How Corporate Governance Is Important To Financial Reporting

How Corporate Governance Is Important To Financial Reporting?

Ceratain perspectives regarding corporate governance merit discussion. A good analysis of this perspective requires the critical assessment of corporate governance practices and the institutional arrangements and structural issues associated with them.

I’ll use these perspectives to explain corporate management’s corporate governance view, which I generally think is not sufficiently discussed in the financial media and financial literacy. 

The financial media and financial literature emphasize the range of governance issues perceived by investors as less relevant. Here I examine issues of financial reporting that concern corporate management and the institutions of corporate governance. It’s important to note that investors’ views of financial reporting are just one element of investor attitudes, not the most important one. 

Another essential element is the investor attitude toward the enterprise of corporate management. The relatively small size of the corporate market creates little incentive for investors to focus on institutional arrangements and structural issues.

How Can Investors Do Better Than The Corporate Media and Financial Academia?

Perhaps the first point to make is that financial reporting concerns are essential. Financial reporting makes markets function, creating rational expectations that enable investors to understand risk.

 Investors need to compare and assess the risk attributes of various investments and the prospects for potential loss of value. A sufficiently transparent and internally consistent set of reporting principles will do much to enable investors to do so.

If investors can’t do their financial reporting, they are required by law to do so by the financial institution they have chosen to hold shares. These institutions are accountable to both government and shareholders. 

The institutional arrangements and structural issues associated with financial reporting concerns are essential for corporate governance. Perhaps the most significant institutional arrangement in the financial system is the banking and brokerage firm. 

A formal institutional relationship in banking between a bank and a broker-dealer is with a mutual fund. The broker-dealer is responsible for arranging and maintaining the market for which the mutual fund is a component. 

It keeps records and pays the management fees on behalf of the mutual fund. The broker-dealer also operates a wealth management division that assists individuals and corporations in managing their assets. Some brokers do other financial services, such as investment banking, credit rating agencies, money market mutual funds, or even bank accounts and other fixed-income products.

The structure of the financial institution itself may facilitate the consideration of corporate governance issues. Perhaps the most crucial type of bank, especially for asset management firms, is the mutual fund.

Mutual funds in corporate governance

Mutual funds are corporations, and the entity that manages them is subject to a broad range of oversight. The corporation is generally structured so that the non-financial management units of the bank are subject to specific constraints, which may include the separation of investment and wealth management and the separation of retail and institutional investors. There may be similar arrangements for other types of banking institutions. At the very least, the financial institution structure creates accountability for financial reporting and institutional design.

Every bank and mutual fund has a board of directors. The requirements of disclosure for directors and managers are generally similar, depending on the context. Also, directors and managers typically face more internal governance constraints than other corporate or financial systems

A company may have a board of directors but not follow any specific regulatory requirements regarding governance structure. Perhaps the most critical difference is the potential accountability of individual shareholders. 

The boards of directors of corporations and mutual funds may remove individual directors, but shareholders may be unwilling or unable to remove individual managers. In many cases, directors and managers must be personally accountable to the shareholders of the financial institution. The more tightly the ownership structure of the financial institution is rooted in specific investors, the more appropriate it is to provide governance structures and oversight for corporate governance.

Important Factors in Corporate Governance

Perhaps the most important determinant of financial accountability for managers is the willingness of institutional investors to vote against individuals and management in the management of funds. Individual investors might also seek to challenge management.

In both the United States and the United Kingdom, corporate governance committees are often composed of management representatives and individuals from institutional investors. The committees generally have more influence on financial decisions than individual investors. In many cases, the most effective corporate governance structures are typically the committee structures.


Perhaps the most important corporate governance structure for financial managers is also the most expensive. The corporate governance structures of mutual funds and banks, mainly when there are more than two shareholders, are governed by a governing board and committees. These financial institutions may also have compliance officers and committees focused on compliance and risk management issues. Management teams of financial institutions tend to place specialized corporate governance structures for compliance, risk management, and corporate governance. It may be beneficial to follow corporate governance best practices when deciding on the structure of the corporate governance structure.

However, we do not find a general correlation between organizational structures and the level of risk management and compliance controls. 

Instead, an individual manager may have additional constraints on what their legal compliance officers must do. This situation is also when a financial institution is subject to broad federal oversight and regulations in the United States or the United Kingdom.