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APG 12010012009



Definition: The system of rules, practices and processes by which a

company is directed and controlled. Corporate governance essentially
involves balancing the interests of the many stakeholders in a company these include its shareholders, management, customers, suppliers,
financiers, government and the community. Since corporate governance
also provides the framework for attaining a company's objectives, it
encompasses practically every sphere of management, from action plans
and internal controls to performance measurement and corporate

In other words, 'good corporate governance' is simply 'good business'. It

Adequate disclosures and effective decision making to achieve corporate
Transparency in business transactions;
Statutory and legal compliances;

Protection of shareholder interests;

Commitment to values and ethical conduct of business.


Rights and equitable treatment of shareholders:

Organizations should respect the rights of shareholders and help
shareholders to exercise those rights. They can help shareholders
exercise their rights by openly and effectively communicating
information and by encouraging shareholders to participate in
general meetings.

Interests of other stakeholders: Organizations should

recognize that they have legal, contractual, social, and market
driven obligations to non-shareholder stakeholders, including
employees, investors, creditors, suppliers, local communities,
customers, and policy makers.

Role and responsibilities of the board: The board needs

sufficient relevant skills and understanding to review and
challenge management performance. It also needs adequate size
and appropriate levels of independence and commitment.

Integrity and ethical behaviour: Integrity should be a

fundamental requirement in choosing corporate officers and board
members. Organizations should develop a code of conduct for their
directors and executives that promotes ethical and responsible
decision making.

Disclosure and transparency: Organizations should clarify and

make publicly known the roles and responsibilities of board and
management to provide stakeholders with a level of accountability.
They should also implement procedures to independently verify
and safeguard the integrity of the company's financial reporting.
Disclosure of material matters concerning the organization should

be timely and balanced to ensure that all investors have access to

clear, factual information.

The benefits of Corporate Governance






Role clarity for the owners and management team.

Governance permits managers and owners to delineate their roles
and separate the issues of ownership (shareholding) from the
management of the business. This usually facilitates faster decision
making as it allows managers and owners to choose which hat to
wear depending on the issue or matter at hand.
Purposeful strategic direction. Corporate Governance relies on
the company defining and following a definitive strategic direction.
This enables the owners and/or management to apply the right
resources to the most beneficial opportunities. In turn this typically
leads to the quicker achievement of company goals, while
minimising wasted resources on less important activities.
Retention of staff. Motivation increases when employees/staff
are part of a business that has a well-defined and communicated
vision and direction. This can improve staff retention which can
become especially important when it comes to attracting and
retaining senior talent.
Improved relationships with the bank. Corporate Governance
enables robust and regular financial and management reporting.
The resulting systematic approach to producing data will foster
confidence in your business from your funders/banks as well as
your investors. Improved access to capital can be another flow-on
benefit from sound Corporate Governance.
Improvement in profitability. Governance often leads to
improved reporting on performance. This means managers and
owners are better equipped to make higher quality decisions that
can drive an increase in sales and margins and a reduction in costs.

Mechanisms and controls

Corporate governance mechanisms and controls are designed to
reduce the inefficiencies that arise from moral hazard and adverse
selection. There are both internal monitoring systems and external
monitoring systems.

Internal corporate governance controls

Internal corporate governance controls monitor activities and then
take corrective action to accomplish organisational goals. Examples

Monitoring by the board of directors: The board of directors,

with its legal authority to hire, fire and compensate top
management, safeguards invested capital. Regular board meetings
allow potential problems to be identified, discussed and avoided.
Whilst non-executive directors are thought to be more
independent, they may not always result in more effective
corporate governance and may not increase performance. Different
board structures are optimal for different firms. Moreover, the
ability of the board to monitor the firm's executives is a function of
its access to information. Executive directors possess superior
knowledge of the decision-making process and therefore evaluate
top management on the basis of the quality of its decisions that
lead to financial performance outcomes, ex ante. It could be
argued, therefore, that executive directors look beyond the
financial criteria.

Internal control procedures and internal auditors: Internal

control procedures are policies implemented by an entity's board of
directors, audit committee, management, and other personnel to
provide reasonable assurance of the entity achieving its objectives
related to reliable financial reporting, operating efficiency, and
compliance with laws and regulations. Internal auditors are
personnel within an organization who test the design and
implementation of the entity's internal control procedures and the
reliability of its financial reporting

Balance of power: The simplest balance of power is very

common; require that the President be a different person from the
Treasurer. This application of separation of power is further
developed in companies where separate divisions check and
balance each other's actions. One group may propose companywide administrative changes, another group review and can veto
the changes, and a third group check that the interests of people
(customers, shareholders, employees) outside the three groups are
being met.

Remuneration: Performance-based remuneration is designed to

relate some proportion of salary to individual performance. It may
be in the form of cash or non-cash payments such
as shares and share options, superannuation or other benefits. Such
incentive schemes, however, are reactive in the sense that they
provide no mechanism for preventing mistakes or opportunistic
behaviour, and can elicit myopic behaviour.

Monitoring by large shareholders and/or monitoring by

banks and other large creditors: Given their large investment in
the firm, these stakeholders have the incentives, combined with the
right degree of control and power, to monitor the management.

External corporate governance controls

External corporate governance controls encompass the controls
external stakeholders exercise over the organization. Examples


debt covenants

demand for and assessment of performance information

(especially financial statements)

government regulations

managerial labour market

media pressure



In India, corporate governance initiatives have been undertaken by the Ministry
of Corporate Affairs (MCA) and the Securities and Exchange Board of India
(SEBI). The first formal regulatory framework for listed companies specifically
for corporate governance was established by the SEBI in February 2000,
following the recommendations of Kumarmangalam Birla Committee Report. It
was enshrined as Clause 49 of the Listing Agreement. Further, SEBI is
maintaining the standards of corporate governance through other laws like the
Securities Contracts (Regulation) Act, 1956; Securities and Exchange Board of
India Act, 1992; and Depositories Act, 1996.
The Ministry of Corporate Affairs had appointed a Naresh Chandra
Committee on Corporate Audit and Governance in 2002 in order to examine
various corporate governance issues. It made recommendations in two key

aspects of corporate governance: financial and non-financial disclosures: and

independent auditing and board oversight of management. It is making all
efforts to bring transparency in the structure of corporate governance through
the enactment of Companies Act and its amendments.
There are three different forms of corporate responsibilities which all countries
do respect:
Political Responsibilities: the basic political obligations are abiding
by legitimate law; respect for the system of rights and the principles of
constitutional state.
Social Responsibilities: the corporate ethical responsibilities, which
the company understands and promotes either as a community with
shared values or as a part of larger community with shared values.
Economic Responsibilities: acting in accordance with the logic of
competitive markets to earn profits on the basis of innovation and respect
for the rights/democracy of the shareholders which can be expressed in
terms of managements' obligation as 'maximizing shareholders value'.