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BENEFITS OF GOOD GOVERNANCE

1. Corporate governance comprises of a set of processes, policies and laws that impact the
way in which a company is administered. Corporate governance gives importance to
shareholders' welfare and also includes the relationships between the strategic goal of the
company and its stakeholders. This relationship helps to sustain the business for a longer
period.

Management
2. Good corporate governance allows even outsiders to assess the company on how well it is
being governed. The core of corporate governance is its transparency and disclosure
principles. An advantage with corporate governance is that the benefits are measurable.
Good corporate governance ensures higher market valuation. Corporate governance
initiatives should ensure that the board of control and management take the necessary
steps that are in the best interest of the business of the company.

Transparency
3. Corporate governance encourages more transparency of the business, thereby attaining
the trust of its stakeholders. This transparency is brought forward by improving access to
capital and financial markets. Raising capital also becomes easier because of the support
the company earns from its stakeholders. Asset diversification through mergers and
acquisitions is made easier with a company that follows good corporate governance.
Corporate governance practices encourage a system of internal control, which in turn
leads to better profit margins. Thus, for a company, corporate governance initiatives
make it possible to attract equity investors. The corporate value of the company is
increased by adopting good corporate governance practices. If two companies have
comparable financial records, institutional investors prefer to invest in the one that has
shown a proven record as a well-governed company.

Benefits to Shareholders
4. Good corporate governance initiatives can assist the board of control and the
management to act on objectives that are in the best interest of both the company and the
shareholders. The shareholders also have greater security on the investments they have
made because of the transparency and access to investment details. The shareholders are
better informed on all important decisions of management, such as the sale of assets and
amendments to articles.

Benefits to the National Economy


5. If a country has a reputation for its strong governance practices, this leads to greater
confidence in the investors, which in turn leads to a good flow in capital. The reporting
and accounting standards adopted by the country are also an important factor to bring in
investments. Thus, good corporate governance practices can be beneficial for any
country's national economy.

The Importance of Good Corporate Governance


During the last decade, policy makers, regulators, and market participants around the
world have increasingly come to emphasize the need to develop good corporate
governance policies and practices. An increasing amount of empirical evidence shows
that good corporate governance contributes to competitiveness, facilitates
corporate access to capital markets, and thus helps develop financial markets and spur
economic growth.

Today, both domestic and foreign investors place an ever greater emphasis on the way
that corporations are operated and how they respond to their needs and demands.
Investors are increasingly willing to pay a premium for well-governed companies that
adhere to good board practices, provide for information disclosure
and financial transparency, and respect shareholder rights. Well-governed companies
are also better positioned to fulfill their economic, environmental, and social
responsibilities, and contribute to sustainable growth.

Improvement in corporate governance practices can improve the decisionmaking


process within and between a company’s governing bodies, and should thus enhance
the efficiency of the financial and business operations. Better corporate governance also
leads to an improvement in the accountability system, minimizing the risk of fraud or
self-dealing by company officers. An effective system of governance should help ensure
compliance with applicable laws and regulations, and further, allow companies to avoid
costly litigation. Also, Russian
companies should stand to benefit from a better reputation and standing, both at home
and in the international community.

What is Corporate Governance?

• Corporate governance refers to the structures and processes for the direction and control
of companies. Corporate governance concerns the relationships among the management,
Board of Directors, controlling shareholders, minority shareholders and other
stakeholders. Good corporate governance contributes to sustainable economic
development by enhancing the performance of companies and increasing their access to
outside capital.
• The OECD Principles of Corporate Governance provide the framework for the work
of IFC in this area, identifying the key practical issues: the rights and equitable treatment
of shareholders and other financial stakeholders, the role of non-financial stakeholders,
disclosure and transparency, and the responsibilities of the Board of Directors. The
OECD Principles are universally applicable to all types of corporate governance systems
in countries at all levels of economic development. The challenge for IFC is to take this
framework of international best practices of corporate governance and use it to add value
to the wide spectrum of our client companies.
Why Corporate Governance Matters for IFC Clients?

• Improving access to capital. Much attention to corporate governance issues in emerging


markets among policymakers and academics has focused on the role governance can play
in improving access for emerging market companies to global portfolio equity. An
increasing volume of empirical evidence indicates that well-governed companies receive
higher market valuations.* However, improving corporate governance will also increase
all other capital flows to companies in developing countries: from domestic and global
capital; equity and debt; and from public securities markets and private capital sources.
• Improving performance. Equally important and, irrespective of the need to access
capital, good corporate governance brings better performance for IFC clients. Improved
governance structures and processes help ensure quality decision-making, encourage
effective succession planning for senior management and enhance the long-term
prosperity of companies, independent of the type of company and its sources of finance.

Why Corporate Governance Matters for IFC?

• Adding value. Corporate governance is a priority for IFC because it presents


opportunities for IFC to manage risks and add value to clients. In addition to the benefits
to individual client companies, working to improve corporate governance contributes
more broadly to IFC's mission to promote sustainable private sector investment in
developing countries.
• Reducing investment risk. It is in IFC's interest to reduce the risk of investments by
improving the governance of investee companies. In the worst corporate governance
environments, poor standards and weak enforcement continue to be barriers to investment
even for IFC with its mandate to work in frontier markets. Improving the corporate
governance of investee companies allows IFC to work in higher risk environments. It
should also bring an increase in the market valuation of companies and attract more
investors, which together increase the opportunities for IFC to exit its equity investments
on favorable terms. In recent years, IFC has worked with some of our highest-profile
clients to improve their governance and to better communicate the quality of their
governance to markets.
• Avoiding reputational risk. If IFC does not work to improve the corporate governance
of client companies, then it takes on not only investment risk, but also a reputational risk
for involvement with companies with poor governance or, in the worst cases, corporate
scandals. This reputational risk is particularly serious where stakeholders and equity
investors stand to lose from governance abuses, such as banks and insurance companies.
• Developing capital markets. Improving corporate governance contributes to the
development of the public and private capital markets.** Poor standards of governance,
particularly in the area of transparency and disclosure have been a major factor behind
instability in the financial markets across the globe. This was seen in the case of the East
Asian financial crisis of 1997, where so-called "crony capitalism" combined with
macroeconomic imbalances to interrupt decades of outstanding economic growth. Most
recently, poor corporate governance contributed to the spread of corruption and fraud that
led to the dramatic corporate failures in United States and Western Europe.
IFC's Comparative Advantage in Corporate Governance

• IFC's experience. Although the term "corporate governance" has only become widely
used in recent years, IFC has worked on the key issues of corporate governance at the
grass-roots level for decades - structuring client companies, appraising investment
opportunities, and nominating Board members. This practical experience allows IFC to
tailor global principles to the realities of the private sector in developing countries.
Development banks and other investors working in emerging markets now look to IFC
for leadership on corporate governance issues in developing countries.
• Global leadership. In addition to working directly with client companies, IFC plays a
leading role in the global policy dialogue on corporate governance and provides technical
assistance to regulators, stock markets and others. In the former Soviet Union, China, the
Middle East and elsewhere, IFC manages a set of large donor-funded technical assistance
projects. IFC helps bring together corporate governance professionals worldwide. It co-
sponsored the OECD Roundtables in Latin America and Eastern Europe and helped
establish networks of Institutes of Directors in East Asia, Central and Eastern Europe,
and Latin America. IFC has convened meetings of international portfolio investors
representing more than $3 trillion with local business leaders in Brazil, Russia and China
to discuss what governance changes are needed to attract more capital.

Sustainability and Corporate Governance

• Corporate governance is one of the pillars of IFC's focus on sustainability following


environmental and social sustainability. Better corporate governance increases the
likelihood that the enterprise will satisfy the legitimate claims of all stakeholders and
fulfill its environmental and social responsibilities. Accordingly, it contributes to the
long-term, sustainable growth of client companies. A company that is well-governed is
one that is accountable and transparent to its shareholders and other stakeholders (such as
employees, creditors, customers and the wider society).

1.a] Explain the concept of Corporate Governance

Corporate governance is the system by which business corporations are directed


and controlled. The corporate governance structure specifies the distribution of
rights and responsibilities among different participants in the corporation, such as,
the board, managers, shareholders and other stakeholders, and spells out the rules
and procedures for making decisions on corporate affairs. By doing this, it also
provides the structure through which the company objectives are set, and the
means of attaining those objectives and monitoring performance''.
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2. b ]Why has it become necessary for business houses to have good Corporate
Governance?
THE ''CG'' HELPS THE OPERATION WITH ITS GUIDELINES.

a) Assist the COS. to achieve its objectives

b) Uphold the Rule of Law and respect for human rights solely in public interest.
Maintain the highest standards of probity and integrity.

c) Conduct themselves such that public feels that decisions taken on


recommendations made are objective, transparent, and not calculated to promote
improper gains for anyone. This is particularly significant to the customers internal
and external.

d) Should not seek to frustrate or undermine policies, decisions and actions taken in
the public interest by the management by declining or abstaining from action
which flows from the management decision. Where following the instructions of
the superior authority would appear to conflict with the exercise of impartial
professional judgement or affect the efficient working of the enterprise, set out
points of disagreement clearly in writing to the superior authority or seek explicit
written instructions.

e) If he or she is required by superior authority to act in a manner which is illegal or


against prescribed rules and regulations, or if any legal infringement comes to his
or her notice, he or she should decline to implement the instruction, and would
also have a right to bring the facts to the notice of Chairman / Managing Director
or Secretary of the co. It shall be incumbent to examine the
issue carefully and take action appropriately.

f) The religion, region, caste, language will have no


influence on the working in his / her official capacity.
Conflict of interest and peer pressure

a) Refrain from decisions where they have reason to believe that they are
calculated
to benefit any particular person or party at the expense of the public interest.
b) Disclose any clash of interest when there is conflict between public and private
interest, or he / she is likely to benefit from any act of omission or commission
while discharging his / her functions.
c) Be alert to any actual or potential conflict of interest, financial or otherwise, and
disclose this to their superiors, whether the conflict covers them or their family
members.
d) Maintain independence, dignity and impartiality by not approaching politicians
and outsiders in respect of service matters or private benefit. Exercise peer
pressure to dissuade those who do so within the organisation and set in motion
disciplinary proceedings against such persons.

Accountability and responsiveness to the public


a) Practise accountability to the people in terms of quality of service, timeliness,
courtesy, people orientation and readiness to encourage participation of, and
form partnership for responsive management.
b) Be consistent, equitable and honest in treatment of public, particularly weaker
sections of society and not even be or appear to be unfair or discriminatory.
Decision in pursuit of discretionary powers should be justifiable on the basis of
non arbitrary and objective criteria.
c) Accept the obligation to recognise and enforce customer’s right for speedy
redressal of grievances and commit themselves to provide services of declared
quality and standard to customers.
d) Respect right of public to information on all activities and transactions of the
organisations except where they are debarred in the public interest from
releasing information by provisions of law or by valid instructions.

Concern for value of public asset and funds


Avoid wastage, extravagance and ensure effective and efficient use of the money
within their control. In cases of disputes or grievances, make efforts to resolve them
quickly. No
unlawful stoppage or disruption of work or damage to assets of the CO. should be
resorted to.

Non abuse of official position


Make decisions on merits and not use the official position to influence any person to
enter into financial or other arrangements with them or with any one else; or, obtain
a benefit
for themselves or for someone else, in financial or some other forms.

Continuous improvement through professionalism and teamwork


Continuously upgrade his /her skills and knowledge, strive for creativity and
innovation
and nurture values of team working and harmony. Promote and exhibit public and
private
conduct in keeping with appropriate behaviour and standards of excellence and
integrity.

Support the efforts of the juniors to resist wrong or illegal directives and assist in
abiding by the
Code of Ethics. Reward good work and punish any dereliction of duty and
obligations based on
objective and transparent criteria.

Key governance issues include, environmental management, stakeholder


engagement, labour standards, employee and community relations, social equity,
responsible sourcing and human rights.
CG is not only about fulfilling a duty to society; it should also bring competitive
advantage. Through an effective CG programme, companies can:
improve access to capital
sharpen decision-making and reduce risk
enhance brand image
uncover previously hidden commercial opportunities, including new markets
reduce costs
attract, retain and motivate employees
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THERE IS Diversity of Perspectives among the organizations.
The following summaries of perspectives of different organizations serve to
indictate the diversity of views on CG that exist
corporate governance and management practices,
community involvement,
human resource management practices,
enviornment, health and safety,
human rights
employee relations
community development
environmental stewardship
international relationships
marketplace practices
fiscal responsibility and accountability
human rights
employee rights
environmental protection
supplier relations
community involvement
stakeholder rights and
CG performance monitoring and assessment.
disclosure of material information
employment and industrial relations
environmental management
bribery
competition
consumer interests
science and technology diffusion, and
taxation.
business ethics
community investment
environment
governance and accountability
human rights
marketplace
mission, vision and values
workplace
social responsibility integrated management
social responsibility reporting and auditing
quality in work
social and eco labels
socially responsible investment
protecting health and safety of workers
not engaging in bribery or corruption
not using child labour
protecting the environment
making profit and paying taxes
treating employees fairly
providing quality products at lowest price
providing secure jobs
applying universal standards across the world
responding to public concerns and viewpoints
reducing human rights abuses
increasing economic stability
supporting charities and communities
solving social problems
supporting progressive government policies
the workplace (health & safety, wages and benefits, non-discrimmination, training,
child labour, etc..)
human rights
suppliers, and
products and services.
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2 A. Identify the characteristics of a dynamic environment and discuss the different
strategic alternatives available for a firm in such an environment.

THE FIVE MAJOR CHARACTERISTICS ARE


1.UNPREDICTABILITY.
2.ASYNCHRONOUS
3.CONCURRENT
4.VARYING PRIORITY
5.LIMITED RESPONSE TIME.
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2 B. discuss the different strategic alternatives available for a firm in such an
environment.
FOR A FIRM, UNDER SUCH A SITUATION ,
THE OPTIONS ARE
1.stay put and defend.
2.go for the results, at all cost.
3. self adapt / self organize/solve multiple multiple tasks and get the results.

4. PLAN AND PROGRESS.


Consider these five principles as a single entity composed of five complementary
and interconnected
sets of activities, each balancing the other.
• Implementation of any one principle and its impact on project success depends on
the
implementation of all the others. To compensate for inability to fully adhere to a
principle, be
prepared to modify the implementation of the others as well as adjust project
expectations.
• Embrace and apply these principles as general guidelines that must be tailored
to each unique context of the project (e.g., stability of objectives, speed, task’s
complexity,
organizational culture, top management support, team members’ experience and
skills).

1.PLANNING & CONTROL


1. Plan and Control to Accommodate Change
1.1. Adopt a learning-based planning mind-set: start
by defining project objectives that are dictated by
customer’s needs, however, don’t finalize them
before you quickly explore the means and the
solutions.

1.2. Start planning early and employ an evolving


planning and control process: continuously and
throughout project life collect feedback on
changes in the environment and in planning
assumptions, and on project performance.

1.3. Use an appropriate amount of redundancy to


contain the impact of uncertainty and enhance
the stability of the plan: add reserves; loosen the
connections between uncertain tasks; prepare
contingency plans for extremely uncertain and
crucial tasks.
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2.IMPLEMENTATION
2. Create a Results-Oriented Focus
2.1. Create and maintain a focus; decide what NOT to do.

2.2. Right from the beginning and throughout, focus


on results—both long-term and short-term. In
particular, prepare tangible intermediate products
(e.g., prototypes) that provide you rich and quick
feedback and that the customer can easily understand
and assess.

2.3. Develop a pragmatic mode of operation: invest in


planning yet be ready to respond swiftly to
frequent, unanticipated events; identify areas
where the search for optimal solutions is worthwhile,
but for the rest of the project, be ready to
embrace “good enough” solutions; for repetitive
activities or critical areas (i.e., safety), employ
formal/standard work processes, otherwise,
employ those that are informal or ad hoc.
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3.ATTITUDE
3. Develop a Will to Win
3.1. Develop a sense of a mission and “own” the
project. (When needed, engage in politics and
work hard to sell your project).

3.2. When necessary, challenge the status quo and be


willing to take calculated risks.
3.3. Persevere; keep trying until you get it right. Yet,
know when it is time to change course or retreat.
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4.PEOPLE & ORGANIZATION
4. Collaborate through Interdependence and Trust
4.1. Take recruiting very seriously and spend as much
energy as possible on getting the right people.

4.2. Develop trust-based teamwork and make sure


that team members feel dependent upon each
other and share the conviction that they are
mutually responsible for project results.

4.3. Throughout project life, assess team functioning,


ensure its alignment on project objectives, and
renew its energy.
------------------------------------
5.COMMUNICATION
5. Pull and Push Information Intensively
5.1. Frequently and vigorously pull and push (ask for
and provide) information within and across
functions and teams, including all project stakeholders.

5.2. Employ multiple communication mediums; in


particular, extensive frequent face-to-face communication
and modern information technology.

5.3. Adopt a moving about mode of communication.


(Moving about helps you affect project performance
by better understanding what is going on
and by influencing people’s behavior in a timely,
natural, and subtle way.)
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3. Discuss the various steps involved in developing R & D strategy.

R&D derives its existence from different disciplines, and four major areas can be
identified as being subjected to change in R&D - organization, technology, strategy,
and people - where a process view is used as common framework for considering
these dimensions.
1.Business strategy is the primary driver of R&D initiatives and the other
dimensions are governed by strategy's encompassing role.
2.The organization dimension reflects the structural elements of the company, such
as hierarchical levels, the composition of organizational units, and the distribution of
work between them.
3.Technology is concerned with the use of computer systems and other forms of
communication technology in the business. In R&D, information technology is
generally considered as playing a role as enabler of new forms of organizing and
collaborating, rather than supporting existing business functions.
4. The people / human resources dimension deals with aspects such as education,
training, motivation and reward systems. The concept of business processes -
interrelated activities aiming at creating an value added output to a customer - is
the basic underlying idea of R&D . These processes are characterized by a number
of attributes: Process ownership, customer focus, value-adding, and cross-
functionality.

Methodology R&D PROCESS/PRODUCT


Envision new processes/ concepts
Secure management support
Identify all opportunities
Identify enabling technologies
Align with CORPORATE STRATEGY
Initiating change
Set up R&D team
Outline performance goals
Process diagnosis
Describe existing processe/PRODUCTS
Uncover CONTENTS in existing processes /PRODUCTS.
Process/PRODUCT/ redesign
Develop alternative process/PRODUCTS scenarios
Develop new process/PRODUCT design
Design HR architecture [PEOPLE/ KNOWLEDGE ETC]
Select IT platform
Develop overall BLUE PRINT and gather feedback
Reconstruction
Develop/install solution
Establish process/PRODUCT changes
Process/PRODUCT monitoring
Performance measurement, including time, quality, cost, IT performance
Link to continuous improvement
-> Loop-back to diagnosis.
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Corporate governance is most often viewed as both the structure and the relationships
which determine corporate direction and performance. The board of directors is typically
central to corporate governance. Its relationship to the other primary participants,
typically shareholders and management, is critical. Additional participants include
employees, customers, suppliers, and creditors. The corporate governance framework
also depends on the legal, regulatory, institutional and ethical environment of the
community. Whereas the 20th century might be viewed as the age of management, the
early 21st century is predicted to be more focused on governance. Both terms address
control of corporations but governance has always required an examination of
underlying purpose and legitimacy. - - James McRitchie, 8/1999

Corporate governance is a field in economics that investigates how to


secure/motivate efficient management of corporations by the use of incentive
mechanisms, such as contracts, organizational designs and legislation. This is often
limited to the question of improving financial performance, for example, how the
corporate owners can secure/motivate that the corporate managers will deliver a
competitive rate of return. (Mathiesen, 2002)

The system by which companies are directed and controlled. (Sir Adrian Cadbury, The
Committee on the Financial Aspects of Corporate Governance)

"Corporate Governance is concerned with holding the balance between economic and
social goals and between individual and communal goals. The corporate governance
framework is there to encourage the efficient use of resources and equally to require
accountability for the stewardship of those resources. The aim is to align as nearly as
possible the interests of individuals, corporations and society" (Sir Adrian Cadbury in
'Global Corporate Governance Forum', World Bank, 2000)

The process by which corporations are made responsive to the rights and wishes of
stakeholders. (Demb and Neubauer, The Corporate Board: Confronting the Paradoxes)

Corporate governance is about how companies are directed and controlled. Good
governance is an essential ingredient in corporate success and sustainable economic
growth. Research in governance requires an interdisciplinary analysis, drawing above
all on economics and law, and a close understanding of modern business practice of
the kind which comes from detailed empirical studies in a range of national systems.
- Simon Deakin, Robert Monks Professor of Corporate Governance

Corporate governance is what you do with something after you acquire it. It's really that
simple. Most mammals do it. (Care for their property.) Unless they own stock. [She
continues:] ... it is almost comical to suggest that corporate governance is a new or
complex or scary idea. When people own property they care for it: corporate
governance simply means caring for property in the corporate setting. - Sarah Teslik,
former Executive Director of the Council of Institutional Investors

Corporate governance describes all the influences affecting the institutional processes,
including those for appointing the controllers and/or regulators, involved in organizing
the production and sale of goods and services. Described in this way, corporate
governance includes all types of firms whether or not they are incorporated under civil
law.
- Shann Turnbull

Corporate governance is about "the whole set of legal, cultural, and institutional
arrangements that determine what public corporations can do, who controls them, how
that control is exercised, and how the risks and return from the activities they undertake
are allocated."
- Margaret Blair, Ownership and Control: Rethinking Corporate Governance for the
Twenty-First Century , 1995.

Corporate governance is the relationship among various participants [chief executive


officer, management, shareholders, employees] in determining the direction and
performance of corporations"
- Monks and Minow, Corporate Governance, 1995.

Corporate governance deals with the way suppliers of finance assure themselves of
getting a return on their investment.
- Shleifer and Vishny, 1997

Corporate governance is about how suppliers of capital get managers to return profits,
make sure managers do not misuse the capital by investing in bad projects, and how
shareholders and creditors monitor managers.
- American Management Association

Corporate governance is the relationship between corporate managers, directors and


the providers of equity, people and institutions who save and invest their capital to earn
a return. It ensures that the board of directors is accountable for the pursuit of corporate
objectives and that the corporation itself conforms to the law and regulations.
- International Chamber of Commerce

The relationship between the shareholders, directors and management of a company,


as defined by the corporate charter, bylaws, formal policy and rule of law.
- The Corporate Library

Corporate governance is the relationship among various participants in determining the


direction and performance of corporations. The primary participants are: shareholders;
company management (led by the chief executive officer); and the board of directors.
- CalPERS

Corporate governance is the method by which a corporation is directed, administered or


controlled. Corporate governance includes the laws and customs affecting that
direction, as well as the goals for which the corporation is governed. The principal
participants are the shareholders, management and the board of directors. Other
participants include regulators, employees, suppliers, partners, customers, constituents
(for elected bodies) and the general community. - Wikipedia

The set of obligations and decision-making structures that shape 'the complex set of
constraints that determine the profits generated by the firm and shape the exp post
bargaining over those profits.
- Stijn Claessens
Where the political scene is capital versus labor, "the investor coalition defined
corporate governance in terms of 'meeting the challenge of financial globalization,'
adherence to the OECD Principles, fulfilling 'international standards of governance in
the global competition for capital.'"

From a labor power position, "blockholders and foreign portfolio investors were
castigated as selfish oligarch in league with the heartless IMF and the faceless gnomes
of Zurich."

Those favoring the corporatist compromise made much of managers and workers
"being in the 'same boat' together, of corporate governance choices that ensured that
firms 'served the nation' in a 'stable' economy - with owners dismissed as oligarchs or
'speculators.'"

Countries shifting transparency coalitions and managerism alignment "witnessed


predictable invocations of corporate governance that protected 'the little guy, ' the
individual investor,' the widow and orphans," such as speeches by U.S. SEC
commissioners.

"Meanwhile across the alignment divide, managers compete to hijack the notion of
corporate governance for their own purpose...'building shareholder value."

As Gourvevitch and Shinn, quoted in the above several paragraphs, note in their book
Political Power and Corporate Control: The New Global Politics of Corporate
Governance:

"Corporate governance - the authority structure of a firm - lies at the heart of the most
important issues of society"… such as “who has claim to the cash flow of the firm, who
has a say in its strategy and its allocation of resources.” The corporate governance
framework shapes corporate efficiency, employment stability, retirement security, and
the endowments of orphanages, hospitals, and universities. “It creates the temptations
for cheating and the rewards for honesty, inside the firm and more generally in the body
politic.” It “influences social mobility, stability and fluidity… It is no wonder then, that
corporate governance provokes conflict. Anything so important will be fought over… like
other decisions about authority, corporate governance structures are fundamentally the
result of political decisions.”

"Shareholder value is partly about efficiency. But there are serious issues of distribution
at stake - job security, income inequality, social welfare. There may be many ways to
organize an efficient firm."

Corporate governance refers to how a corporation is governed. Who has the authority to
make decisions for a corporation within what guidelines? This is the corporation’s
governance. In the United States, the governance of corporations is largely determined
by state laws of incorporation. State laws typically say that each corporation must be
"managed by or under the direction of its boards of directors." More specifically,
corporate boards of directors are responsible for certain decisions on behalf of the
corporation. At a minimum, as stated in most state statutes of incorporation, director
approval is usually required for amending corporation bylaws, issuing shares, or
declaring dividends. Also, the board alone can recommend that shareholders vote to
amend articles of incorporation, dissolve the corporation, or sell the corporation. No
other person or entity except the board can take these actions. That is why discussions
of "corporate governance" often focus on boards. For more on basic corporate
governance, see A Practical Guide, NACD. For a guide to the role of a director, see
Report of the NACD Blue Ribbon Commission on Director Professionalism. (NACD,
2005)

"Corporate governance is not an abstract goal, but exists to serve corporate purposes
by providing a structure within which stockholders, directors and management can
pursue most effectively the objectives of the corporation." - US Business Round Table
White Paper on Corporate Governance September 1997

Corporate governance by definition rests with the conduct of the board of directors, who
are chosen on behalf of the shareholders. - Corporate Governance Forum of Japan
1997

The in which a company organizes and manages itself to ensure that all financial
stakeholders receive their fair share of a company's earnings and assets. Standard and
Poor's

Corporate governance is the system by which companies are directed and managed. It
influences how the objectives of the company are set and achieved, how risk is
monitored and assessed, and how performance is optimised. Good corporate
governance structures encourage companies to create value (through enterpreneurism,
innovation, development and exploration) and provide accountability and control
systems commensurate with the risks involved. (ASX Principles of Good Corporate
Governance and Best Practices Recommendations, 2003)

Corporate governance is the process carried out by the board of directors, and its
related committees, on behalf of and for the benefit of the company's stakeholders, to
provide direction, authority, and oversights to management.

Defining good corporate governance


By Jon Hartzell

We are currently living through a tidal wave of interest in the forces of corporate governance.
This has much to do - at least in the United States - with the prominent and increasingly activist
role of institutional fund investors as corporate shareholders, bent on securing top performance
from their investments. An aggressive shareholder demand for corporate responsiveness has
spilled over into other countries, as fund managers have diversified their portfolios
internationally and set an example for local investors elsewhere.

But there is also an international public interest in good corporate governance that intersects in
many ways with what the investor and corporate communities are pursuing. This is especially the
case for financial institutions and their public sector supervisors, regardless of whether those
institutions are widely-held stock companies of interest to professional asset managers.

Internationally active financial institutions find themselves particularly challenged by the need to
promote a corporate governance "tidal wave". First, they must work hard to understand, and
adapt strategies and operations to a great diversity of national practices, traditions, laws,
regulations, and political and market structures. And second, their possibilities for implementing
an American style of "good corporate governance" are often constrained in a given context or a
given country by legal, cultural, economic, or even purely logistical factors.

Some institutions do a better job of pressing ahead than others. But all of them, because they
must have some kind of dialogue with their supervisors, shareholders, and other "stakeholders",
have the possibility to accelerate international awareness of good corporate governance practice.
Over time, this awareness can force public authorities and business leaders in different countries
to recognize where their policy and practice may fall short, and give them incentives to do better.

What is corporate governance?


Despite all the discussion and analysis that we encounter these days, succinct definitions of
corporate governance are not easily found. Before offering one definition - let me precede it with
a brief bit of history.

According to Norman Veasey, Chief Justice of the State of Delaware, the concept of corporate
governance began in the US early in the 20th Century when a number of states, most notably
Delaware, passed "enabling statutes" known as general corporation laws. These created a legal
framework in which stockholders invested in corporations - becoming owners - which were
separated from the managers of those corporations. Boards of directors were formed which
included managers and the officers they hired. Over time it was held that boards had fiduciary
duties of loyalty and care in the wise management of the corporation in the best interests of its
owners. A key element in this was the independence of directors from undue influence by
interested parties at the expense of the corporation's welfare.

In the 1930s and in the aftermath of the stock market crash, there was something of a public
debate over the evident inability of shareholders, often small and widely dispersed, to assure that
boards and their appointed managers were in fact operating in the best interests of owners. Flash
forward to the 1980s and you will recall, perhaps vividly, the climate of excitement and
controversy surrounding the wave of hostile takeovers, leveraged buyouts, management buyouts,
junk bond financing, "poison pills", and the general merger frenzy of those days. With
shareholder interests again at issue, the corporate governance debate revived and large
institutional investors began to be heard.

In the 1990s, it has been primarily these institutional investors in the form of pension and
retirement funds - along with the legal, accounting, and consulting professions - who have driven
the development of concepts of corporate control and accountability. Their main focus has been
on the role of the board of directors and more particularly, those directors who are not also senior
executives of the corporation, ie, the outside directors.

At the same time, for US banking institutions and their supervision by public sector regulatory
authorities, there has been a very distinct shift over the last two decades to a supervisory
approach based effectively on corporate governance - the accountability by boards of directors
for the condition and performance of the bank. While the ultimate objectives of bank supervisors
are somewhat different from those of bank shareholders, many of the precepts and tools are the
same.

There are also other groups of interested parties, in addition to shareholders and regulatory
authorities, who have a stake in the sound management of a corporation. These may include
creditors, employees, customers (including, for banks, the special category of depositors),
government policy makers, and even the general public. All of these groups are represented by
the term "stakeholders", those whose interests could be materially affected by good or bad
corporate governance.

With so many groups and different viewpoints, trying to find a comprehensive definition of
corporate governance may be dubious. Nevertheless, I prefer one suggested by former colleagues
on the staff of the Basle Committee on Banking Supervision, the international committee of bank
regulatory authorities sponsored by the Bank for International Settlements. In their formulation,
corporate governance is defined as "the system of rights, processes, and controls established
internally and externally over the management of a business entity with the objective of
protecting the interest of all stakeholders".

That may seem too broad to be practical, but it does convey the reality that different stakeholder
groups will focus on different criteria and elements in deciding what makes up good corporate
governance as they see it. For example, shareholders probably attach the greatest importance to
maximizing the market value of company shares on a sustained basis. They will look for devices,
primarily strong board oversight of management, the independence of boards from the influence
of insider and other special interests, and accessibility of boards to shareholders, to protect that
possibility. Policies to control excessive board and management compensation also play an
important role here. Of course, not all enhancements to a corporation's intrinsic or book value are
necessarily reflected in the market price of its shares - which can present a shareholder-conscious
management with difficult business decisions from time to time.

A bank regulator's corporate governance view, on the other hand - while it might include a
secondary interest in the share price in terms of an institution's greater or lesser ability to raise
capital, or how the market perceives the bank's quality - is relatively more focused on bank
policy and operational issues. These might include whether there is demonstration of a strong
board commitment to effective risk management and internal control systems, or whether the
board has the will and skill to correct serious problems, once detected. This supervisory point of
view is well represented in the excellent corporate governance guidelines from the BNA. You
may have noticed that, as a supervisory policy document, the guidance notes make very few
references to shareholder issues.

Yet another perspective comes from the general public, which wants to be sure the corporation
treats customers fairly and has sensitivity to its impact - socially, environmentally, fiscally - on
the local community. And corporate employees, for their part, want assurances the company will
compensate them properly, provide opportunities for advancement, offer training and career
development assistance, and help with their retirement planning.

All of these responses to stakeholder expectations or needs are examples of some kind of good
corporate governance. They actually appear in some formal statements of corporate government
policy by large business entities like Philip Morris and General Motors. They make the point that
"corporate governance" is a fairly elastic concept, with a multitude of practices and guidelines
that respond to the concerns of particular groups.

At the same time, there are elements that can be distilled from the various concepts and are
commonly recognized, at least in the US, as indicating a company's strong commitment to good
corporate governance. These include:

 A well-informed, energetic board of directors, with a majority of outside (one hopes,


independent) members, preferably compensated in company stock rather than cash, and with the
information resources and the confidence to give proper direction to the CEO and other senior
company management.

 Transparent organizational structures and business processes, including, to the extent


possible, transparency in the corporate decision-making process. This can be particularly
important for officer and director selection and compensation.

 Integrity of strategies, operating systems, and controls: things like formal "bright line"
policies, criteria, and guidelines, a comprehensive Management Information System, a reliable
process for management to detect, evaluate, and correct both strategic and operational problems,
a sound risk management approach, and a strong internal audit program.

 Full, accurate, and timely financial disclosure - which in the US would mean "in conformity
with US Generally Accepted Accounting Principles", and outside the US, disclosure at least up
to International Accounting Standards.

 A policy and record of "corporate good citizenship" confirming the company's ethical and
social awareness.
 A strong corporate governance culture, probably formally articulated in a company statement
of "what we stand for" and perhaps a code of corporate ethics.

 A commitment to the creation and preservation of "shareholder value" with various programs
and benchmarks that enable measurement of progress (eg, ROA and ROE targets, operating cost
ratio targets).

 An appropriate level of responsiveness and accountability to shareholders, in the form of, for
example, some - but not disruptive - access for shareholders to directors, and possibly to senior
management, as well as opportunities for meaningful shareholder participation in voting on
company policies and director/CEO selection.

All of this can reduced to one sentence: although good corporate governance generally begins
with a strong, independent board of directors, there is a lot more to the story, in terms of policies,
systems, and performance.

The views expressed here are solely those of the author and do not express those of Dresdner
Kleinwort Wasserstein, where Jon Hartzell is the Director of Corporate and External Affairs.
Hartzell previously worked as a Deputy Comptroller at the Office of the Comptroller of the
Currency in Washington, DC.

Benefits and Limitations


The concept of corporate governance has been attracting public attention for quite some time. It
has been finding wide acceptance for its relevance and importance to the industry and economy.
It contributes not only to the efficiency of a business enterprise, but also, to the growth and
progress of a country's economy. Progressively, firms have voluntarily put in place systems of
good corporate governance for the following reasons:

 Several studies in India and abroad have indicated that markets and investors take notice
of well managed companies and respond positively to them. Such companies have a
system of good corporate governance in place, which allows sufficient freedom to the
board and management to take decisions towards the progress of their companies and to
innovate, while remaining within the framework of effective accountability.
 In today's globalised world, corporations need to access global pools of capital as well as
attract and retain the best human capital from various parts of the world. Under such a
scenario, unless a corporation embraces and demonstrates ethical conduct, it will not be
able to succeed.
 The credibility offered by good corporate governance procedures also helps maintain the
confidence of investors – both foreign and domestic – to attract more long-term capital.
This will ultimately induce more stable sources of financing.
 A corporation is a congregation of various stakeholders, like customers, employees,
investors, vendor partners, government and society. Its growth requires the cooperation of
all the stakeholders. Hence it imperative for a corporation to be fair and transparent to all
its stakeholders in all its transactions by adhering to the best corporate governance
practices.
 Good Corporate Governance standards add considerable value to the operational
performance of a company by:

1. improving strategic thinking at the top through induction of independent directors


who bring in experience and new ideas;
2. rationalizing the management and constant monitoring of risk that a firm faces
globally;
3. limiting the liability of top management and directors by carefully articulating the
decision making process;
4. assuring the integrity of financial reports, etc.

It also has a long term reputational effects among key stakeholders, both internally and
externally.

 Also, the instances of financial crisis have brought the subject of corporate governance to
the surface. They have shifted the emphasis on compliance with substance, rather than
form, and brought to sharper focus the need for intellectual honesty and integrity. This is
because financial and non-financial disclosures made by any firm are only as good and
honest as the people behind them.
 Good governance system, demonstrated by adoption of good corporate governance
practices, builds confidence amongst stakeholders as well as prospective stakeholders.
Investors are willing to pay higher prices to the corporates demonstrating strict adherence
to internally accepted norms of corporate governance.
 Effective governance reduces perceived risks, consequently reduces cost of capital and
enables board of directors to take quick and better decisions which ultimately improves
bottom line of the corporates.
 Adoption of good corporate governance practices provides long term sustenance and
strengthens stakeholders' relationship.
 A good corporate citizen becomes an icon and enjoy a position of respects.
 Potential stakeholders aspire to enter into relationships with enterprises whose
governance credentials are exemplary.
 Adoption of good corporate governance practices provides stability and growth to the
enterprise.

Effectiveness of corporate governance system cannot merely be legislated by law neither can any
system of corporate governance be static. As competition increases, the environment in which
firms operate also changes and in such a dynamic environment the systems of corporate
governance also need to evolve. Failure to implement good governance procedures has a cost in
terms of a significant risk premium when competing for scarce capital in today's public markets.