Explain the relationship between stakeholders and corporate governance.

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Stakeholders are individuals or groups with a legitimate interest (stake) in an organisation. Examples include shareholders, employees, company pensioners and directors.

According to the Cadbury report, corporate governance is the system by which companies are directed and controlled. In some countries corporate governance is a legal requirement (e.g. USA), in others it is formalised by a code or a set of best practice guidance (e.g. UK). The practice of corporate governance is aimed at protecting and taking account of the rights and claims of stakeholder groups.

The primary reason for corporate governance is to protect stakeholders such as shareholders, employees and pensioners against directors abusing their positions of power. Corporate governance reminds directors of the limitations of their power, and enforces the principle that directors work on behalf of shareholders.


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