Introduction

Corporate governance has a broad scope. It includes both social and institutional aspects.
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 &
assessed, & how performance is optimized.

Corporate governance is the system of principles, policies, procedures, and clearly defined
responsibilities and accountabilities used by stakeholders to overcome the conflicts of interest
inherent in the corporate form.

Corporate governance is the interaction between various participants (Shareholder, Board of

Director and Company Management) in shaping corporation’s performance and the way it is
proceeding towards. Corporate governance deals with determining ways to take effective
strategic decisions and developed added value to the stakeholder.

Corporate governance ensures transparency which ensures strong and balance economic
development. This is also ensures that the interest of all shareholders (Majority as well as
minority shareholder) are safeguard.

Why good corporate governance is important

Corporate Governance is intended to increase the accountability of your company and avoid
massive disasters before they occur. Failed energy giant Enron, and its bankrupt employees and
shareholders, is a prime argument for the importance of solid Corporate Governance. Well-
executed Corporate Governance should be similar to a police department’s internal affairs unit,
weeding out and eliminating problems with extreme prejudice. The Need, Significance or
Importance of Corporate Governance is listed below.

Changing Ownership Structure

In recent years, the ownership structure of companies has changed a lot. Public financial
institutions, mutual funds, etc. are the single largest shareholder in most of the large
companies. So, they have effective control on the management of the companies. They force
the management to use corporate governance. That is, they put pressure on the management
to become more efficient, transparent, accountable, etc. They also ask the management to
make consumer-friendly policies, to protect all social groups and to protect the environment.
So, the changing ownership structure has resulted in corporate governance.

Importance of Social Responsibility

Today, social responsibility is given a lot of importance. The Board of Directors has to protect
the rights of the customers, employees, shareholders, suppliers, local communities, etc. This is
possible only if they use corporate governance

Growing Number of Scams

In recent years, many scams, frauds and corrupt practices have taken place. Misuse and
misappropriation of public money are happening everyday in India and worldwide. It is
happening in the stock market, banks, financial institutions, companies and government offices.
In order to avoid these scams and financial irregularities, many companies have started
corporate governance.

Indifference on the part of Shareholders

In general, shareholders are inactive in the management of their companies. They only attend
the Annual general meeting. Postal ballot is still absent in India. Proxies are not allowed to
speak in the meetings. Shareholders associations are not strong. Therefore, directors misuse
their power for their own benefits. So, there is a need for corporate governance to protect all
the stakeholders of the company.

Globalization
Today most big companies are selling their goods in the global market. So, they have to attract
foreign investor and foreign customers. They also have to follow foreign rules and regulations.
All this requires corporate governance. Without Corporate governance, it is impossible to enter,
survive and succeed the global market.

Takeovers and Mergers

Today, there are many takeovers and mergers in the business world. Corporate governance is
required to protect the interest of all the parties during takeovers and mergers.

SEBI
SEBI has made corporate governance compulsory for certain companies. This is done to protect
the interest of the investors and other stakeholders.

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.

Corporate governance is the combination of rules, processes or laws by which businesses are
operated, regulated or controlled. The term encompasses the internal and external factors that
affect the interests of a company’s stakeholders, including shareholders, customers, suppliers,
government regulators management. The board of directors is responsible for creating the
framework for corporate governance that best aligns business conduct with objectives.

Specific processes that can be outlined in corporate governance include action plans,
performance measurement, disclosure practices, executive compensation decisions, dividend
policies, procedures for reconciling conflicts of interest and explicit or implicit contracts
between the company and stakeholders.

An example of good corporate governance is a well-defined and enforced structure that works
for the benefit of everyone concerned by ensuring that the enterprise adheres to accepted
ethical standards, best practices formal laws. Alternatively, bad corporate governance is seen as
poorly-structured, ambiguous and noncompliant, which could damage the image or financial
health of a business.

Principles of corporate governance

While corporate governance structure may vary, most organizations incorporate the following
key elements:

All shareholders should be treated equally and fairly. Part of this is making sure shareholders
are aware of their rights and how to exercise them.

Legal, contractual and social obligations to non-shareholder stakeholders must be upheld. This
includes always communicating pertinent information to employees, investors, vendors
members of the community.

The board of directors must maintain a commitment to ensure accountability, fairness, diversity
transparency within corporate governance. Board members must also possess the adequate
skills necessary to review management practices.

Organizations should define a code of conduct for board members and executives, only
appointing new individuals if they meet that standard.

All corporate governance policies and procedures should be transparent or disclosed to

relevant stakeholders.

Conflict management in corporate governance

One purpose of corporate governance is to implement a checks and balances system that
minimizes conflicts of interest. Conflicts typically arise when two involved parties have opposing
opinions on the way the business should be conducted. Since a board of directors is typically a
mix of internally and externally involved members, corporate governance is a non-biased way
to approach conflict.

Conflicts could occur when executives disagree with shareholders. For example, the
shareholders will typically want to solely pursue interests that generate profit while the chief
executive officer might want to invest in better employee engagement efforts. Another type of
conflict could arise if multiple shareholders disagree with each other. It would be the role of
corporate governance to define how these matters are settled.

Regulation of corporate governance

Corporate governance has received increased attention because of high-profile scandals
involving abuse of corporate power or alleged criminal activity by corporate officers. Therefore,
laws and regulations have been passed to address the components of corporate governance.

The Four Ps of Corporate Governance

Corporate governance is a complex beast. Even those of us who have built their careers in fields
where governance is a necessity might not fully understand everything it encompasses.

That’s why many governance experts break it down into four simple words: People, Purpose,
Process,and Performance.

These are the Four Ps of Corporate Governance, the guiding philosophies behind why
governance exists and how it operates. Let’s have a look at exactly what each of the Ps means.

People
People come first in the Four Ps because people exist on every side of the business equation.
They are the founders, the board, the stakeholder and consumer and impartial observer.

People are the organisers who determine a purpose to work towards, develop a consistent
process to achieve it, evaluate their performance outcomes, and use those outcomes to grow
themselves and others as people.

Purpose
Purpose is the next step. Every piece of governance exists for a purpose and to achieve a
purpose. The ‘for’ is the guiding principles of the organisation. Their mission statement. Every
one of their policies and projects should exist to further this agenda.

The ‘achieve’ is the small step on the road to completing that large goal. It might seem pointless
to type up minutes for a meeting that felt irrelevant, but those minutes and all the other
governance from that meeting contribute to making the business effective at achieving it’s
stated purpose.

Process
Governance is the process by which people achieve their company’s purpose, and that process
is developed by analysing performance. Processes are refined over time in order to consistently
achieve their purpose, and it’s always smart to take a critical eye to your governance processes.

Can they be streamlined? Are they efficiently achieving their purpose? It takes work to make
your processes function, but once they do you will quickly see how they can help your company
grow.

Performance
Performance analysis is a key skill in any industry. The ability to look at the results of a process
and determine whether it was successful (or successful enough), and then apply those findings
to the rest of your organisation, is one of the primary functions of the governance process.

Using these results to develop personal skills, both your own and your coworkers’, is how the
Four Ps cycle revolves endlessly. So take a critical eye to your governance: is it performing?

Conclusion
The annual financial reports commonly contain a statement on corporate governance, so it is
useful to have an awareness of what this involves. This has important implications for
interpreting the financial statements: a company with a weak system of corporate governance
will provide greater opportunities for the manipulation of financial statements, with adverse
consequences for users.