The term
‘governance’ is derived from the Latin word gubernare, meaning ‘to
steer’, usually applying to the steering of a ship, which implies that
corporate governance involves the function of direction rather than control.
Corporate or a Corporation is derived from Latin term “corpus” which means a
“body”.
Corporate Governance
refers to the way a corporation is governed. It is the technique by which
companies are directed and managed. It means carrying the business as per the
stakeholders’ desires. Corporate
governance is the system of rules, practices and processes by which a company
is directed and controlled.
It is actually conducted by the board of
Directors and the concerned committees for the company’s stakeholder’s benefit.
It is all about balancing individual and societal goals, as well as, economic
and social goals.
The heart of
corporate governance is transparency, disclosure, accountability and integrity.
It is to be borne in mind that mere legislation does not ensure good
governance. Good governance flows from ethical business practices even when
there is no legislation.
|
“Corporate
Governance is about promoting corporate fairness, transparency and
accountability”.
James D.
Wolfensohn (Ninth President World Bank)
“Accountability
to providers of capital.” — Bruce Weber
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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 voluntarily adopted practices.
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.
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: Corporate Governance enables a
corporation to compete more efficiently and
prevent fraud
and malpractices within the organization.
Easy
Finance From Institutions: 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. The
transparent and accountable system that Corporate Governance system makes the
Board of a company aware of majority of the mask risks involved in a particular
strategy, thereby, placing various control systems in place to facilitate
monitoring the related issues.
Accountability:
Good
Corporate Governance practices create the environment where Boards cannot
ignore their
accountability to these stakeholders.
Scope
of Corporate Governance
Corporate
governance covers the following functional areas of governance:
1. Preparation
of company’s financial statements: Financial disclosure is a very
important and critical component of corporate governance. Disclosure of
material matters concerning the organization should be timely and balanced to
ensure that all investors have access to clear, factual information.
2. Internal
controls and the independence of entity’s auditors: Internal control is
implemented by the board of directors, audit committee, management, and other
personnel to provide assurance of the company achieving its objectives related
to reliable financial reporting, operating efficiency, and compliance with laws
and regulations.
Review
of compensation arrangements for chief executive officer and other senior
executives:
Performance-based
remuneration is designed to relate some proportion of salary to individual
performance. It may be in the form of cash or non-cash payments such as shares and
share options, superannuation or other benefits. Such incentive schemes,
however, are reactive in the sense that they provide no mechanism for
preventing mistakes or opportunistic behaviour, and can elicit myopic
behaviour.
The
way in which individuals are nominated for the positions on the board: The
Board of Directors have the power to hire, fire and compensate the top management.
The owners of a business who have decision-making authority, voting authority,
and specific responsibilities, which in each case is separate and distinct from
the authority, and responsibilities of owners and managers of the business
entity.
5. The
resources made available to directors in carrying out their duties: The
duties of the
directors are
the fiduciary duties similar to those of an agent or trustee. They are
entrusted with adequate power to control the activities of the company.
6. Oversight
and management of risk: It is important for the company to be fully
aware of the risks facing the business and the shareholders should know that
how the company is going to tackle the risks. Similarly the company should also
be aware about the opportunities lying ahead.
Principles of Corporate Governance
Corporate governance includes principles
such as honesty, trust, integrity, responsibility, accountability and
commitment to the organization. Apart from these, the other principles of
corporate governance are as follows:
Rights and equitable treatment of
shareholders: The organizations must acknowledge the
rights of the shareholders and they must help the shareholders in exercising
their rights effectively. Shareholders must also be encouraged to participate
in the general meetings of an organization.
Interests of other stakeholders:
It is the duty of an organization to recognize the legal and other obligations
of certain stakeholders.
Role and responsibilities of the board:
In order to deal with various issues of a business, an organization needs a
wide range of skills among the members of the board. The members of the
organization must work with great responsibility.
Integrity and ethical behaviour:
In order to promote ethical and responsible decision-making, organizations must
develop a code of conduct for the directors of an organization.
Disclosure and transparency:
The roles and duties of directors must be clearly defined by an organization.
Organizations must implement certain procedures in order to verify and
safeguard the integrity of the organization. An organization must disclose the
financial information to investors and shareholders.
After
2nd world War, the United States experience strong economic growth.
Which had a strong impact on the
history of corporate governance. Corporations were thriving and growing
rapidly. The 1980’s brought a corporate governance reform counter-reaction. The
modern practice of corporate governance has its roots in the 17th
century Dutch Republic. The first recorded corporate governance dispute in
history took place in 1609.
The history of corporate
governance in Canada, China, France, Germany, Japan, India, Italy, the Netherland,
Sweden, the United Kingdom and the United States, together the studies underscore
the importance of path dependence, after as far pack into pre-industrial
period, legal system, or financial, though in a more advanced form than more statutory
share holders right, and wealthy families.
The topic of corporate
governance is vast subject that enjoys a long and rich history. It is a topic
that incorporated managerial accountability, board structure and shareholders
rights. The issue of governance began with the beginning of corporations.
Dating back to the 16th & 17th centuries.
Advancement in technology has improved
efficiency in governance and they have created new risk as well. Data breached
are a new and real concern for corporate.
First
generation of international corporate governance
The
international corporate governance research that we label generations is
largely patterned after large body of US research. The Frist generation of
researcher on corporate governance mechanism generally. Concerns itself with 2
questions regarding a particular mechanisam. It affect firm performance, where
performance is typically measured by profitable or relative market value.
Seconds
generations of international corporate governance
The evidence discussed
in section 2 indicates that blockshareholders are more common in most in most
other countries of the world than in the US. The first generation of international
corporate governance research does not directly address the reason for the
increased prevalence and impact of large shareholders outside of US. In
addition, some research downplay the legal system as an effective means of
corporate governance.
§ Capititalisam
at the beginning of the 21st century is a variegated collection of
economic systems. In America, capitalisam is a system where a huge number of independent
corporations compete with each other for customer.
§ The
corporate governance frame work in many countries of the world is largely.
§ Speaks
mainly of the composition of management structure at various levels.
§ The
assumption being that the structure will automatically ensure quality of
delivery.
§ As
a history of corporate governance around the world shows, neither conceptions
is wrongly.
§ In
this volume, some of the brightest minds in the field of economics present.
§ New
empirical research that suggestion that each side of the debate.
No one can say exactly now
corporate governance should be incorporated in a company’s strategy. Different
people have different definitions of corporate governance. In the debate
concerning the impact of corporate governance is performance. There are
basically 2 different model of the corporation.
Evolution of corporate governance in India
Corporate governance is the
system by which companies are directed and controlled. This concerned with set
of principles, ethics, values, moral, rules regulations and procedures.
§ The
Indian corporate scenario was more or less stagnant till the early 90s.
§ This
concept emerged in India after the second half of 1990 due to economic liberalization
and deregulation of industry and business.
§ Indian
approach is drawn from the Gandhian principle of trusteeship and the directive
principles of Indian constitution.
§ Sir
Adrian Cadburys report popularly known as Cadbury
Report (1992) was the first report on corporate governance released in UK
§
In 1996,Confederation of Indian Industries (CII)
took a special initiative on corporate governance. The objective was to develop
and promote a code for corporate governance to be adopted and followed by Indian
companies, be these in private sector, the public sector, bank or financial
institutions, all of which are corporate entities. In April 1998, the CII
released the code called “Desirable Corporate
Governance”.
§
The second
major initiative was undertaken by the Securities
and Exchange Board of India (SEBI) which set up a committee under the
chairmanship of Kumar Mangalam Birla
in 1999 with the objective of promoting and rising of standards of good
corporate governance.
§
In May
2000, the Department of Corporate Affairs (DCA) formed a broad based study
group under the chairmanship of Dr. P.L. Sanjeev Reddy, Secretary of DCA. The
group was given the ambitious task of examining ways to “operationalise the
concept of corporate excellence on a sustained basis” so as to “sharpen India’s
global competitive edge and to further develop corporate culture in the
country”.
§
A
committee was appointed by Ministry of Finance and Company Affairs in August
2002 under the chairmanship of Naresh Chandra to examine and recommend inter
alia amendments to the law involving the auditor-client relationships and the
role of independent directors. The committee made recommendations in two key
aspects of corporate governance: financial and non-financial disclosures: and
independent auditing and board oversight of management.
§ Narayana
Murthy Committee Report in 2002: The
SEBI constituted a committee under the chairmanship
of Narayana Murthy for reviewing implementation of the corporate governance
code by listed companies and issue of revised clause 49.
§
J.J. Irani
Committee Report: The Companies Act 1956
was enacted on the recommendations of the Bhaba Committee set up in 1950 with
the object to consolidate the existing corporate laws and to provide a new
basis for corporate operation in independent India.
§
A high
powered Central Coordination and Monitoring Committee (CCMC) co-chaired by
Secretary, Department of Corporate Affairs’ and Chairman, SEBI was set up by
the Department of Corporate Affairs to monitor the action taken against the
vanishing companies and unscrupulous promoters who misused the funds raised
from the public.
§
Recently
the Ministry of Company Affairs has set up National Foundation for Corporate
Governance (NFCG) in association with Confederation of Indian Industry (CII),
Institute of Company Secretaries of India (ICSI) and Institute of Chartered
Accountants of India (ICAI).
§
Voluntary
Guidelines on Corporate Governance were issued by the Ministry of Corporate
Affairs in December2009.
§
Establishment
of the NSE Centre for Excellence in Corporate Governance in December, 2012 to
encourage best standards of corporate governance among the Indian corporate.
§
Finally
the enactment of the companies Act 2013 was major development in corporate
governance in 2013. The new Act replaces the Companies Act, 1956 and aims to
improve corporate governance standards simplify regulations and enhance the interests
of minority shareholders.
§
Now
corporate governance in India is modeled on the line of the Anglo-American system (give importance
to share holders).
Objectives of
Corporate Governance
Good governance is
integral to the very existence of a company. It inspires and strengthens
investor's confidence by ensuring company's commitment to higher growth and
profits. It seeks to achieve following objectives:
1. Good Corporate
Governance ensures corporate success and economic growth.
2. Strong Corporate
Governance maintains investors’ confidence, as a result of which, company can
raise capital efficiently and effectively.
3. It lowers the
capital cost.
4. There is a positive
impact on the share price.
5. It provides proper
inducement to the owners as well as managers to achieve objectives that are in
interests ofthe shareholders and the organization.
6. Good Corporate
Governance also minimizes wastages, corruption, risks and mismanagement.
7. It helps in brand
formation and development.
8. It ensures
organization in managed in a manner that fits the best interests of all.
Elements of good
Corporate Governance
Good governance is
decisively the manifestation of personal beliefs and values, which configure
the organizational values, beliefs and actions of its Board. The Board as a
main functionary is primary responsible to ensure value creation for its
stakeholders. The absence of clearly designated role and powers of Board
weakens accountability mechanism and threatens the achievement of
organizational goals. Therefore, the foremost requirement of good governance is
the' clear identification of powers, roles, responsibilities and accountability
of the Board, CEO, and the Chairman of the Board. The role of the Board should
be clearly documented in a Board Charter. To sub-serve the above discussion,
the following are the essential elements of good corporate governance:
· Transparency in Board’s
processes and independence in the functioning of Boards. The Board should
provide effective leadership to the company and management for achieving
sustained prosperity for all stakeholders. It should provide independent
judgment for achieving company's objectives.
· Accountability to stakeholders
with a view to serve the stakeholders and account to them at regular intervals
for actions taken, through strong and sustained communication processes.
· Fairness to all stakeholders.
· Social, regulatory and
environmental concerns
· Clear and unambiguous legislation
and regulations are fundamentals to effective corporate governance.
· A healthy management environment
that includes setting up of clear objectives and appropriate ethical framework,
establishing due processes, clear enunciation of responsibility and
accountability, sound business planning, establishing clear boundaries for
acceptable behavior, establishing performance evaluation measures.
· Explicitly prescribed norms of
ethical practices and code of conduct are communicated to all the stakeholders,
which should be clearly understood and followed by each member of the
organization.
· The objectives of the company
must be clearly documented in a long-term corporate strategy including an
annual business plan together with achievable and measurable performance
targets and milestones.
· A well composed Audit Committee
to work as liaison with the management, internal and statutory auditors,
reviewing the adequacy of internal control and compliance with significant
policies and procedures, reporting to the Board on the key issues.
· Risk is an important element of
corporate functioning and governance, which should be clearly identified,
analyzed for taking appropriate remedial measures. For this purpose the Board
should formulate a mechanism for periodic reviews of internal and external
risks.
· A clear Whistle Blower Policy whereby the
employees may without fear report to the management about unethical behaviour,
actual or suspected frauds or violation of company’s code of conduct. There
should be some mechanism for adequate safeguard to employees against
victimization that serves as whistleblowers.
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