CORPORATE GOVERNANCE Concept and Objectives Corporate Governance may be defined as a set of systems, processes and principles which

ensure that a company is governed in the best interest of all stakeholders. It is the system by which companies are directed and controlled. It is about promoting corporate fairness, transparency and accountability. In other words, 'good corporate governance' is simply 'good business'. It ensures:

Adequate disclosures and effective decision making to achieve corporate objectives; Transparency in business transactions; Statutory and legal compliances; Protection of shareholder interests; Commitment to values and ethical conduct of business.

In other words, corporate governance is the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It deals with conducting the affairs of a company such that there is fairness to all stakeholders and that its actions benefit the greatest number of stakeholders. In this regard, the management needs to prevent asymmetry of benefits between various sections of shareholders, especially between the owner-managers and the rest of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal and corporate funds in the management of a company. Ethical dilemmas arise from conflicting interests of the parties involved. In this regard, managers make decisions based on a set of principles influenced by the values, context and culture of the organization. Ethical leadership is good for business as the organization is seen to conduct its business in line with the expectations of all stakeholders. The aim of "Good Corporate Governance" is to ensure commitment of the board in managing the company in a transparent manner for maximizing long-term value of the company for its shareholders and all other partners. It integrates all the participants involved in a process, which is economic, and at the same time social. The fundamental objective of corporate governance is to enhance shareholders' value and protect the interests of other stakeholders by improving the corporate performance and accountability. Hence it harmonizes the need for a company to strike a balance at all times between the need to enhance shareholders' wealth whilst not in any way being detrimental to the interests of the other stakeholders in the company. Further, its objective is to generate an environment of trust and confidence amongst those having competing and conflicting interests. It is integral to the very existence of a company and strengthens investor's confidence by ensuring company's commitment to higher growth and profits. Broadly, it seeks to achieve the following objectives:

A properly structured board capable of taking independent and objective decisions is in place at the helm of affairs;

The board is balance as regards the representation of adequate number of nonexecutive and independent directors who will take care of their interests and wellbeing of all the stakeholders; The board adopts transparent procedures and practices and arrives at decisions on the strength of adequate information; The board has an effective machinery to subserve the concerns of stakeholders; The board keeps the shareholders informed of relevant developments impacting the company; The board effectively and regularly monitors the functioning of the management team; The board remains in effective control of the affairs of the company at all times.

The overall endeavour of the board should be to take the organisation forward so as to maximize long term value and shareholders' wealth. OBJECTIVE Transparency and Full Disclosure

Good corporate governance aims at ensuring a higher degree of transparency in an organization by encouraging full disclosure of transactions in the company accounts. Full disclosure includes compliance with regulations and disclosing any information important to the shareholders. For example, if a manager has close ties with suppliers or has a vested interest in a contract, it must be disclosed. Also, directors should be independent so that the oversight of the company management is unbiased. Transparency involves disclosure of all forms of conflict of interest. Accountability

Jean Du Plessis, James McConvill and Mirko Bagaric, in their book, "Principles of Contemporary Corporate Governance," point out that a corporate governance structure encourages accountability of the management to the company directors and the accountability of the directors to the shareholders. Through hiring independent directors, a company aims to create good corporate governance. The compensation of the chief executive officer has to be approved by the company directors to ensure that the compensation structure is fair and in the best interests of the shareholders. Any discrepancies in the company accounts or malfunctioning of the company is closely watched by the board of directors. The board has a right to question strategic decisions. Equitable Treatment of Shareholders

A corporate governance structure ensures equitable treatment of all the shareholders of the company. In some organizations, a particular group of shareholders remains active due to their concentrated position and may be better able to guard their interests; such groups include high-net-worth individuals and institutions that have a substantial proportion of their portfolios invested in the company. However, all shareholders deserve equitable treatment, and this equity is ensured by a good corporate governance structure in any organization. Self Evaluation

Corporate governance allows firms to evaluate their behavior before they are scrutinized by regulatory bodies. Firms with a strong corporate governance system are better able to limit

their exposure to regulatory risks and fines. An active and independent board can successfully point out the loopholes in the company operations and help solve issues internally. Increasing Shareholders' Wealth

The main objective of corporate governance is to protect the long-term interests of the shareholders. Ira Millstein, in his book, "Corporate Governance: Improving Competitiveness and Access to Capital in Global Markets," mentions that firms with strong corporate governance structures are seen to have higher valuation premiums attached to their shares. This shows that good corporate governance is perceived by the market as an incentive for shareholders to invest in the company. Goal congruence is the term which describes the situation when the goals of different interest groups coincide. A way of helping to achieve goal congruence between shareholders and managers is by the introduction of carefully designed remuneration packages for managers which would motivate managers to take decisions which were consistent with the objectives of the shareholders. Agency theorysees employees of businesses, including managers, as individuals, each with his or her own objectives. Within a department of a business, there are departmental objectives. If achieving these various objectives also leads to the achievement of the objectives of the organization as a whole, there is said to be goal congruence. Achieving Goal Congruence Goal congruence can be achieved, and at the same time, the agency problem can be dealt with, providing managers with incentives which are related to profits or share price, or other factors such as:

1. Pay or bonuses related to the size of profits termed as profit-related pay. 2. Rewarding managers with shares, e.g.: when a private company goes public and managers are invited to subscribe for shares in the company at an attractive offer price. 3. Rewarding managers with share options. In a share option scheme, selected employees are given a number of share options, each of which gives the right (after a certain date) to subscribe for shares in the company at a fixed price. The value of an option will increase if the company is successful and its share price goes up. Such measures might encourage management in the adoption of creative accounting methods which will distort the reported performance of the company in the service of the managers own ends. However, creative accounting methods such as off-balance sheet finance present a temptation to management at all times given that they allow a more favorable picture of the state of the company to be presented than otherwise, to shareholders, potential investors, potential lenders and others. An alternative approach is to attempt to monitor managers behavior, for example, by establishing Management audit procedures, to introduce additional reporting requirements, or to seek assurance from managers that shareholders interests will be foremost in their priorities.