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Code of Corporate Governance

Code of Corporate Governance

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Published by: zeeshan655 on Mar 29, 2010
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08/01/2011

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Concept of Corporate Governance:
A company is an artificial and unnatural entity concerned with achieving, inter alia, thefollowing goals:(
i
)
Continuity, i.e., succession planning whereby a corporate enterprise maycontinue as a working unit.(
ii
)
Stimulating the enterprise so that it is capable of identifying the opportunitiesavailable at a particular juncture of time.(
iii
)
Facilitating constructive challenges within the business.(
iv
)
Identification of right challenges so as to make an appropriate allocation ofresources.A company attempts to achieve these objectives through the instrumentality of a groupof people known as the board of directors. But the interests of the board may not alwaysmatch those of the shareholders (owners of the company
)
on account of various reasons.It is in this context that the need of corporate governance arises. It may, however, benoted that governance is a dynamic concept which cannot be placed in the straitjacketof any single definition. Corporate governance is drawn from diverse fields like laws,economics, ethics, politics, management, finance, etc. Consequently, a properunderstanding of corporate governance requires familiarity with concepts; assumptionand vocabulary of each of these disciplines, besides the capacity of synthesize andtranscend them.According to Ada Demb and F-Friedrich Neubauer, ´Corporate governance is theprocess by which corporation is made responsive to the rights and wishes ofstakeholdersµ.According to James D.Wolfensohnn, president of World Bank, ¶Corporate governance isabout promoting corporate fairness, transparency and accountability·.
 
Standard and poor consider corporate governance as ´the way a company is organizedand managed to ensure that all financial stakeholders (shareholders and creditors
)
 receive their fair share of a company·s earnings and assets.Corporate governance denotes the process, structure and relationship through whichthe Board of Directors oversee what the management does. It is also about beinganswerable to different stakeholders. It is concerned with the ways of bringing theinterests of investors and managers in line and ensuring that firms are run for thebenefit of investors.
S
cope of corporate governance:
The scope of corporate governance extends to the following:
i)
 
Structuring of boards: It covers aspects relating to the composition of boards,representation of insiders and outsiders on the board, role of non-executiveand independent directors.
ii)
 
Board Procedures: It covers aspects like convening of board meetings;frequency and attendance at board meetings, fulfilling informationrequirements of the board for decision making; constitution of various boardcommittee like audit committee, compensation committee, shareholdersgrievance committee.
iii)
 
E
nhancing of shareholders· participation, disclosure of financial information,and fulfilling shareholders· right.
iv)
 
Industrial democracy through co-determination on boards, setting up ofSOPs, and representation of institutional investors.Corporate governance also encompasses ethics, values and morals of a corporation andits directors. Since governance is a kind of social contract between the company and itswider constituencies, it morally obliges the company and its directors to take account ofother stakeholders· interests. It also involves monitoring and overseeing strategicdirection in a socio-economic and cultural context.Thus, corporate governance is a system which involves the distribution of rights andresponsibilities among different participants in the corporation such as the board,management, shareholders and other stakeholders. It spells out the rules andprocedures of making decisions about corporate affairs. It also includes structures,processes, cultures and system through which a company sets its objectives, determinesthe means of attaining those objectives and monitoring its performance.
 
N
ature of Corporate Governance:
H
uman society needs governing. Whenever power is exercised to direct, control andregulate social activity affecting people·s legitimate interest governing comes to thefore. Governance is necessary whether the social or economic group is nation, State, aprofessional body or a business corporation.
E
ach has its governing body and particulargovernance activities. Governance identifies rights and responsibilities, legitimizesactions and determines accountability. It is concerned with derivation, use andlimitations of power.Corporate governance is concerned with the process by which corporate entities andparticularly limited liability companies are governed. Specifically, it is concerned withthe exercise of power over the direction of the enterprise, the supervision of executiveactions, the acceptance of duty to be accountable, and regulation of the corporationwithin the jurisdiction of the State in which it operates. Primarily, corporate governanceis connected with the board of directors, its structure, style and processes, theirrelationships and roles, the linkages and activities, as well as the roles of company·smembers, auditors and others.Corporate governance has two aspects as follows:1.
 
Internal Aspects: these refer to the set of organizational rules within acompany. These aspects comprise of the following:(a
)
 
Sound internal processes and procedures(b
)
 
Sound Philosophy based on ethical principles(c
)
 
Good quality leadership by the board and senior management(d
)
 
The management·s mindset imbued by vision, sense ofresponsibility, respect for law and a value system2.
E
xternal Aspects: These aspects are reflected through a corporate entity·sfocus on profit optimization rather than maximization as well as the existenceof smooth relation between the company and the various stakeholders. Theseaspects relate to the assessment of performance of the company throughmarket mechanism. Both the above aspects must ensure the ushering of thecorporation into an era where no single person or group could commandconcentrated decision-making power.

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