Effect of corporate governance on the

performance of an organisation
The final project submitted on complete fulfillment of the course, human resource management
during the academic session 2018-2019, Semester-1.

Submitted by

Name: Madhavi Bohra

Roll No.:2023

Class: BBA LL.B. (H)

Submitted to

Ms. Kirti

Faculty of human resource management

September, 2018

CHANAKYA NATIONAL LAW UNIVERSITY, NYAYA NAGAR, MITHAPUR,

PATNA- 800001.

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 ACKNOWLEDGEMENT

I would like to thank my faculty Ms. Kirti whose assignment of such a relevant
topic made me work towards knowing the subject with a greater interest and
enthusiasm and moreover he guided me throughout the project.

I owe the present accomplishment of my project to my friends, who helped me

immensely with sources of research materials throughout the project and without
whom I couldn’t have completed it in the present way.

I would also like to extend my gratitude to my parents and all those unseen hands
who helped me out at every stage of my project.

THANK YOU!
NAME-Madhavi Bohra
ROLL NO- 2023
1st Semester (bba.llb)

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 DECLARATION

I hereby declare that the work reported in this project report entitled “effect of corporate

governance on performance of an organisation” submitted at Chanakya National Law

University, Patna is an outcome of my work carried out under the supervision of Ms. Kirti. I

have duly acknowledged all the sources from which the ideas and extracts have been taken. To

the best of my understanding, the project is free from any plagiarism issue.

Madhavi Bohra

DATE- 20-09-2018

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Table of Contents
1 Introduction- ................................................................................................................................... 6
1.1. Meaning and concept- ............................................................................................................ 6
1.2 Definitions ............................................................................................................................... 6
2 need of corporate governance- ...................................................................................................... 8
3 Pillars of good corporate governance-............................................................................................ 9
1.1. Accountability: ........................................................................................................................ 9
3.2 Fairness: ................................................................................................................................ 10
3.3 Transparency......................................................................................................................... 10
3.4 Independent Assurance: ....................................................................................................... 10
3.5 Leadership: ............................................................................................................................ 10
3.6 Stakeholder engagement: ..................................................................................................... 10
4 Benefits of corporate governance- ............................................................................................... 11
4.1 Excellent management ......................................................................................................... 11
4.2 High level of transparency .................................................................................................... 11
4.3 Stakeholder benefits ............................................................................................................. 11
4.4 Reputation and recognition .................................................................................................. 11
4.5 Reduced wastage .................................................................................................................. 12
4.6 Reduced risks, mismanagement and corruption .................................................................. 12
4.7 Economic benefit .................................................................................................................. 12
5 Corporate governance control mechanism- ................................................................................. 12
5.1 Internal corporate governance mechanism- ........................................................................ 12
5.1.1 The Board of Directors: ................................................................................................ 12
5.1.2 Board Committees ........................................................................................................ 12
5.1.3 Financial Statements and Auditors .............................................................................. 13
5.2 External Corporate Governance Mechanisms- ..................................................................... 13
5.2.1 The Financial Market .................................................................................................... 13
5.2.2 The Market of Goods and Services: ............................................................................. 13
5.2.3 The Labour Market for Managers ................................................................................ 14
6 Problems of good governance in India- ........................................................................................ 14
7 Conclusion-.................................................................................................................................... 14
8 Bibliography- ................................................................................................................................. 15
8.1 Websites- .............................................................................................................................. 15
8.2 books-.................................................................................................................................... 15

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RESEARCH METHODOLOGY:

This project would follow doctrinal methodology. Descriptive and analytical research
methodology will be followed by researcher in this project. Primary and secondary sources
have been helpful in gathering relevant information regarding project. Secondary sources like
books and articles which are available online have been used. Books suggested by faculty have
also been referred to have a detailed idea about subject matter and to give a firm structure to
project. Footnotes have also been given to acknowledge wherever necessary.

Method of Writing:

The method of writing followed in the course of this research project is primarily analytical.

Mode of Citation:

The researchers have followed a uniform mode of citation throughout the course of this project.

Aims and objectives:

1.to understand the need and importance of corporate governance in every kind of organisation.

2.to understand the role of members of organisation in corporate governance.

3.to find the situation of corporate governance in Indian organisations.

Research questions:

1. how does corporate governance beneficial for an organisation on its performance?

2.what are the control mechanism of corporate governance?

3. how to face the problems that may arise during its performance?

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 Hypothesis:

the researcher believes that corporate governance is very important in every organisation as it
is very beneficial which leads to development and growth of organisation. The manager must
ensure the good governance for effectiveness and efficient performance of an organisation.
Poor governance may lead failure in an organisation therefore, control mechanism of corporate
governance should be used properly.

1 Introduction-

1.1. Meaning and concept-

Corporate governance refers to the accountability of the Board of Directors to all
stakeholders of the corporation i.e. shareholders, employees, suppliers, customers and society
in general; towards giving the corporation a fair, efficient and transparent administration.

Corporate Governance refers to the way a corporation is governed. It is the technique by

which companies are directed and managed. It means carrying the business as per the
stakeholders’ desires. It is actually conducted by the board of Directors and the concerned
committees for the company’s stakeholder’s benefit. It is all about balancing individual and
societal goals, as well as, economic and social goals.

Corporate Governance is the interaction between various participants (shareholders, board of

directors, and company’s management) in shaping corporation’s performance and the way it
is proceeding towards. The relationship between the owners and the managers in an
organization must be healthy and there should be no conflict between the two. The owners
must see that individual’s actual performance is according to the standard performance.
These dimensions of corporate governance should not be overlooked.
1.2 Definitions
Following are the definition given by some organisations:

• “Corporate governance means that company managers its business in a manner that is
accountable and responsible to the shareholders. In a wider interpretation, corporate
governance includes company’s accountability to shareholders and other stakeholders such as
employees, suppliers, customers and local community.” – Catherwood.

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• “Corporate governance is the system by which companies are directed and controlled.” – The
Cadbury Committee (U.K.)

Corporate governance is more than company administration. It refers to a fair, efficient and
transparent functioning of the corporate management system.

Corporate governance refers to a code of conduct; the Board of Directors must abide by;
while running the corporate enterprise.

Corporate governance refers to a set of systems, procedures and practices which ensure that
the company is managed in the best interest of all corporate stakeholders.

The Kumar Mangalam Birla Committee constituted by SEBI has observed that "Strong
corporate governance is indispensable to resilient and vibrant capital markets and is an
important instrument of investor protection. It is the blood that fills the veins of transparent
corporate disclosure and high quality accounting practices. It is the muscle that moves a
viable and accessible financial reporting structure”

N.R. Narayana Murthy Committee on Corporate Governance constituted by SEBI has

observed "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 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."

The Institute of Company Secretaries of India has also defined the term Corporate
Governance as under: "Corporate Governance is the application of best management
practices, compliance or jaw in true letter and spirit and adherence to ethical standards for
effective management and distribution of wealth and discharge of social responsibility for
sustainable development of all stakeholders."
Another comprehensive definition given in the report on corporate governance that was
accepted for implementation by the Singapore Government is that the term refers to the
“process and structure by which the business and affairs of the company are directed and
managed in order to enhance long term shareholder value through enhancing corporate
performance and accountability, whilst taking into account the interests of other stakeholders”.

Thus, in order to get a fair view on the subject we may summarize the Corporate
Governance in a narrow and broad definition. In the narrow sense, corporate governance
involves a set of relationship amongst the company’s management, its board of directors,
its shareholders, its auditors and other stakeholders. These relationships, which involve
various rules and incentives, provide the structure through which the objectives of the
company are set, and the means of attaining these objectives as well as monitoring
performance is determined. Thus, the key aspects of good corporate governance include
transparency of corporate structures and operations; the accountability of managers and
the boards to shareholders; and corporate responsibility towards stakeholders. While
corporate governance essentially lays down the framework for creating long-term trust

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between companies and the external providers of capital, it would be wrong to think that
the importance of corporate governance lies solely in better access of finance.

2 need of corporate governance-

• Wide Spread of Shareholders:

Today a company has a very large number of shareholders spread all over the nation and even
the world; and a majority of shareholders being unorganised and having an indifferent
attitude towards corporate affairs. The idea of shareholders’ democracy remains confined
only to the law and the Articles of Association; which requires a practical implementation
through a code of conduct of corporate governance.

• Changing Ownership Structure:

The pattern of corporate ownership has changed considerably, in the present-day-times; with
institutional investors (foreign as well Indian) and mutual funds becoming largest
shareholders in large corporate private sector. These investors have become the greatest
challenge to corporate managements, forcing the latter to abide by some established code of
corporate governance to build up its image in society.

• Corporate Scams or Scandals:

Corporate scams (or frauds) in the recent years of the past have shaken public confidence in
corporate management. The event of Harshad Mehta scandal, which is perhaps, one biggest
scandal, is in the heart and mind of all, connected with corporate shareholding or otherwise
being educated and socially conscious.
The need for corporate governance is, then, imperative for reviving investors’ confidence in
the corporate sector towards the economic development of society.

• Greater Expectations of Society of the Corporate Sector:

Society of today holds greater expectations of the corporate sector in terms of reasonable
price, better quality, pollution control, best utilisation of resources etc. To meet social
expectations, there is a need for a code of corporate governance, for the best management of
company in economic and social terms.

• Hostile Take-Overs:
Hostile take-overs of corporations witnessed in several countries, put a question mark on the
efficiency of managements of take-over companies. This factors also points out to the need

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for corporate governance, in the form of an efficient code of conduct for corporate
managements.

• Huge Increase in Top Management Compensation:

It has been observed in both developing and developed economies that there has been a great
increase in the monetary payments (compensation) packages of top level corporate
executives. There is no justification for exorbitant payments to top ranking managers, out of
corporate funds, which are a property of shareholders and society.
This factor necessitates corporate governance to contain the ill-practices of top managements
of companies.

• Globalisation:
Desire of more and more Indian companies to get listed on international stock exchanges also
focuses on a need for corporate governance. In fact, corporate governance has become a
buzzword in the corporate sector. There is no doubt that international capital market
recognises only companies well-managed according to standard codes of corporate
governance.

3 Pillars of good corporate governance-

Governance Risk & Compliance- GRC, AML-CTF, Fraud Management Expert and Trainer
The pillars of successful corporate governance are: accountability, fairness, transparency,
assurance, leadership and stakeholder management. All six are critical in successfully
running a entity and forming solid professional relationships among its stakeholders which
include board directors, managers, employees, customers, regulators and most importantly,
shareholders.

1.1. Accountability:
Accountability embraces ownership of strategy and task required to attain organisational
goals. This also means owing reward and risk in clear context of predetermined value
proposition. When the idea of accountability is approached with this positive outlook, people
will be more open to it as a means to improve their performance. This applies from the staff
all the way up to top leadership embracing Risk management within defined formal appetite
for risk. This also include fostering culture of compliance to create real and perceived believe
that the entity is operation within internal and external boundaries.

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 3.2 Fairness:
This means “treating all stakeholders s including minorities, reasonably, equitably and
provide effective redress for violations. Establishing effective communication mechanism is
important in ensure just and timely protection of resource sand people asset as well correcting
of wrongs.

3.3 Transparency:
Transparency “means having nothing to hide” that allows its processes and transactions
observable to outsiders. It also makes necessary disclosures, informs everyone affected about
its decisions. Transparency is a critical component of corporate governance because it
ensures that all of entity’s actions can be checked at any given time by an outside observer.
This makes its processes and transactions verifiable, so if a question does come up about a
step, the company can provide a clear answer

3.4 Independent Assurance:

In progressing transparency, it is important for non-direct actors to obtain confidence that
executive actors are leading the entity towards pre-defined intent and not using it for self and
obtain expert advisory on how applied approached can be improved. Assurance services
provide independent and professional opinions that reduce the information risk (risk that
comes from incorrect information). This independent assurance insures that
(1) the representation or acceptance test results are accurate and provide a fair and equitable
basis for construction acceptance and
(2) quality control testing is accurate and thus will properly indicate process quality.

3.5 Leadership:
Direction “defining and offering leadership on organisation’s agenda within the values
and principles that frame the way business should be done. Those charged with
governance are responsible for these key strategic issues and for proving leadership in
establishing the right culture to drive the performance of the business. Without clear
direction, policy and procedures, the organisation will flounder and likely never to realise
its long-term goals and potential. This should include leadership and core expertise
renewal to both retains knowledge/experience, ensure appropriate representation and
continuity.

3.6 Stakeholder engagement:

Those charged with governance should identify the key stakeholders and how they
interact with the business and how they are engaged with to ensure the best outcome for the
organisation. Stakeholder engagement included in the annual agenda and strategic plan.

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4 Benefits of corporate governance-
A company’s reputation on corporate governance program can be boosted if such company
broadcast its corporate governance policies and detail how they work, as more stakeholders
will be willing to work with such company.1This is realized when most organizations embark
on wealth creation for their shareholders but their contributions to the economy extend well
beyond the return of profit. As such, these organizations can provide employment, purchase
goods and services, support innovation, pay taxes and support various social and charitable
programs. This predominant role which organizations play in the society has led to increased
concerns about the use of power and expectations for the board continues to expand and thus
calling for board to manage integrity as one way of building trust with suppliers, customers
and employees as well as investors. The board can only communicate integrity through
continuous reporting both internally and externally 2. Noticeable progressive results of good
governance are often visible when both the economy and the market are growing.

It is beneficial not only for a company as its stakeholder, but also for the economy as a whole.
The following are some of the benefits that corporate governance offers:

4.1 Excellent management

Company practicing good governance allows people not inked to it to be able to assess its
governance due to transparency.

4.2 High level of transparency

Companies following a set of best practices are encouraged to be highly transparent about their
business.

4.3 Stakeholder benefits

Under corporate governance, companies tend to act in the best of itself and its stakeholders.

4.4 Reputation and recognition

Good governance allows companies to gain the trust of the investors, customers and the
community at large.

1
Ashe-Edmund, 2016.
2
Greggory & Austin, 2014

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4.5 Reduced wastage
Employees that are trained to follow a good ethical practice will avoid excess wastage of
company resources.

4.6 Reduced risks, mismanagement and corruption

An amount of transparency applied in companies following good governance practices has
reduced amount of risks of corruption and mismanagement.

4.7 Economic benefit

A company following a good governance practice will be able to achieve the trust of the
community and thus gaining success in the long run.

5 Corporate governance control mechanism-

5.1 Internal corporate governance mechanism-

Internal mechanisms are the ways and methods used by the firms which help the management
in enhancing the value of shareholders. The constituents of internal mechanisms include
ownership structure, the board of directors, audit committees, compensation board and so on.

5.1.1 The Board of Directors:

they are the backbones of the business. They have more authorities and responsibilities of the
business firm and they keep track on monitoring and controlling all activities of the
management in order to maintain the business performance on the track as well as safeguard
the interest of stakeholders. Moreover, board of directors is accountable legally for the
decisions they make on behalf of their firm and also they are more authorised to hire a new
member or employee for the firm. At the time of auditing, they are highly accountable for the
financial information provided to them concerning with the firm. There are three types of
directors: internal, external and independent directors. Internal directors work within the
organisation, external director’s work from outside business, they work for several companies
on board, independent directors maintain their reputation objectively and present their own
way of decisions.

5.1.2 Board Committees:

Board committees are the additional part of the board of directors. They are involved in
those activities which are assigned by the board of members to them. According to the nature
of business, board committees are regulated by the laws and regulations issued by the

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company. It totally depends on the country’s laws and regulations whether the creation of
these types of committees should be mandatory for the firm or not.

5.1.3 Financial Statements and Auditors:

Financial statements are the information which contains the company data and transactions.
Every company needs to present their financial reports on the quarterly and annual basis and
get them checked with the auditors. The real picture presented by the auditors reveals the true
financial picture of the firm which further becomes the information for the parties involved
with the firm either directly or indirectly. On the basis of these financial statements,
stakeholders create their statements of action towards the firm. In case they found the reports
in positive track, they make up their mind to invest in those firms, on the other side if the
stakeholders find the report in the negative side, it will further hamper their trust level in
favour of the firms.

5.2 External Corporate Governance Mechanisms-

Sometimes internal mechanism lacks in itself while performing the best for the company.
This time external factors play a vital role in controlling the corporate governance mechanism
of the business firm. The constituents of external governance mechanism include market
factors, intermediaries, goods and services prevailing in the market, managers of labour
market etc.

5.2.1 The Financial Market:

Stock market plays a significant role in firm’s ups and downs. There is a direct relation
between the market value of the firm and the efficiency of the managers. In case if the
shareholders start selling the shares of the company due to somehow reason and if the process
is going on in large number further then naturally the market value of the firm starts
declining. This way the company who is losing its market value may become the target of
acquisition with the help of other big company. Due to the threat of acquisition, the
management of the firm can adopt the negative actions like adopting agency costs policy or
any other strategy in order to safeguard their business.

5.2.2 The Market of Goods and Services:

Competition is another factor which leads the business firm. If the society does not like the
products and services offered by a business firm then it becomes natural that their business
starts declining and further it may lead to a reduction in the profits ratio of the business firm.
Thus, company needs to adopt timely researchers and survey in order to tap the resources in
accordance with the market requirements.

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5.2.3 The Labour Market for Managers:
In controlling process, human capital is the concept which can be sometimes controlled and
sometimes not. If the managers are highly conservative and strict to their employees than the
labour market can go in against with the business and may harm the resources of the firm in
order to fulfil their demands. This process needs a proper selection of competent manager
(who controls the lower-class employees) should be done in order to create a proper balance
of coordination between the managers and the employees.

6 Problems of good governance in India-

The prevailing issue behind poor corporate governance mechanism found in Indian corporate
sector is that most of the firms are family structure. Most of the so-called shareholders are
related entities who does not need to enquire about the better governance of the firm.
Therefore, these types of firms need proper monitoring and controlling mechanism in order
create proper governance. Further, the problem exaggerates that as the company has higher
number of relatives in terms of stakeholders and owners, it is certain that the most of the
business transactions can be related to known parties. After research, it is found out that a big
number of Indian listed companies are affiliates or divisions of MNC’s (Multinational
companies). As per the FEMA Act and their regulations, the company must follow all
statutory requirement while making transfers from Parent Company to Division Company.
Here companies try to avoid following that statutory requirement due to having stuck in long
procedures and formalities. All such activities are due to having business transactions with
familiar parties and in order to get potential gains by doing fair dealings with mostly familiar
parties or with businesses of related family members. Such issues undermine the financial
market confidence and moreover, it may harm the process of investment mobility in between
countries. In order to eliminate such malpractices government of India has set the certain
statutory framework which enables in creating a better corporate governance mechanism in
the corporate world.

7 Conclusion-
In summary, the responsibility an individual assumes when he became charged with
governance of an entity is considerable and one that should only be taken with a clear
understanding of, and commitment to, fulfilling this responsibility to the best of their ability
foremost for the stakeholder interest. Having a clear understanding of the principles and
practices of good governance will enhance the performance of both the individual and the
organisation.
Generally speaking, corporate governance is an inevitable topic for companies nowadays.
Investors are more aware of the governance significance on the firms’ performance. A good
corporate governance builds up stakeholders’ confidence and helps them in keeping their
interests safe. This concept is also an important concept for foreign investors as well. It keeps
investors well versed about the various plans and policies, rules and regulations about the
company. Overall, corporate governance is the key to introducing accountability, flexibility,
and transparency in decision making, and other measures of the company which not only

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fosters in safeguarding the stakeholder’s interest but also reflects a positive picture of the
financial performance of the company. Ultimately it helps in enhancing the economic
progress of the country as well.

8 Bibliography-

8.1 Websites-
http://www.yourarticlelibrary.com/business/corporate-governance-business/corporate-governance-
in-india-concept-needs-and-principles/69978

https://www.researchgate.net/publication/267327619_CORPORATE_GOVERNANCE_NOTES

https://www.linkedin.com/pulse/pillars-good-corporate-governance-patrick

8.2 books-
8th edition K. Ashwathapa human resource management.

11th edition international student version by David A. Decenzo, Stephen P. robins and Susan L.
Verhulst.

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