ACCA P1 Governance, Risk and Ethics by Emile Woolf International Publishing

By Emile Woolf International Publishing

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Greater accountability should reduce the agency problem, because it provides management with a greater incentive (obtaining rewards or avoiding punishments) to achieve performance levels that are in the best interests of the shareholders. However, the costs of accountability (which are monitoring costs) should not be excessive and should not exceed the value of the benefits that the monitoring provides. Accountability and the source of authority in an entity Accountability also determines where the centre of authority lies within an entity.

In the UK for example, the influence of the institutional investors has been significance in persuading listed companies to adopt (most of) the provisions of the Combined Code on corporate governance. Their role in promoting good corporate governance has therefore been critically important. „ In the UK, a section of the Combined Code on corporate governance contains principles about the role of institutional investors in contributing to good corporate governance. „ The institutional shareholder bodies have issued guidelines on corporate governance to their members, which they encourage their members to apply.

Fama and Jensen (1983) argued that an effective board must consist largely of independent non-executive directors. Independent non-executive directors have no executive role in the company and are not full-time employees. They are able to act in the best interests of the shareholders. „ Independent non-executive directors should also take the decisions where there is (or could be) a conflict of interest between executive directors and the best interests of the company. For example, non-executive directors should be responsible for the remuneration packages for executive directors and other senior managers.

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