What is Corporate Governance?

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.
Corporate Governance deals with the manner the providers of finance guarantee
themselves of getting a fair return on their investment. Corporate Governance
clearly distinguishes between the owners and the managers. The managers are the
deciding authority. In modern corporations, the functions/ tasks of owners and
managers should be clearly defined, rather, harmonizing.
Corporate Governance deals with determining ways to take effective strategic
decisions. It gives ultimate authority and complete responsibility to the Board of
Directors. In today’s market- oriented economy, the need for corporate governance
arises. Also, efficiency as well as globalization are significant factors urging
corporate governance. Corporate Governance is essential to develop added value to
the stakeholders.
Corporate Governance ensures transparency which ensures strong and balanced
economic development. This also ensures that the interests of all shareholders
(majority as well as minority shareholders) are safeguarded. It ensures that all
shareholders fully exercise their rights and that the organization fully recognizes
their rights.
Corporate Governance has a broad scope. It includes both social and institutional
aspects. Corporate Governance encourages a trustworthy, moral, as well as ethical
environment.
Benefits of Corporate Governance
 1. Good corporate governance ensures corporate success and economic growth.
2. Strong corporate governance maintains investors’ confidence, as a result of
which, company can raise capital efficiently and effectively.
3. It lowers the capital cost.
4. There is a positive impact on the share price.
5. It provides proper inducement to the owners as well as managers to achieve
objectives that are in interests of the shareholders and the organization.
6. Good corporate governance also minimizes wastages, corruption, risks and
mismanagement.
7. It helps in brand formation and development.
8. It ensures organization in managed in a manner that fits the best interests of
all.

Pillars of successful corporate governance

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.

 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
 Fairness: Fairness 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
 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
 Independent Assurance: In progressing transparency it is important for
non-direct actors to obtain confidence that 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). Independent
assurance is the verification by a third party (not directly responsible for QA
and acceptance of the product/deliverable  and/or the reliability of test
results obtained from quality control and acceptance testing. 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.
 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.
 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.

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 – so how do you and your
organisation stack up against this checklist of good governance
Top 5 corporate governance best practices that every Board of Directors can
engage – and that will benefit every company.

1. Build a strong, qualified board of directors and evaluate

performance. Boards should be comprised of directors who are
knowledgeable and have expertise relevant to the business and are qualified
and competent, and have strong ethics and integrity, diverse backgrounds
and skill sets, and sufficient time to commit to their duties. How do you
build – and keep – such a Board?
o Identify gaps in the current director complement and the ideal
qualities and characteristics, and keep an “ever-green” list of suitable
candidates to fill Board vacancies.
o The majority of directors should be independent: not a member of
management and without any direct or indirect material relationship
that could interfere with their judgment.
o Develop an engaged Board where directors ask questions and
challenge management and don’t just “rubber-stamp” management’s
recommendations.
o Educate them. Give new directors an orientation to familiarize them
with the business, their duties and the Board’s expectations; reserve
time in Board meetings for on-going education about the business and
governance matters.
o Regularly review Board mandates to assess whether Directors are
fulfilling their duties, and undertake meaningful evaluations of their
performance. 
 
2. Define roles and responsibilities. Establish clear lines of accountability
among the Board, Chair, CEO, Executive Officers and management: 
o Create written mandates for the Board and each committee setting out
their duties and accountabilities.
o Delegate certain responsibilities to a sub-group of directors. Typical
committees include: audit, nominating, compensation and corporate
governance committees and “special committees” formed to evaluate
proposed transactions or opportunities.
o Develop written position descriptions for the Board Chair, Board
committees, the CEO and executive officers.
o Separate the roles of the Board Chair and the CEO: the Chair leads the
Board and ensures it’s acting in the company’s long-term best
 interests; the CEO leads management, develops and implements
business strategy and reports to the Board.
3. Emphasize integrity and ethical dealing. Not only must directors declare
conflicts of interest and refrain from voting on matters in which they have an
interest, but a general culture of integrity in business dealing and of respect
and compliance with laws and policies without fear of recrimination is
critical.  To create and cultivate this culture:
o  Adopt a conflict of interest policy, a code of business conduct setting
out the company’s requirements and process to report and deal with
non-compliance, and a Whistleblower policy.
o Make someone responsible for oversight and management of these
policies and procedures.
4. Evaluate performance and make principled compensation
decisions. The Board should:
o Set directors’ fees that will attract suitable candidates, but won’t
create an appearance of conflict in a director’s independence or
discharge of her duties.
o Establish measurable performance targets for executive officers
(including the CEO), regularly assess and evaluate their performance
against them and tie compensation to performance.
o Establish a Compensation Committee comprised of independent
directors to develop and oversee executive compensation plans
(including equity-based ones like stock option plans).
5. Engage in effective risk management. Companies should regularly identify
and assess the risks they face, including financial, operational, reputational,
environmental, industry-related, and legal risks:

o The Board is responsible for strategic leadership in establishing the

company’s risk tolerance and developing a framework and clear
accountabilities for managing risk. It should regularly review the
adequacy of the systems and controls management puts in place to
identify, assess, mitigate and monitor risk and the sufficiency of its
reporting.
o Directors are responsible to understand the current and emerging short
and long-term risks the company faces and the performance
implications. They should challenge management’s assumptions and
the adequacy of the company’s risk management processes and
procedures.
Corporate Governance in India: Need, Importance and Conclusion
Need of Corporate Governance:
The need for corporate governance has arisen because of the increasing concern
about the non-compliance of standards of financial reporting and accountability by
boards of directors and management of corporate inflicting heavy losses on
investors.

The collapse of international giants likes Enron, World Com of the US and Xerox
of Japan are said to be due to the absence of good corporate governance and
corrupt practices adopted by management of these companies and their financial
consulting firms.

The failures of these multinational giants bring out the importance of good
corporate governance structure making clear the distinction of power between the
Board of Directors and the management which can lead to appropriate governance
processes and procedures under which management is free to manage and board of
directors is free to monitor and give policy directions.

In India, SEBI realised the need for good corporate governance and for this
purpose appointed several committees such as Kumar Manglam Birla Committee,
Naresh Chandra Committee and Narayana Murthy Committee.

Importance of Corporate Governance:

A good system of corporate governance is important on account of the
following:
1. Investors and shareholders of a corporate company need protection for their
investment due to lack of adequate standards of financial reporting and
accountability. It has been noticed in India that companies raised capital from the
market at high valuation of their shares by projecting wrong picture of the
company’s performance and profitability.

The investors suffered a lot due to unscrupulous management of corporate that

performed much less than reported at the time of raising capital. “Bad governance
was also exemplified by allotment of promoters’ share at preferential prices
disproportionate to market value affecting minority holders interest”.

There is increasing awareness and consensus among Indian investors to invest in

companies which have a record of observing practices of good corporate
governance. Therefore, for encouraging Indian investors to make adequate
investment in the stock of corporate companies and thereby boosting up rate of
growth of the economy, the protection of their interests from fraudulent practices
of corporate of boards of directors and management are urgently needed.

2. Corporate governance is considered as an important means for paying heed to

investors’ grievances. Kumar Manglam Birla Committee on corporate governance
found that companies were not paying adequate attention to the timely
dissemination of required information to investors in by India.

Though some measures have been taken by SEBI and RBI but much more required
to be taken by the companies themselves to pay heed to the investors grievances
and protection of their investment by adopting good standards of corporate
governance.

3. The importance of good corporate governance lies in the fact that it will enable
the corporate firms to (1) attract capital and (2) perform efficiently. This will help
in winning investors confidence. Investors will be willing to invest in the
companies with a good record of corporate governance.

New policy of liberalization and deregulation adopted in India since 1991 has
given greater freedom to management which should be prudently used to promote
investors’ interests. In India there are several instances of corporate’ failures due to
lack of transparency and disclosures and instances of falsification of accounts. This
discourages investors to make investment in the companies with poor record of
corporate governance.

4. Global Perspective. The extent to which corporate enterprises observe the basic
principles of good corporate governance has now become an important factor for
attracting foreign investment. In this age of globalisation when quantitative
restrictions have been removed and trade barriers dismantled, the relationship
between corporate governance and flows of foreign investment has become
increasingly important.

Studies in India and abroad show that foreign investors take notice of well-
managed companies and respond positively to them, capital flows from foreign
institutional investors (FII) for investment in the capital market and foreign direct
investment (FDI) in joint ventures with Indian corporate companies will be coming
if they are convinced about the implementation of basic principles of good
corporate governance.
Thus, “International flows of capital enable companies to access financing from a
large pool of investors. If countries are to reap the full benefits of the global capital
markets, and if they are to attract long-term capital, corporate governance
arrangements must be credible and well understood across borders”. The large
inflows of foreign investment will contribute immensely to economic growth.

5. Indispensable for healthy and vibrant stock market. An important advantage of

strong corporate governance is that it is indispensable for a vibrant stock market. A
healthy stock market is an important instrument for investors protection. A bane of
stock market is insider trading. Insider trading means trading of shares of a
company by insiders such directors, managers and other employees of the
company on the basis of information which is not known to outsiders of the
company.

It is through insider trading that the officials of a corporate company take undue
advantage at the expense of investors in general. Insider trading is a kind of fraud
committed by the officials of the company. One way of dealing with the problem
of insider trading is enacting legislation prohibiting such trading and enforcing
criminal action against violators.

In India, insider trading has been rampant and therefore it was prohibited by SEBI.
However, the experience shows prohibiting insider trading by law is not the
effective way of dealing with the problem of insider trading because legal process
of providing punishment is a lengthy process and conviction rate is very low.
According to Sandeep Parekh, an advocate (Securities and Financial Regulations),
the effective way of tackling the problem is by encouraging the companies to
practice self regulation and taking prophylactic action. This is inherently connected
to the field of corporate governance.

It is a means by which the company signals to the market that effective self-
regulation is in place and that investors are safe to invest in their securities. In
addition to prohibiting inappropriate actions (which might not necessarily be
prohibited) self-regulation is also considered an effective means of creating
shareholders value. Companies can always regulate their directors/officers beyond
what is prohibited by the law”.

Conclusion:
It is evident from above that it is essential that good governance practices must be
effectively implemented and enforced preferably by self-regulation and voluntary
adoption of ethical code of business conduct and if necessary through relevant
regulatory laws and rules framed by Government or its agencies such as SFBI,
RBI.

The effective implementation of good governance practices would ensure investors

confidence in the corporate companies which will lead to greater investment in
them ensuring their sustained growth. Thus good corporate governance would
greatly benefit the companies enabling them to thrive and prosper.

Further, in the context of liberalization and globalisation there is growing

realization in the emerging economies including India that a country’s business
environment must be maintained and operated in a manner that is conducive to
investors’ confidence so that both domestic and foreign investors are induced to
make adequate investment in corporate companies. This will be conducive to rapid
capital formation and sustained growth of the economy.

Some persons regard certain good corporate practices as ‘irritants’ to the growth of
their businesses since they require the implementation of minimum standards of
corporate governance. However, fact of the matter is that the observance of
practices of good corporate governance will ensure investors’ confidence in the
companies which have record of good corporate governance.

Further, it needs to be emphasized that practices and principles of good corporate

governance have been evolved which stimulate business rather than stifle it. In fact
in good corporate governance structure what is ensured is that companies must
preferably follow voluntarily ethical code of business conduct which are conducive
to the expansion of investment in them and ensure good outcome in terms of rates
of return.