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A public corporation typically has multiple owners who often play little or no role in business decisions.
Instead, decisions are delegated to professional managers who determine how assets are used and how the business is run.
This separation between business owners and management creates the potential for conflicts where management may put their own interests ahead of those of shareholders.
Other potential conflicts of interest in a corporation may involve directors, creditors and other stakeholders, such as employees and customers.
The goal of corporate governance is to minimize these conflicts of interest through the application of practical measures and policies.
A company that does not have a sound system of corporate governance in place is taking on a major risk.
Well known examples include:
The lack of an effective corporate governance system can threaten a company’s very existence.
Corporate governance has two major objectives:
An effective corporate governance system will:
Conclusion
It is important that the companies you invest in have a strong corporate governance system. The strength and effectiveness of a corporate governance system has a direct and significant impact on the value of the company.
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