CORPORATE GOVERNANCE
OVERVIEW
“The proper governance of companies will become as crucial to the world economy as the proper
governing of countries…. strong corporate governance produces good social progress. The two go
together.” James Wolfensohn, 1999
Corporate Governance has become a buzzword for organizations today. According to Modi, Y.K,
"Good corporate governance is the key that enhances the long-term value of any organisation. The
pillars on which the edifice of corporate governance stands are Fairness and Accountability.” Thus
it is necessary for every organization to achieve high standards of corporate governance.
Corporate Governance is a culture of relationships and a desired way of life.
Corporate governance involves a set of relationships between an organization’s management, its
board, its shareholders and other stakeholders. It also provides the structure through which the
objectives of the organisation are set, and the means of attaining those objectives and monitoring
performance are determined. Good corporate governance should provide proper incentives for the
board and management to pursue objectives that are in the interests of the organization and
should facilitate effective monitoring. The presence of an effective corporate governance system,
within an individual organisation and across an economy as a whole, helps to provide a degree of
confidence that is necessary for the proper functioning of the organisation.
DEFINITION OF CORPORATE GOVERNANCE
Adrian Cadbury, whose report has become the Bible of Corporate Governance, defines it as 'a
system or process by which companies/organisations are directed and controlled.' The bedrock of
good corporate governance is conducting the affairs of an organisation in such a way as to ensure
fairness to employees, investors, the government and the society at large as the case may be. It
requires quality leadership, values, transparent management, vision and goals, respect for law, and
sense of social responsibility for which there are no rigid standards. This can also be seen as a
process or a set of systems and processes to ensure that an organisation is managed to suit the
best interests of all. The systems, which can ensure this, may include structural and organizational
matters.
It is concerned with accountability of persons who are managing an entity and has to do with the
morals, ethics, values, conduct and behaviour of the organisation and its management. According
to the institute of company secretaries of India, “Corporate Governance is the application of best
Management Practices, Compliance of Laws 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.”
Scholars and practitioners of corporate governance give the term a wide variety of definitions.
Economists and social scientists tend to define it broadly as "the institutions that influence how
business corporations allocate resources and returns" and "the organizations and rules that affect
expectations about the exercise of control of resources in firms." One noted economist has rather
cryptically written that governance is “an institutional framework in which the integrity of the
transaction is decided." These definitions focus not only on the formal rules and institutions of
corporate governance, but also on the informal practices that evolve in the absence or weakness of
formal rules.
The concept of corporate governance has grown in prominence in recent times. In the wake of
Enron, WorldCom, Adelphia Communications and an ever-lengthening litany of corporate
malpractice scandals, finding new ways to protect average investors has become an international
priority. It is, therefore, not surprising that corporate governance reform is gaining importance as a
crucial mechanism for addressing the erosion of investor confidence. As professed by Scott (1999),
corporate governance in its most comprehensive sense, includes every force that bears on the
decision-making of an institution. That would encompass not only the control rights of stockholders,
but also the contractual covenants and insolvency powers of debt holders, the commitments
entered into with employees and customers and suppliers, the regulations issued by governmental
agencies, and the statutes enacted by parliamentary bodies.
One could go still further, to bring in the social and cultural norms of the society. All are relevant,
but the analysis would become so diffuse that it risks becoming unhelpful as well as unbounded.
Thus the United Kingdom’s 1992 Cadbury Report‘s often quoted definition is: “Corporate
governance is the system by which businesses are directed and controlled.” As applied in practice,
this narrower definition focuses almost exclusively on the internal structure and operation of the
corporation’s decision-making processes. It has been this narrower definition that has been central
to public policy discussions about corporate governance in most countries.
For example, the
OECD Principles of Corporate Governance deal with only 5 governance issues:
 The Rights of Shareholders;
 The Equitable Treatment of Shareholders;
 The Role of Stakeholders in Corporate Governance;
 Disclosure and Transparency; and
 The Responsibility of the Board.
At the same time, as will be seen, countries within the UNECE region have applied and elaborated
upon these narrower definitions in different ways. This chapter will focus primarily on the formal
rules and institutions of corporate governance in UNECE countries.
OBJECTIVES OF CORPORATE GOVERNANCE
Corporate Governance is aimed at creating an organization which maximizes the efforts of
stakeholders. It envisages an organization in which emphasis is laid on fulfilling the social
responsibilities towards the stakeholders in addition to the impact it creates. The objectives of
Corporate Governance are to ensure the following:
1. Properly constituted management/leadership capable of taking independent and objective
decisions.
2. Management/leadership is independent and impartial.
3. Management adopts transparent procedures and practices.
4. Management has an effective machinery to serve the concerns of the Stakeholders.
5. Management to monitor the functioning of the Management Team.
6. Management remains in effective control of the affairs of the organisation.
The concept of Corporate Governance hinges on total transparency, integrity and accountability of
the management. It is a system of making management accountable to the stakeholders for
effective management of the organisation, in the interests of the organisation and also with
adequate concern for ethics and values. Corporate Governance recognizes issues like maintaining
continuity by succession planning, identifying opportunities, facing challenges and managing
changes within the business and allocation of resources towards the right priority.
Corporate Governance mainly consists of two elements
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A long-term relationship, which has to deal with the checks and balances, incentives of
mangers and communications between the management and the investors and
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A transactional relationship involving matters relating to disclosure and authority.
Corporate Governance deals with laws, procedures, practices and implicit rules that determine an
organization’s stability to take managerial decision vis-à-vis its elements, particularly its
stakeholders. Corporate Governance refers to an economic, legal and institutional environment
that allows institutions to diversify, grow, restructure and exist and do everything necessary to
maximize long-term organisational value.
COMPONENTS OF CORPORATE GOVERNANCE
Trucker (1984) identifies four crucial components of corporate governance:
 Setting corporate direction
 Involvement in executive action
 Supervision of management
 Accountability
ELEMENTS OF GOOD CORPORATE GOVERNANCE
1. Role and Powers of management.
7. Organisational Resources
2. Legislation
8. Code of Conduct
3. Management Environment
9. Strategy setting
4. Management Skills
10. Financial and Operational Reporting
5. Organisational Induction and Training
11. Monitoring the institutional Performance
6. Organisational Meetings
12. Audit Committee
13. Risk Management
IMPORTANCE OF CORPORATE GOVERNANCE
In the opinion of Adi Godrej, the benefits of having top-notch corporate governance are plenty,
which include:1. Good governance provides a competitive advantage in the global marketplace.
2. Governed companies raise capital widely, easily and cheaply.
3. Governance leads to improved employee morale and higher productivity.
4. Well-governed companies last longer.
Also, corporate governance matters to organisations for the following reasons:
 Avoidance of business scandals, which damage trust in business.
 Value placed on good corporate governance by institutional investors.
 Growing involvement of the private sector in service delivery.
 Need for systems to prevent and deter corruption in developing countries.
 The deregulation and integration of capital markets.
 Recognition of the importance of harnessing domestic savings for economic growth.
 The risk of financial crisis and contagion.
Factors influencing the quality of Corporate Governance
1. Integrity of the Management
2. Ability of the Board
3. Adequacy of the Process
4. Quality of Corporate Reporting
5. Participation of Stakeholders
What organisations/institutions desire in Corporate Governance
Corporate Governance helps in maximizing the long-term shareholder value. It is more a way of
business life than a mere legal compulsion. Four ideals, which should be the guiding force of
company’s philosophy on Corporate Governance, are:
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Transparency
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Accountability
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Disclosure
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Value Creation.
The World Bank argues that these frameworks should be based on four ‘pillars’ - of responsibility,
accountability, fairness and transparency (RAFT)
The Code of Business Conduct and Ethics helps ensuring compliance with legal requirements and
other standards of Business Conduct. All company Employees and Trainees are expected to read
and understand this code of ethics, comply with all applicable policies and procedures, and ensure
that all agents and contractors are aware of, understand and adhere to these standards. The
Company expects all employees, agents and contractors to exercise good judgment to ensure all
employees, agents and contractors and to maintain competitive, efficient, positive harmonious and
productive Work Environment and business organization.
Elements of Corporate Governance
 Role, Powers, and skills of the Board
 Board appointments and Independence
 Strategy setting
 Monitoring the Board performance
 Role and Responsibilities of Board Committees
 Financial and Operational reporting
 Management environment (objectives, framework, processes, responsibility and
accountability)
 Code of Conduct
 Legislation
Corporate Governance and Management
The complex growth of modern business and emergence of corporate giants necessitate and
require professionalized approach in governance and management of corporations. The changing
global corporate scenario also emphasizes that a good management owes not necessarily to
effective organization culture but to a great extent to the mission, vision and proactive approach of
the top management.
The success of an organization greatly depends on the leadership, human resources and
information system, etc. Organizations have to be well structured and steered by professional
managers. The structure of an organization must suit the mission and should aim at enhancing the
commitment to optimize the resources. Thus, there is need for a value committed professional
organization opportunities for the professional managers to exemplify their potential for the
common objectives of accomplishing the goal.
In view of the advancement in information
technology, technical expertise coupled with professional vision, commitment, objectivity,
responsiveness and proactive approach can add to the professionalization of Corporate
Governance and Corporate Management
Managing Corporate Governance is a complicated task as all corporate may not be professionally
managed. This position becomes further compounded when confronted with the manner of
enforcement of code of good corporate practices. There is no scope for imposition of such code of
the corporate from the above, but the need to evolve such a code by the corporate financial
institutions themselves is nonetheless relevant and important for the future of corporate, major
stock holders and lenders of finance, whose nominee directors are on the Boards of assisted
concerns have a proactive role to play though Audit Committees in evolving a code for incorporate
practices to suit our needs and economic development.
For any organization to ensure that corporate governance penetrates deep into all its branches, it
important to break the 'vicious circle' and create a 'virtuous circle', wherein there is greater
accountability and responsibility towards all the stakeholders.
Sources of corporate governance
Corporate governance demonstrates two basic approaches to assuring managerial dedication to
the interests of the corporation and its shareholders: the regulatory approach and the nonregulatory approach. The regulatory approach relies upon formal rules and institutions backed by
the coercive power of the state’s legal system. The non-regulatory approach, pointing to the costs
of regulation, emphasizes the market mechanism and contractual arrangements, such the
corporate control markets, incentive compensation schemes involving stock and stock options, and
efficient capital markets, as means for inducing desired management behavior. Both approaches
are needed to achieve optimal systems of corporate governance, but an important question for
policy makers is what is the appropriate balance. The rules and institutions of corporate
governance come from a wide variety of sources, both public and private. A primary source is the
company or corporation law of the individual countries concerned.
A second important source of corporate governance are national rules and regulations with respect
to the sale, distribution and trading of securities involving the public. One basic goal of securities
regulation in virtually all countries is to assure that investors receive adequate information about
the corporation and its activities so that they may make investment decisions and exercise
shareholder rights appropriately. As with corporation laws and codes, the extent of protection
afforded to shareholders by securities legislation varies from country to country
Any system of corporate governance must answer a fundamental question: what is the objective of
the corporation and for whose benefit is it to be run? Thus the American Law Institute (ALI), after
considering various formulations to accommodate social needs to corporate purposes, finally
concluded in its Principles of Corporate Governance:
“…a corporation should have as its objective the conduct of business activities with a view to
enhancing corporate profit and shareholder gain.”