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1. Introduction
It has been stated on many occasions that accountability of boards of directors is important to corporate governance. In the UK’s Cadbury Report (1992) (para 6.1), the central issue for corporate governance was said to be: How to strengthen the accountability of boards of directors to shareholders? The G20/OECD’s (2015, Principle 7) Principles of Corporate Governance states that:
The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.
It has been said that good corporate governance is able to be best achieved by focusing on the accountability of directors, and it can be argued that accountability of directors is the basis for the success of all other principles of corporate governance (Makuta, 2009). It is widely posited that holding directors accountable for their behaviour and decisions is fundamental to good corporate governance (Solomon and Solomon, 2004).
Agency theory, employed often in relation to corporate governance issues, is a theory devised to explain and conceptualise the role and behaviour of agents, including managers and directors of companies. It seeks to address the issue of what are known as agency problems, which exist as a consequence of the appointment of boards and managers in companies and the separation of ownership and control (Jensen and Meckling, 1976; Fama, 1980; Fama and Jensen, 1983)[1]. The separation occurs in large companies where those who are said to own the company, the shareholders, do not control it. Control is left in the hands of the directors and managers. According to agency theory, holding directors accountable for what they do is one of the major issues of corporate governance (Filatotchev et al., 2007). The theory holds that the central problem is ascertaining how the principals (the shareholders in corporate governance) can ensure that the agents (the directors) act in the interests of the principals rather than in their own interests (Pastoriza and Arinio, 2008), given that, according to agency theory, agents will seek to maximise their own personal interests when acting in such a role. Following on from that, many commentators have seen the existence of agency problems as the primary, or only, rationale for ensuring that the board...