Governance in business organisations

Q: What are the four core functions of Non-Executive Directors captured by the S-M-R-P mnemonic?

The four functions are Strategy , Monitoring , Remuneration , and People .

Q: What are the four core principles of good governance represented by the FATR framework?

The FATR principles are Fairness , Accountability , Transparency , and Responsibility .

Business and Technology (BT) · ACCA · 6 min read · Updated: Nov 5, 2026

Welcome to Governance: The "Rules of the Game"

Hello there! Welcome to one of the most important chapters in your Business and Technology (BT) studies. Don't let the word "Governance" intimidate you. At its simplest, governance is just about how a company is directed and controlled. Think of it like the rules of a sport: without them, players might cheat, and the game would fall apart. In business, governance ensures that the people running the company do so fairly and honestly. By the end of these notes, you'll understand why this protects everyone from the owners to the general public!

1. What is Corporate Governance?

Corporate Governance is the system by which companies are directed and controlled. It’s about making sure the "bosses" (directors) are doing what they are supposed to do for the "owners" (shareholders).

The Agency Problem (The "House Sitter" Analogy)

To understand governance, you must understand Agency Theory. In large companies, the people who own the business (Shareholders) are usually not the same people who run the business (Directors).

Analogy: Imagine you own a beautiful house, but you have to go abroad for a year. You hire a house sitter (the Agent) to look after it. You are the Owner (Principal). The problem? The house sitter might throw parties or forget to water the plants because it’s not their house. Corporate Governance is the set of rules you give the house sitter to make sure they look after your home properly!

Key Terms:
Principal: The owner (Shareholder).
Agent: The person acting on behalf of the owner (Director).
Stewardship: The duty of the directors to look after the company’s assets as if they were their own.

Quick Review:

The Agency Problem occurs when the interests of the directors and shareholders don't match. Governance helps fix this!

2. The Board of Directors

The Board is the group of people at the top of a company. They are responsible for making strategic decisions. To keep things fair and avoid concentration of power, best practice recommends a clear division of responsibilities at the head of the company (e.g. separating the role of Chairman and Chief Executive Officer), and balancing two types of directors:

1. Executive Directors: These are full-time employees who run the company day-to-day (e.g., the CEO or Finance Director).
2. Non-Executive Directors (NEDs): These are not employees. They do not perform an executive management role and attend meetings to provide challenge and monitor the Executive Directors. Non-executive status alone does not establish independence.

The Importance of NEDs

Independent NEDs provide independent monitoring on the board. Their independence must be assessed, including whether business, financial, or personal ties could impair their judgement.

Memory Aid: The Role of NEDs (S-M-R-P)
Strategy: They constructively challenge and contribute to the development of strategy.
Monitoring: They scrutinise executive performance against agreed goals.
Remuneration: They determine appropriate levels of remuneration for executive directors.
People: They assist in appointing and succession planning for board members.

3. Business Committees: Purposes, Advantages, and Disadvantages

A committee is a group of people appointed to deal with specific issues, investigate matters, or take decisions on behalf of a larger body (such as the main board). Committees may be permanent (standing committees, like an audit committee) or temporary (ad hoc committees formed to handle a specific project).

Advantages and Disadvantages of Committees

Advantages:
- Pooling of expertise: Combines individuals with varied skills, specialist knowledge, and perspectives.
- Shared responsibility: Reduces the risk of individual bias or excessive power resting with a single person.
- Detailed examination: Allows in-depth discussion and detailed scrutiny of complex or sensitive issues that the full board lacks time to examine.
- Improved communication: Encourages cross-functional coordination and stakeholder representation.

Disadvantages:
- Slow decision-making: Scheduling meetings and achieving consensus can take significant time.
- Compromise solutions: To reach agreement, committees may settle for the lowest common denominator rather than the optimal decision.
- Dilution of accountability: When a group decides, no single person feels solely responsible for poor outcomes.
- High administrative cost: Organizing meetings, documentation, and member time can be expensive.

4. Roles of the Chair and Secretary

Effective committee and board functioning depends heavily on two specific officials:

The Chair (Chairperson):
- Leads the committee or board and ensures meetings run smoothly, efficiently, and effectively.
- Sets the agenda in consultation with the Secretary and ensures discussions stay focused on agenda items.
- Promotes a culture of open debate, ensuring all members contribute and no individual dominates.
- Summarises findings, calls for votes where required, and signs approved minutes.

The Secretary (Company / Committee Secretary):
- Handles administrative arrangements: sending notices of meetings, booking venues, and issuing agendas.
- Prepares and distributes board/committee packs and briefing papers in advance.
- Records accurate and objective minutes of meetings, noting resolutions and action points.
- Advises the Chair and members on legal compliance, governance duties, and procedure.

5. Board Committees and Best Practice

In corporate governance best practice, the board establishes dedicated committees comprised largely or entirely of independent NEDs to manage areas where executive conflicts of interest are greatest:

1. The Audit Committee: Composed of independent NEDs (with at least one member having recent and relevant financial experience). They oversee financial reporting, internal controls, risk management, and the relationship with both internal and external auditors.
2. The Remuneration Committee: Composed of independent NEDs. They determine the remuneration packages of executive directors, ensuring pay is linked to long-term performance without rewarding failure.
Common Mistake: Executive directors must never set their own remuneration. That would be an obvious conflict of interest.
3. The Nomination Committee: Leads the process for board appointments and ensures a formal, rigorous, and transparent procedure for succession planning and board balance.
4. Public Oversight: Regulators and external governance bodies oversee reporting and audit standards to protect market integrity, investor confidence, and the public interest.

6. Principles of Good Governance

Good governance relies on core principles that guide board behaviour, often summarised by the FATR framework:

Fairness: All shareholders (including minority shareholders) and stakeholders are treated equitably.
Accountability: The board must present a balanced assessment of the company's position and explain its actions.
Transparency: Timely, accurate, and open disclosure of all material matters regarding the business.
Responsibility: Directors accept their legal and moral duties to the company, society, and the environment.

7. Rules-Based vs. Principles-Based Governance

Countries approach corporate governance enforcement in two primary ways:

1. Rules-Based (e.g., USA): Governance requirements are codified into legal statute. Non-compliance leads to statutory penalties, fines, or prosecution ("comply or else").
2. Principles-Based (e.g., UK): Sets broad standards and codes of best practice. Companies follow the "Comply or Explain" approach: if a company departs from a specific provision, it must explain its rationale to shareholders in the annual report.

8. Why is Governance Important?

Good corporate governance is vital because it:
1. Reduces investment and operational risk.
2. Prevents fraud, mismanagement, and financial crime.
3. Ensures long-term sustainable performance and shareholder value.
4. Fosters public trust and protects wider stakeholder interests.

Chapter Summary Checklist

Before you move on, make sure you can answer these:
- Can I explain the Agency Problem (principals vs. agents)?
- Do I know the difference between an Executive and an independent Non-Executive director?
- Can I outline the advantages and disadvantages of business committees?
- Can I distinguish the duties of the Chair from those of the Secretary?
- Do I understand the roles of the Audit and Remuneration committees and public oversight?
- Can I compare rules-based and principles-based ("comply or explain") governance?

References

ACCA Business and Technology (BT/FBT) Syllabus and Study Guide September 2026 to June 2027 — ACCA

Quick check

Can you answer these now?

Open each question to check the key ideas from this chapter.

What is the formal definition of corporate governance?

Corporate governance is the system by which companies are directed and controlled.

What is the Agency Problem in corporate governance?

The Agency Problem arises because the owners of a company (principals) are separate from the managers running it (agents), creating a potential conflict of interest.

What is the primary operational difference between Executive Directors and Non-Executive Directors (NEDs)?

Executive Directors are full-time employees responsible for day-to-day operations, whereas Non-Executive Directors are not employees and focus on oversight, objective challenge, and monitoring.

What are the four core functions of Non-Executive Directors captured by the S-M-R-P mnemonic?

The four functions are Strategy, Monitoring, Remuneration, and People.

What are the main advantages and disadvantages of using business committees?

Advantages include pooling specialist expertise, shared responsibility, and detailed examination; disadvantages include slow decision-making, compromise solutions, diluted accountability, and high administrative costs.

How do the distinct roles of the Chair and the Secretary differ in meeting governance?

The Chair leads the board, directs discussions, and ensures effective debate, whereas the Secretary manages meeting administration, documentation, and compliance advisory duties.

What are the primary responsibilities of the Audit Committee and the Remuneration Committee?

The Audit Committee oversees financial reporting, internal controls, and auditor relationships, while the Remuneration Committee determines executive director compensation.

What are the four core principles of good governance represented by the FATR framework?

The FATR principles are Fairness, Accountability, Transparency, and Responsibility.

How does a principles-based governance regime differ from a rules-based regime?

A principles-based regime applies high-level codes using a "comply or explain" approach, whereas a rules-based regime enforces mandatory statutory requirements punishable by law ("comply or else").

Why is corporate governance essential for businesses and capital markets?

Good governance reduces operational and investment risk, prevents corporate fraud, preserves long-term shareholder value, and builds public trust.

Ready to test yourself?

Turn these notes into exam-style practice. Get unlimited AI questions on this topic with instant marking and explanations.

Practice This Topic

More Business and Technology (BT) chapters

* The content provided by thinka is generated by AI and may not always be accurate or up-to-date. Please use it as a supplementary resource and verify with official materials.

Put These Notes into Practice

Reading the notes is a great start. Now practice with unlimited AI-generated questions and get instant feedback. 100,000+ students are already improving their grades.

Start Practicing Now View Pricing

Done reading? Test yourself with AI practice questions

Practice This Topic Now