ExpertGovernance and Social Responsibility
Learning outcomes
- Understand the Agency Problem in corporate governance.
- Identify the roles of Executive and Non-Executive Directors (NEDs).
- Evaluate corporate social responsibility (CSR) initiatives.
Corporate Governance and Agency Theory
Corporate governance is the system by which companies are directed and controlled.
Agency Theory: In large companies, the owners (shareholders/principals) do not run the company. They hire managers (directors/agents) to run it. The 'Agency Problem' occurs when directors act in their own self-interest (e.g., massive bonuses) rather than maximizing shareholder wealth.
In Agency Theory, who are the 'Principals'?
NEDs are still Directors
Non-Executive Directors (NEDs) do not work in the company day-to-day, but they sit on the Board and have the same legal liabilities as Executive Directors if the company fails.
The Board of Directors
To solve the agency problem, governance codes recommend a balanced board:
- Executive Directors (EDs): Full-time employees running the business (CEO, CFO).
- Non-Executive Directors (NEDs): Independent outsiders. Their job is to scrutinize the EDs, bring external expertise, and ensure shareholders' interests are protected.
What is the primary role of a Non-Executive Director (NED)?
Exam Focus
Governance codes state that the roles of Chairman (runs the board) and CEO (runs the company) should NOT be held by the same person. This prevents too much power concentrating in one individual.
Why is it recommended that the Chairman and the CEO be two different people?
Corporate Social Responsibility (CSR) refers to:
Which committee should be composed entirely of independent Non-Executive Directors?
Ready to put this into practice?
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ACCA BT — Business & Technology Practice Exam 1
A premium, complete mock exam replication for ACCA BT (Business & Technology). This exam mirrors live computer-based testing parameters, featuring 46 objective test questions (Section A) and 6 multi-task scenario questions (Section B). It covers the entire syllabus: Business Organization, Structure & Governance, Technology & Regulation, Leadership, Personal Effectiveness, and Professional Ethics.