Introduction to Corporate Governance:
1.0 Corporate Governance ISSUES:
Governance, the
root of the word Governance is from ‘gubernate’, which means to steer.
Corporate governance would mean to steer an organization in the desired
direction. The responsibility to steer lies with the board of directors/
governing board.
Corporate
or
a Corporation is derived from Latin term “corpus” which means a “body”.
Governance means administering the processes and systems placed for satisfying
stakeholder expectation.
When combined,
Corporate Governance means a set of systems procedures, policies, and practices,
standards put in place by a corporate to ensure that relationship with various
stakeholders is maintained in transparent and honest manner.
Corporate
Governance is concerned with the intrinsic nature, purpose, integrity and
identity of an organization with primary focus on the entity’s relevance,
continuity and fiduciary aspects.
What is corporate governance?
Corporate
Governance is concerned with holding the balance between economic and social
goals and between individual and communal goals.
The corporate
governance framework is there to encourage the efficient use of resources and
equally to require accountability for the stewardship of those resources.
The concept of
governance has been known in both political and academic circles for a long
time, referring generally to the task of running a government, or any other
appropriate entity for that matter.
Corporate
governance is therefore the process whereby people in power direct, monitor and
lead corporations, and thereby either create, modify or destroy the structures
and systems under which they operate.
The primary
purpose of corporate leadership is to create
wealth legally and ethically.
This translates
to bringing a high level of satisfaction to five constituencies -- customers, employees, investors, vendors and
the society-at-large.
Definitions of
Corporate Governance
There is no universal definition
of corporate governance.
Some good definitions are given
hereunder for your better understanding:-
Noble laureate Milton Friedman
defined Corporate Governance as “the conduct of business in accordance with
shareholders’ desires, which generally is to make as much money as possible,
while conforming to the basic rules of the society embodied in law and local
customs.”
“Corporate Governance is concerned with the
way corporate entities are governed, as distinct from the way business within
those companies are managed.
Corporate governance addresses
the issues facing Board of Directors, such as the interaction with top
management and relationships with the owners and others interested in the
affairs of the company.” Robert Ian (Bob) Tricker (who introduced the
words corporate governance for the first time in his book in 1984)
“Corporate Governance is about
promoting corporate fairness, transparency and accountability”.
James D. Wolfensohn
(Ninth President World Bank) OECD Corporate governance structure
specifies the distribution of rights and responsibilities among
different participants in the company such as board, management,
shareholders and other stakeholders; and spells out the rules and
procedures for corporate decision-making. By doing this, it provides the
structure through which the company’s objectives are set along with the means
of attaining these objectives as well as for monitoring
performance. “A system by which business Corporations are directed and
controlled” Cadbury Committee, U.K
“Corporate governance deals with
laws, procedures, practices and implicit rules that determine A Company’s
ability to take informed managerial decisions vis-à-vis its claimants -
in particular, its shareholders, creditors, customers, the State and employees.
Confederation of
Indian Industry (CII) – Desirable Corporate Governance Code (1998)
“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.”
Report of Kumar
Mangalam Birla Committee on Corporate Governance constituted by SEBI (1999)
“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.”
Report of N.R.
Narayana Murthy Committee on Corporate Governance constituted by SEBI (2003)
“Corporate Governance is the
application of best management practices, compliance of law 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.”
Objectives of Corporate Governance
To align
corporate goals of its stakeholders (society,shareholders,etc.)
Corporate
governance a way of Life rather than a Code
To strengthen
corporate functioning and discourage mismanagement
To achieve
corporate goals by making investment in profitable investment outlets.
To specify
responsibility of the B.O.D and managers in order to ensure good corporate
performance.
There
is a global consensus about the objective of ‘good’ corporate governance: maximising long-term shareholder value.”
Corporate Governance is a system
of structuring, operating and controlling a company with the following specific
aims:—
(i) Fulfilling long-term
strategic goals of owners;
(ii) Taking care of the interests
of employees;
(iii) A consideration for the
environment and local community;
(iv) Maintaining excellent
relations with customers and suppliers;
(v) Proper compliance with all
the applicable legal and regulatory requirements.
2.0 NEED for Corporate Governance:
Corporate Governance is needed to
create a corporate culture of Transparency, accountability and disclosure. It
refers to compliance with all the moral & ethical values, legal framework
and voluntary adopted practices. This enhances customer satisfaction,
shareholder value and wealth.
Corporate
Performance: Improved
governance structures and processes help 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 & 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 upto 40 percent for shares in
companies with superior corporate governance practices.
Better Access to
Global Market: Good
corporate governance systems attracts 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 will 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. Evidence indicates 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 return, increase the value of corporations.
Reduced Risk of
Corporate Crisis and Scandals: Effective Corporate Governance ensures
efficient risk mitigation system in place. The transparent and accountable system
that Corporate Governance makes the Board of a company aware of all the risks
involved in particular strategy, thereby, placing various control systems to monitor
the related issues.
Accountability: Investor
relations’ is essential part of good corporate governance.
Investors have directly/
indirectly entrusted management of the company for the creating enhanced value
for their investment. The company is hence obliged to make timely disclosures
on regular basis to all its shareholders in order to maintain good investor’s
relation. Good Corporate Governance practices create the environment where
Boards cannot ignore their accountability to these stakeholders.
Importance of Corporate Governance
It shapes the
growth and future of capital markets of the economy
It helps in
raising funds from capitals markets
It links
company’s management with its financial reporting system.
It improves
efficiency and effectiveness of the enterprise and wealth of the economy
It improves
international image of the corporate sector and enables home companies to raise
global
It help management to take innovative
decisions for effective functioning of the enterprise
3.0 CODE of best Corporate Practices:
The main
objective of the Code of Best Corporate Governance Practices is to suggest
courses of action to all types of companies
– Whether listed
or privately held corporations, limited liability companies or partnerships
– With a view
to: improving their performance facilitating access to capital
The Code is made up of six parts:
Owners – shareholders, stakeholders or
partners
Board of Directors – the body representing the
owners
Management – the chief executive officer and top
managers
Auditing – the independent auditors
Surveillance – the fiscal council
Ethics/Conflicts of interest
The Code may
include issues already covered by legislation or subject to new laws or
regulations, but their application should be voluntary.
Business owners
willing to improve performance or gain access to capital are advised to follow
the Code.
Access to
capital is not restricted to public offerings of shares, it also involves
private equity operations and funds from a company’s own cash flow generated
through improved performance.
The pillars of this Code of Best Practice
of Corporate Governance are
Transparency
The Code
requires that the CEO and management meet different information and
transparency needs of the owners, the board of directors, the independent
auditors, the supervisory board, the stakeholders, and the public at large.
Accountability
The following
agents of corporate governance
Board of
directors,
CEO and
management,
Independent
auditors
Fiscal council should
account for their results and activities to those bodies that elected them.
Fairness
Relations
between all agents of corporate governance and the different types of owners
must be based on fair treatment of all the parties involved.
Ethics
