governance matters because the separation of ownership and control creates an agency problem: managers may be tempted to pursue their own interests — excessive pay, empire building, short-term results — at shareholders' expense. Strong governance mechanisms, including transparent financial reporting, shareholder voting rights, internal controls, and codes of ethics, narrow that gap. High-profile corporate collapses driven by weak oversight led to reforms such as the Sarbanes-Oxley Act, which tightened audit and reporting requirements for public companies.

Corporate governance is tested across accounting and finance credentials. The CMA Part 1 exam covers governance roles, responsibilities, and structures within its internal controls section, the ACCA Financial Accounting exam links governance duties to financial reporting, and the CIMA/CGMA Certificate in Business Accounting frames governance around aligning management decisions with shareholder wealth.