 Corporate governance is based on three interrelated

components: corporate governance principles, functions

and mechanisms.
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 management’s 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 company’s
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.
 Corporate Laws May vary from state to state. But most adopted
Model Business Corporation Act as their
corporate law

The Federal Securities Laws
Listing Standards
Fundamental are: the Securities Act of 1933 and
Securities Exchange Act of 1934
SOX expanded the role of federal statutes by
providing measures to improve corporate
governance, financial reports, and audit
activities.
Adopted by national stock exchanges, these
standards are applicable to all public companies
listing their equity shares with some exceptions

Best Practices Recommended by professional organizations

(e.g. The
Conference Board, the Business Roundtable
Institute) and investor activists (e.g. Council of
Institutional Investors)
 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.
 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)