CORPORATE GOVERNANCE  Introduction :Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the

way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, the board of directors, executives, employees, customers, creditors, suppliers, and the community at large. 

Definition :In A Board Culture of Corporate Governance, business author Gabrielle O'Donovan defines corporate governance as 'an internal system encompassing policies, processes and people, which serves the needs of shareholders and other stakeholders, by directing and controlling management activities with good business savvy, objectivity, accountability and integrity. Sound corporate governance is reliant on external marketplace commitment and legislation, plus a healthy board culture which safeguards policies and processes. SEBI committee (India) on Corporate Governance defines corporate governance as 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 & corporate funds in the management of a company.´ The definition is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution. Corporate Governance is viewed as business ethics and a moral duty. Corporate Governance may be defined as a set of systems, processes and principles which ensure that a company is governed in the best interest of all stakeholders. It is the system by which companies are directed and controlled. It is about promoting corporate fairness, transparency and accountability. In other words, 'good corporate governance' is simply 'good business'. It ensures: 
   

Adequate disclosures and effective decision making to achieve corporate objectives; Transparency in business transactions; Statutory and legal compliances; Protection of shareholder interests; Commitment to values and ethical conduct of business.

The board remains in effective control of the affairs of the company at all times. Note that this process occurred simultaneously with the direct growth of individuals investing indirectly in the market . The board effectively and regularly monitors the functioning of the management team. such as wealthy businessmen or families. and other financial institutions). it seeks to achieve the following objectives:        A properly structured board capable of taking independent and objective decisions is in place at the helm of affairs.  Role of institutional investors :Many years ago. other investor groups. markets have become largely institutionalized: buyers and sellers are largely institutions (e. of which there are many). buyers and sellers of corporation stocks were individual investors. personal and emotional interest in the corporations whose shares they owned. The board is balance as regards the representation of adequate number of non-executive and independent directors who will take care of their interests and well-being of all the stakeholders. insurance companies.. The board keeps the shareholders informed of relevant developments impacting the company. mutual funds. The board has an effective machinery to subserve the concerns of stakeholders. The overall endeavour of the board should be to take the organisation forward so as to maximize long term value and shareholders' wealth.g. worldwide. Broadly. exchange-traded funds. The board adopts transparent procedures and practices and arrives at decisions on the strength of adequate information. Objectives :It is integral to the very existence of a company and strengthens investor's confidence by ensuring company's commitment to higher growth and profits. banks. hedge funds. pension funds. Over time. The rise of the institutional investor has brought with it some increase of professional diligence which has tended to improve regulation of the stock market (but not necessarily in the interest of the small investor or even of the naïve institutions.who often had a vested. brokers.

In return these individuals provide value in the form of natural. creditors. and disclosure in financial reports. in the effective performance of the organization. social and other forms of capital. performance orientation. suppliers receive compensation for their goods or services. the Chief Executive Officer. supervise and remunerate senior executives and to ensure accountability of the organization to its owners and authorities. there has been an opportunity for a reversal of the separation of ownership and control problems because ownership is not so diffuse. responsibility and accountability. and commitment to the organization. This separation of ownership from control implies a loss of effective control by shareholders over managerial decisions. benefits and reputation. trust and integrity. A board of directors often plays a key role in corporate governance. while shareholders receive capital return. Of importance is how directors and management develop a model of governance that aligns the values of the corporate participants and then evaluate this model periodically for its effectiveness. human. With the significant increase in equity holdings of investors. the board of directors. Directors. Parties to corporate governance :Parties involved in corporate governance include the regulatory body (e.  Principles :Key elements of good corporate governance principles include honesty. appoint. In particular. It is their responsibility to endorse the organization's strategy. especially concerning actual or apparent conflicts of interest. management. Customers receive goods and services. mutual respect. The shareholder delegates decision rights to the manager to act in the principal's best interests. They can help shareholders exercise their rights by effectively communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings. shareholders and Auditors). Commonly accepted principles of corporate governance include: y Rights and equitable treatment of shareholders: Organizations should respect the rights of shareholders and help shareholders to exercise those rights. workers and management receive salaries. Partly as a result of this separation between the two parties. All parties to corporate governance have an interest. employees. openness. customers and the community at large. . Other stakeholders who take part include suppliers.g. a system of corporate governance controls is implemented to assist in aligning the incentives of managers with those of shareholders. whether direct or indirect. develop directional policy. senior executives should conduct themselves honestly and ethically.

discussed and avoided. many organizations establish Compliance and Ethics Programs to minimize the risk that the firm steps outside of ethical and legal boundaries. the ability of the board to . that reliance by a company on the integrity and ethics of individuals is bound to eventual failure. Integrity and ethical behaviour: Ethical and responsible decision making is not only important for public relations. safeguards invested capital. fire and compensate top management. Whilst nonexecutive directors are thought to be more independent. It is important to understand. Moreover. Regular board meetings allow potential problems to be identified. but it is also a necessary element in risk management and avoiding lawsuits. For example. though. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. Examples include: y Monitoring by the board of directors: The board of directors. Role and responsibilities of the board: The board needs a range of skills and understanding to be able to deal with various business issues and have the ability to review and challenge management performance. Because of this. an independent third party (the external auditor) attests the accuracy of information provided by management to investors. There are issues about the appropriate mix of executive and non-executive directors.y y y Interests of other stakeholders: Organizations should recognize that they have legal and other obligations to all legitimate stakeholders. they may not always result in more effective corporate governance and may not increase performance. Internal corporate governance controls Internal corporate governance controls monitor activities and then take corrective action to accomplish organizational goals. with its legal authority to hire..[17] Different board structures are optimal for different firms. An ideal control system should regulate both motivation and ability. It needs to be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties. Issues involving corporate governance principles include: y y y y y y y y internal controls and internal auditors the independence of the entity's external auditors and the quality of their audits oversight and management of risk oversight of the preparation of the entity's financial statements review of the compensation arrangements for the chief executive officer and other senior executives the resources made available to directors in carrying out their duties the way in which individuals are nominated for positions on the board dividend policy  Mechanisms and controls :Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse selection. to monitor managers' behaviour.

audit committee. Internal control procedures and internal auditors: Internal control procedures are policies implemented by an entity's board of directors. Examples include: y y y y y y y competition debt covenants demand for and assessment of performance information (especially financial statements) government regulations managerial labour market media pressure takeovers . and compliance with laws and regulations. Internal auditors are personnel within an organization who test the design and implementation of the entity's internal control procedures and the reliability of its financial reporting Balance of power: The simplest balance of power is very common. External corporate governance controls External corporate governance controls encompass the controls external stakeholders exercise over the organisation. ex ante. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. superannuation or other benefits. are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behaviour. another group review and can veto the changes. therefore. that executive directors look beyond the financial criteria. however. Such incentive schemes. This application of separation of power is further developed in companies where separate divisions check and balance each other's actions. Executive directors possess superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes. shareholders. It may be in the form of cash or non-cash payments such as shares and share options. operating efficiency. and a third group check that the interests of people (customers.y y y monitor the firm's executives is a function of its access to information. One group may propose company-wide administrative changes. and other personnel to provide reasonable assurance of the entity achieving its objectives related to reliable financial reporting. require that the President be a different person from the Treasurer. management. It could be argued. and can elicit myopic behaviour. employees) outside the three groups are being met.

. Imperfections in the financial reporting process will cause imperfections in the effectiveness of corporate governance. ideally. This should. be corrected by the working of the external auditing process. y Supply of accounting information: Financial accounts form a crucial link in enabling providers of finance to monitor directors. Systemic problems of corporate governance :y Demand for information: In order to influence the directors. the shareholders must combine with others to form a voting group which can pose a real threat of carrying resolutions or appointing directors at a general meeting.

Sign up to vote on this title
UsefulNot useful