Corporate governance is based on three interrelated components:
corporate governance principles, functions and mechanisms.
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OVERSIGHT FUNCTION. The board of directors should provide
strategic advice to management and oversee managerial performance,
yet avoid micromanaging. MANAGERIAL FUNCTION. The effectiveness of
this function depends on the alignment of managements interests
with those of shareholders. COMPLIANCE FUNCTION. The set of laws,
regulations, rules, standards, and best practices developed by
state and federal legislators, regulators, standard-setting bodies,
and professional organizations to create a compliance framework for
public companies in which to operate and achieve their goals.
INTERNAL AUDIT FUNCTION. Assurance and consulting services to the
company in the areas of operational efficiency, risk management,
internal controls, financial reporting, and governance processes.
LEGAL AND FINANCIAL ADVISORY FUNDTIONS. Legal advice and assists
the company, its directors, officers, and employees in complying
with applicable laws and other legal obligations and fiduciary
duties. EXTERNAL AUDIT FUNCTION. External auditors lend credibility
to the companys financial reports and thus add value to its
corporate governance through their integrated audit of both
internal control over financial reporting and financial statements.
MONITORING FUNCTION. Shareholders, particularly institutional
shareholders, empowered to elect and, if warranted, remove
directors.
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SOX was signed into law on July 30, 2002, to reinforce
corporate accountability and rebuild investor confidence in public
financial reports. It was designed to: (1) establish an independent
regulatory structure for the accounting profession, (2) set high
standards and new guiding principles for corporate governance, (3)
improve the quality and transparency of financial reporting, (4)
improve the objectivity and credibility of audit functions and
empower the audit committee, (5) create more severe civil and
criminal remedies for violations of federal securities laws, (6)
increase the independence of securities analysts.
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SOX provisions, SEC-related rules, and listing standards
influence corporate governance structure in at least three ways:
Auditors, analysts, and legal counsel are now brought into the
realm of internal governance as gatekeepers Legal status and
fiduciary duty of company directors and officers, (audit committee
and CEO), have been more clearly defined and in some instances,
significantly enhanced Certain aspects of state corporate law were
preempted and federalized (For example, Section 402 of SOX
prohibits loans to directors and officers, whereas state law
permits such loans) SOX provisions, SEC-related rules, and listing
standards influence corporate governance structure in at least
three ways: Auditors, analysts, and legal counsel are now brought
into the realm of internal governance as gatekeepers Legal status
and fiduciary duty of company directors and officers, (audit
committee and CEO), have been more clearly defined and in some
instances, significantly enhanced Certain aspects of state
corporate law were preempted and federalized (For example, Section
402 of SOX prohibits loans to directors and officers, whereas state
law permits such loans)