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Subject 1. Introduction

The separation of ownership (shareholders) and control (managers) may result in different conflicts of interest between managers and shareholders. Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance.

The importance of corporate governance:

  • It helps investors better understand the risk inherent in an investment in a company.

    The failure of a company to establish an effective system of corporate governance represents a major operational risk to the company and its investors. Corporate governance deficiencies may even imperil the continued existence of a company. Consequently, to understand the risks inherent in an investment in a company, it's essential to understand the quality of the company's corporate governance practices and continually monitor a company's corporate governance practices.

  • It helps to build investors' confidence essential to the efficient functioning of financial markets worldwide.

    Strong corporate governance structures are essential to the efficient and effective functioning of companies and the financial markets in which they operate.

Study notes from a previous year's CFA exam:

1. Introduction