1. Read and translate the text “Corporate governance”.

Company Ownership and the principal-agency problem

The simplest type of ownership is a sole proprietor owning a small business. Sole proprietors can lose personal assets if the business fails, so they may register as a private limited company (Ltd.). This means that the company becomes a legal entity, with liability limited to the amount of capital the owners have invested in the company. However, when a company becomes a public limited company (plc), allowing its shares to be traded on the stock market, the problem arises that ownership and control are now separated. The directors are agents, or fiduciaries, legally responsible for making the best use of the shareholders' money. How can the shareholders, the principals, ensure that their agent will look after their investment? Directors might use inside information about the company's financial condition to act for their own benefit against the interests of shareholders — as occurred most famously in the Enron scandal, where shareholders lost nearly $11 billion as a result of fraud by the executives.

Solutions to this problem include strict regulation by government and industry bodies. For example, under the Companies Act, registered UK companies must hold an AGM (Annual General Meeting), where shareholders can vote on important issues. Company accounts must also be impartially reviewed by external auditors. If they are satisfied that the accounts are true and fair, auditors will give an unqualified opinion. A qualified opinion suggests the accounts are inaccurate or incomplete.

Executive compensation

CEO compensation in the USA rose from 42 times that of an average worker's wage in 1982 to 531 times as much in 2000 and people often claim that this is unfair. However, to avoid a conflict of interest it is necessary to reward executives well. Such remuneration schemes include bonuses based on key performance indicators or share options allowing them to buy company shares at some future date, at a fixed price, thus making a profit if the company performs well. However, often these incentives are designed so that they promote a fixation on short-term success, which may encourage the type of risk-taking that led to the 2008 banking collapse.

The board of directors

These extracts from the UK Financial Reporting Council Corporate Governance Code explain the roles and responsibilities of boards of directors and shareholders.

Corporate governance is the system by which companies are directed and controlled. The shareholders' role is to appoint the directors and auditors and to satisfy themselves that an appropriate governance structure is in place. The board of directors has collective responsibility for setting the company's strategic aims, supervising the management of the business and reporting to shareholders on their stewardship.

There should be a clear division of responsibilities between the running of the board and the executive responsibility for running the company's business. The chairman is responsible for leadership of the board and ensuring its effectiveness. The non-executive directors, who are not employees of the company, have the role of constructively challenging proposals on strategy. The board has ultimate accountability for risk management and ensuring transparency in communicating with investors.