ASSIGNMENT OF SOCIAL

AND ETHICAL ISSUES

TOPIC :-
1. EXPLAIN THE NEED OF CORPORATE
GOVERNANCE FOR BUSINESS AND DISCUSS ITS
THEORIES.
2. WRITE A DETAILED NOTE ON CADBURY
COMMITTEE REPORT.
3. LIST THE MAJOR REFORMS DONE IN THE FIELD
OF CORPORATE GOVERNANCE AND HOW WERE
THEY IMPLEMENTED .

Submitted to : TANIA MA’AM

Submitted BY : BHUMIKA NAGI
ROLL NO : 1921924
  EXPLAIN THE NEED OF
CORPORATE GOVERNANCE
FOR BUSINESS AND DISCUSS
ITS THEORIES.

Introduction to Corporate
Governance
Corporate Governance is an increasingly significant
aspect of business and organisational management,
extending to international politics and trade laws; and
to globalised economics, corporations and
organisations, and markets.
Theories, standards and regulations relating to
Corporate Governance began to develop properly in
the 1990s, so it is a relatively recent field of economic
and management practice.

Definition:-
From a simple and minimal point of view:
• Corporate Governance is a specialised mechanism for
regulating risk in corporate activities, thereby averting
corporate disasters, scandals, and consequential
damage or losses to investors, staff, society and the
wider world.
More broadly:
• Corporate Governance is a very sophisticated and
flexible concept which addresses fundamental
organisational purposes (for every type of organisation
- from small businesses to the largest multinational
conglomerate) together with the most serious
challenges arising from the globalisation of corporate
and organisational structures and the markets they
serve.

Corporate Governance has also become an instrument

for understanding, questioning, and refining some
fundamental economic systems and philosophies,
notably: capitalism, free market/market forces
economics, business ethics, corporate leadership, the
Psychological Contract, political economics, and
globalisation itself.
The emergence of Nudge theory in the 2000s - a
powerful system for change/societal-management
increasingly used by governments to understand and
alter group behaviour - reinforces the principle that
governance must be driven by needs of the people
being governed, not by the governing authority.

Application

With special regard to globalisation, the US economist

visionary and author, Joseph Stiglitz, winner of the
Nobel Prize in Economics, noted the growing
significance of Corporate Governance relating to
globalisation, with these remarks in 2006: "...Corporate
governance can recognize the rights not only of
shareholders, but of others who are touched by the
actions of corporations... An engaged and educated
citizenry can understand how to make globalisation
work... and can demand that their political leaders
shape globalisation accordingly." (Joseph Stiglitz,
2006.)
In recent and modern use the term Corporate
Governance essentially refers to the actions of directors
who run publicly quoted companies.
Increasingly the principles of Corporate Governance
also apply to public services organisations and can be
adapted for small businesses and cooperatives and
social enterprises too.
In fact, Corporate Governance is now a very flexible
concept by which to examine, develop, and establish
the fundamental aims and rules for any sort of
organization, and especially organizations which serve
multiple purposes (e.g., for owners, staff, customers,
etc), as most do.

NEED OF CORPORATE GOVERNANCE

Corporate Governance is needed to create a corporate
culture of transparency, accountability and disclosure.
Corporate Performance: Improved governance
structures and processes 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. This can be linked
with improved corporate performance- either in terms
of share price or profitability.

• Enhanced Investor Trust: Investors consider

corporate governance as important as financial
performance when evaluating companies for
investment. Investors who are provided with high levels
of disclosure and transparency are likely to invest
openly in those companies. The consulting firm
McKinsey surveyed and determined that global
institutional investors are prepared to pay a premium
of up to 40 percent for shares in companies with
superior corporate governance practices.Better Access
to Global Market: Good corporate governance systems
attract investment from global investors, which
subsequently leads to greater efficiencies in the
financial sector.

• Combating Corruption: Companies that are

transparent, and have sound system that provide full
disclosure of accounting and auditing procedures,
allow transparency in all business transactions, provide
environment where corruption would certainly fade
out. Corporate Governance enables a corporation to
compete more efficiently and prevent fraud and
malpractices within the organization.

Easy Finance from Institutions:

Several structural changes like increased role of
financial intermediaries and institutional investors, size
of the enterprises, investment choices available to
investors, increased competition, and increased risk
exposure have made monitoring the use of capital
more complex thereby increasing the need of Good
Corporate Governance. Evidences indicate that well-
governed companies receive higher market valuations.
The credit worthiness of a company can be trusted on
the basis of corporate governance practiced in the
company.
• Enhancing Enterprise Valuation: Improved
management accountability and operational
transparency fulfill investors expectations and
confidence on management and corporations, and in
return, increase the value of corporations.
• Reduced Risk of Corporate Crisis and Scandals:
Effective Corporate Governance ensures efficient risk
mitigation system in place. A transparent and
accountable system makes the Board of a company
aware of the majority of the mask risks involved in a
particular strategy, thereby, placing various control
systems in place to facilitate the monitoring of the
related issues.
• Accountability:
Investor relations are essential part of good corporate
governance. Investors directly/ indirectly entrust
management of the company to create enhanced value
for their investment. The company is hence obliged to
make timely disclosures on regular basis to all its
shareholders in Corporate Governance is integral to the
existence of the company. Lesson 3 Conceptual
framework of Corporate Governance 47 order to
maintain good investor’s relation. Good Corporate
Governance practices create the environment whereby
Boards cannot ignore their accountability to these
stakeholders.
Theories of Corporate Governance
We will discuss the following theories of corporate
governance:
• Agency Theory
• Stewardship Theory
• Resource Dependency Theory
• Stakeholder Theory
• Transaction Cost Theory
• Political Theory

Agency Theory
Agency theory defines the relationship between the
principals (such as shareholders of company) and
agents (such as directors of company). According to
this theory, the principals of the company hire the
agents to perform work. The principals delegate the
work of running the business to the directors or
managers, who are agents of shareholders. The
shareholders expect the agents to act and make
decisions in the best interest of principal. On the
contrary, it is not necessary that agent make decisions
in the best interests of the principals. The agent may be
succumbed to self-interest, opportunistic behavior and
fall short of expectations of the principal. The key
feature of agency theory is separation of ownership
and control. The theory prescribes that people or
employees are held accountable in their tasks and
responsibilities. Rewards and Punishments can be used
to correct the priorities of agents.

Stewardship Theory
The steward theory states that a steward protects and
maximises shareholders wealth through firm
Performance. Stewards are company executives and
managers working for the shareholders, protects and
make profits for the shareholders. The stewards are
satisfied and motivated when organizational success is
attained. It stresses on the position of employees or
executives to act more autonomously so that the
shareholders’ returns are maximized. The employees
take ownership of their jobs and work at them
diligently.

Stakeholder Theory
Stakeholder theory incorporated the accountability of
management to a broad range of stakeholders. It
states that managers in organizations have a network
of relationships to serve – this includes the suppliers,
employees and business partners. The theory focuses
on managerial decision making and interests of all
stakeholders have intrinsic value, and no sets of
interests is assumed to dominate the others
Resource Dependency Theory
The Resource Dependency Theory focuses on the role of
board directors in providing access to resources needed
by the firm. It states that directors play an important
role in providing or securing essential resources to an
organization through their linkages to the external
environment. The provision of resources enhances
organizational functioning, firm’s performance and its
survival. The directors bring resources to the firm, such
as information, skills, access to key constituents such as
suppliers, buyers, public policy makers, social groups as
well as legitimacy. Directors can be classified into four
categories of insiders, business experts, support
specialists and community influentials.

Transaction Cost Theory

Transaction cost theory states that a company has
number of contracts within the company itself or with
market through which it creates value for the
company. There is cost associated with each contract
with external party; such cost is called transaction cost.
If transaction cost of using the market is higher, the
company would undertake that transaction itself.
Political Theory
Political theory brings the approach of developing
voting support from shareholders, rather by purchasing
voting power. It highlights the allocation of corporate
power, profits and privileges are determined via the
governments’ favour

 . WRITE A DETAILED
NOTE ON CADBURY
COMMITTEE REPORT

CADBURY COMMITTEE REPORT

The Cadbury Report 1992: Shared Vision and Beyond
INTRODUCTION Corporate governance in United
Kingdom has changed since the Cadbury Report (1992)
was first produced by the Committee on the Financial
Aspects of Corporate Governance (Cadbury
Committee), is changing, and is expected to change in
the future, which is evident from the number of
corporate governance codes at national levels and the
need for greater accountability and corporate
transparency. We begin with the Cadbury Report,
which correctly has been universally received and that
it might almost be considered a truism for corporate
governance. Over the twenty-five years since this
report, the growth of interest in corporate governance,
worldwide, has been dramatic. We note three major
themes that the Cadbury Report has significantly
contributed to corporate governance practices: the
definition of corporate governance, voluntary adoption
of the code and the “comply or explain” approach. The
advancement of the Cadbury Report was enhanced by
the London Stock Exchange (LSE) requirement for all
listed companies in the UK as a continuing obligation of
listing to state whether they are complying with the
code and to give reasons for non-compliance (Cheffins,
1997, 76-77). Currently the corporate governance code
is nonstatutory, which only applies to companies listed
on the London Stock Exchange. This paper explores the
shift from the Cadbury Report (1992) to the current UK
Corporate Governance Code (2014)1 focusing upon the
reasoning, the influences and the implications thereof.
In the early1990s, the reputation of the London as a
financial centre would have dramatically suffered
because of the failures of some major companies due
to heightened attention of the following: corporate
fraud, director malfeasance and the extent of these
problems were not revealed by the published
accounting report (Cadbury, 2000). Hence, a private
sector initiative made up of the Financial Reporting
Council (FRC), the London Stock Exchange (LSE) and the
accounting profession set up a committee to review the
Financial Aspects of Corporate Governance. The aim
was to establish a code of best practice, whilst avoiding
an inflexible one size fits all approach. The Cadbury
Report identifies three themes to strengthen the
unitary board system of all listed companies and
summarise their recommendations in a code of best
practice: the structure and responsibilities of boards of
directors; the role of auditors and recommendations to
the accountancy profession; and the rights and
responsibilities of shareholders.

 LIST THE MAJOR

REFORMS DONE IN THE
FIELD OF CORPORATE
 GOVERNANCE AND HOW
WERE THEY IMPLEMENTED .
An Overview of Corporate Governance Reforms in
India

Abstract
Corporate Governance Reforms in India are of recent
origin – the reform process got a kick start only with
the liberalization of the Indian Economy in 1991. While
the progress in legislating and introducing corporate
governance reforms in India in the last two decades
has been quite significant, so far these have largely
remained on paper only.

A major criticism of the Indian corporate governance

reform process is that it is primarily based on the Anglo
Saxon model of governance which has limited
applicability in India. Unlike the central governance
issue in the US or the UK which is essentially that of
disciplining the management that has ceased to be
effectively accountable to the owners (dispersed
shareholders) the central focus of the corporate
governance framework for India needs to be on
disciplining the dominant shareholder, who is the
principal Block holder, and in protecting the interest of
the minority shareholders. Given that the Indian
corporate governance regulations have largely
borrowed from the Anglo Saxon model of governance,
it is not surprising that they are found wanting in
addressing issues that are peculiar to the Indian
context and, therefore, do not provide an adequate
solution to India’s corporate governance woes.

Adding to the problem arising from the application of

an alien corporate governance model, which was not
suitably adapted to the Indian context, is also the
problem of weak enforcement of corporate governance
regulations through the Indian legal system which
raises serious concerns on whether investors would be
able to get timely dispensation of justice in case of
corporate governance wrongdoings.

Currently Corporate Governance Reforms in India are

at crossroads; while there is no doubt about the good
intention behind the reforms, there is a need to look for
a more complete solution, evolved from within, and to
craft a solution that would address the specific
challenges of India.

This paper provides a history of the evolution of

corporate governance in India and identifies issues that
are peculiar to the Indian context which are not being
fully addressed in the current framework.

Lastly, this paper gives some thought on the future

direction for corporate governance reforms to make
them more suitable for Indian conditions and identifies
areas for further research in this field.

This paper is work-in-process and the author invites

comments and viewpoints from other fellow
researchers interested in the Corporate Governance
Reforms in India.