Unit 49-LO4 Evaluate the role and impact of corporate governance in the management of companies-BTEC-HND-Level 4 & 5

Course: Pearson BTEC Levels 4 and 5 Higher Nationals in Business

Corporate governance is a set of rules to govern a company. A board of directors makes major decisions about the company and sets up formal governance rules.

Corporate governance is about making sure that upper management is doing what they need to do. They make goals in their contracts that they have to do for the company. This can affect how profitable and valuable the company is and this affects how many people want to buy shares of that company.

When other investors see that executives are held accountable, it helps with trust factors. This encourages more investment because employees can get better benefits. The board of directors hires people who have experience in a certain industry or area of business to deal with this part of the company’s success.

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Also Read: Evaluate the nature and legal status of companies

Role of corporate governance:

Definition of corporate governance

Corporate governance is a set of rules for running a company. It includes how you deal with legal matters, transactions, and risks. The board monitors these things to make sure they are done correctly. Shareholder rights are one of the most important parts of corporate governance.

The history of corporate governance, international requirement, Enron case, the interaction of governance with business ethics, and company law

History of corporate governance

Corporate governance is when businesses have rules and laws to follow. The history of corporate governance starts in the 1900s. This is when there were changes in business, like companies becoming more complex and having more size.

International Requirement for corporate governance

All major international financial centers have rules about when a change in ownership happens. This can happen through an IPO or takeover. These centers also require companies to give senior management and the board of directors clear authority to run the company.

Enron Case(The Enron Scandal)

In 2001, Enron went bankrupt. The company was one of the largest in America and it made electricity, natural gas, pulp and paper, and other things. The scandal led to Congress passing a law that increased regulation over American companies while also punishing people who steal from them.

Corporate Governance Interaction with Business Ethics

Corporate governance is a system to keep an organization or company running efficiently and honestly. The people in charge, called directors, need to make sure everything is done right. Directors must have a plan for everything they do so it will benefit the company. They also need to help build trust between shareholders, employees, stakeholders of the company and protect their own reputation by being responsible for their actions as well as those of others who are following them.

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Impact of corporate governance:

The corporate governance code

The corporate governance code is a set of rules that every company on the stock exchange in America has to follow. These rules make sure executives, board members and shareholders are responsible for their money when doing business with investors. Boards generally spend about 70% of their time reviewing financial operations, 10% investigating possible acquisitions, and 20% considering other important matters such as employee relations or customers complaints.

The need for corporate governance

The need for corporate governance is an important issue that has garnered bipartisan and international support.

Governance in the 21st century requires a company to be able to efficiently adapt its values, goals, and business model to changing conditions on the ground as well as a complex web of expectations from stakeholders such as customers, suppliers, communities where it operates or does business with, employees and shareholders. Without good governance, you’ll find out quickly how hard it is to compete in a global marketplace.

Effect of corporate governance on directors’ behavior and duties of care and skill

Directors are responsible for the well-being of a company and can be sued if something goes wrong. A director is usually the CEO of a subsidiary that is controlled by an investor or parent company. They will have to follow proportionality, good faith, care, and diligence concerning any transactions they make between themselves (or their own firm) and related parties (in order not to create any conflicts).

If there is a market for shares and the director can buy or sell them to anyone, they have to act in the best interest of the shareholders.

Conflicts of interest and policies e.g. bribery, compliance, data protection regulations

Conflicts of interest exist in our world. We have many policies, laws, and regulations to make sure companies don’t do the wrong thing. However, we can’t eliminate conflicts.

Firms should manage conflicts of interest by having a way to tell if they happen. For example, firms could require people to be open about conflicts of interest. It is also important to put in place a plan for when the conflicts do happen. Firms should get expert legal advice so that they know what obligations they have and what obligations they don’t have if there is a conflict.

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Rules-based versus principles approach

The rules-based approach is more about getting the result you want. It tells you what to do, and how to do it. The principles-based approach is more of a philosophy about how things should be done, and it has general ideas that can change so that they work better for future needs.

Corporate rescue and liquidations

Corporate Rescue

There are two types of corporate rescues. One is a rights issue and the other is a share issuance. A rights issue is when the company takes away some of your shares and then gives you some money. A share issue is when the company wants to bring in new investors. The new people get their proportional share from the old people that are already there.


Liquidation is when a company sells some of its assets to pay off debt. Most people think that a company should sell its assets instead of using them to pay off debts and just closing down. Liquidation can be good, but it may not always work.

The rationale of corporate rescue, the role of Administrator, voluntary winding up, creditors winding up, duties and functions of a liquidator, distribution of surplus assets, dissolution

The rationale for the Corporate Rescue is to turn around a company’s fortunes and improve its prospects. This is typically achieved by either restructuring the company, or by reconstructing it on different principles with new management and staff.

The role of an Administrator is to manage and administer a company during a period when its management, directors, or shareholders are incapacitated or absent.

Voluntary winding up is when a company decides to voluntarily cease business. During this, the directors will notify their creditors of an intention to dissolve and appoint a liquidator.

Creditors’ Winding Up is when the company has unpaid debts and the creditors want to get their money back.

Duties and functions of liquidators are:

1) To protect the company’s assets and complete unfinished transactions, they need to keep good records. They can also sell off any assets for a good price by doing public or private sales.

2) To pay creditors back with money from the sale of assets. If it turns out that there isn’t enough money to pay them all, priority must be given to paying employees and suppliers.

3)The company will take care of all debts before taking money for themselves. They will also give it to the shareholders.

4) To report on what happened and why the company went into liquidation so that other people can avoid making the same mistakes. Then give the report to the appropriate government agency. Once the company finishes its job, it stops. It no longer serves a purpose to make money or provide services.

Distribution of surplus assets Once a company is done, the money will go to the people who are owed, and then the company can be dissolved.

Dissolution occurs when a company is liquidated and ceases to exist.

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