CorporateGovernance has emerged as an important academic discipline in its own right, bringingtogether contributions from accounting, finance, law and management.
Corporate governancenow offers a comprehensive, interdisciplinary approach to the management and controlof companies. Corporate professionals of today and tomorrow must imbibe in themselvesthe evolving principles of good corporate governance across the globe on a continualbasis. Excellence can be bettered only through continuous study, research and academicand professional interaction of the highest quality in the theory and practiceof good corporate governance. The corporate world looks upon especially CompanySecretaries to provide the impetus, guidance and direction for achievingworld-class corporate governance. Company Secretaries are the primary source ofadvice on the conduct of business. This can take into its fold everything fromlegal advice on conflicts of interest, through accounting advice, to thedevelopment of strategy/corporate compliance and advice on sustainability aspects. Today, thecorporate world as a whole is in the process of acquiring a moral conscience.The new and emerging concepts in management like corporate governance, businessethics and corporate sustainability are some of the expressions through whichthis emerging ethical instinct in the corporate world is trying to express andembody itself in the corporate life.
In this study we examine the concept ofethics and its importance for the business, corporate governance and governancethrough inner conscience and sustainability. Definitionsof Corporate Governance:There is nouniversal definition of corporate governance. Some good definitions are givenhereunder:-“CorporateGovernance is concerned with the way corporate entities are governed, asdistinct from the way business within those companies is managed. Corporategovernance addresses the issues facing Board of Directors, such as the interactionwith top management and relationships with the owners and others interested inthe affairs of the company” -Robert Ian (Bob) Tricker (who introducedthe words corporate governance for the first time in his book in 1984). “CorporateGovernance is about promoting corporate fairness, transparency andaccountability”.James D.Wolfensohn (Ninth President World Bank) OVERNANCEETHICSCorporate Governance Ethics:Businessethics and corporate governance of an organization go hand in hand.
In fact, anorganization that follows ethical practices in all its activities will, in allprobability, follow best corporate governance practices as well. Corporategovernance is meant to run companies ethically in a manner such that allstakeholders including creditors, distributors, customers, employees, thesociety at large, governments and even competitors are dealt with in a fairmanner. Good corporate governance should look at all stakeholders and not justthe shareholders alone. Corporate governance is not something which regulatorshave to impose on a management, it should come from within. A businessorganization has to compete for a share in the global market on its owninternal strength, in particular on the strength of its human resource, and onthe goodwill of its other stakeholders. While its state-of-the-art technologiesand high level managerial competencies could be of help in meeting the quality,cost, volume, speed and breakeven requirements of the highly competitive globalmarket, it is the value-based management and ethics that the organization hasto use in its governance. This would enable the organization to establishproductive relationship with its internal customers and lasting businessrelationship with its external customers.
Characteristic Features of Corporate Governance:CorporateGovernance is integral to the existence of the company. It is needed to createa corporate culture of transparency, accountability and disclosure. It refersto compliance with all the moral & ethical values, legal framework andvoluntarily adopted practices. It is useful in the below following ways:1. Corporate Performance2. Enhanced Investor Trust3. Better access to global market4.
Combating Corruption5. Easy Finance from Institutions6. Enhancing Enterprise Valuation7. Reduced Risk of Corporate Crisis and Scandals8.
Accountability 1. Corporate Performance: Improved governance structures and processes ensurequality decision-making, encourage effective succession planning for seniormanagement and enhance the long-term prosperity of companies, independent ofthe type of company and its sources of finance. This can be linked withimproved corporate performance- either in terms of share price orprofitability.2. Enhanced Investor Trust: Investors consider corporate governance as important as financialperformance when evaluating companies for investment. Investors who areprovided with high levels of disclosure and transparency are likely to investopenly in those companies.
The consulting firm McKinsey surveyed and determinedthat global institutional investors are prepared to pay a premium of upto 40percent for shares in companies with superior corporate governance practices.3. Better Access to Global Market: A good corporate governance system attracts investmentfrom global investors, which subsequently leads to greater efficiencies in thefinancial sector.4. Combating Corruption: Companies that are transparent, and have sound systemthat provide full disclosure of accounting and auditing procedures, allow transparencyin all business transactions, provide environment where corruption wouldcertainly fade out. Corporate Governance enables a corporation to compete moreefficiently and prevent fraud and malpractices within the organization.5. Easy Finance from Institutions: Several structural changes like increased role offinancial intermediaries and institutional investors, size of the enterprises,investment choices available to investors, increased competition, and increasedrisk exposure have made monitoring the use of capital more complex therebyincreasing the need of Good Corporate Governance.
Evidences indicate thatwell-governed companies receive higher market valuations. The credit worthinessof a company can be trusted on the basis of corporate governance practiced inthe company. 6. Enhancing Enterprise Valuation: Improved management accountability and operationaltransparency fulfil investors’ expectations and confidence on management andcorporations, and in return, increase the value of corporations.7.
Reduced Risk of Corporate Crisis and Scandals: Effective Corporate Governance ensures efficient riskmitigation system in place. A transparent and accountable system makes theBoard of a company aware of the majority of the mask risks involved in aparticular strategy, thereby, placing various control systems in place tofacilitate the monitoring of the related issues.8. Accountability: Investor relations are essential part of goodcorporate governance. Investors directly/ indirectly entrust management of thecompany to create enhanced value for their investment.
The company is henceobliged to make timely disclosures on regular basis to all its shareholders inorder to maintain good investors relation. Good Corporate Governance practicescreate the environment whereby Boards cannot ignore their accountability tothese stakeholders. Approaches to Corporate Governance Theories:The followingtheories elucidate the basis of corporate governance:1. AgencyTheory2. ShareholderTheory3.
StakeHolder Theory4. StewardshipTheory 1. AgencyTheoryAccording tothis theory, managers act as ‘Agents’ of the corporation. The owners set thecentral objectives of the corporation. Managers are responsible for carryingout these objectives in day-to-day work of the company.
Corporate Governance iscontrol of management through designing the structures and processes. In agencytheory, the owners are the principals. But principals may not have knowledge orskill for getting the objectives executed. Thus, principal authorizes themangers to act as ‘Agents’ and a contract between principal and agent is made.Under the contract of agency, the agent should act in good faith. He shouldprotect the interest of the principal and should remain faithful to the goals.
In modern corporations, the shareholdings are widely spread. The management(the agent) directly or indirectly selected by the shareholders (thePrincipals), pursue the objectives set out by the shareholders. The main thrustof the Agency Theory is that the actions of the management differ from thoserequired by the shareholders to maximize their return. The principals who arewidely scattered may not be able to counter this in the absence of propersystems in place as regards timely disclosures, monitoring and oversight. CorporateGovernance puts in place such systems of oversight. 2. Stockholder/shareholder TheoryAccording tothis theory, it is the corporation which is considered as the property ofshareholders/ stockholders. They can dispose off this property, as they like.
They want to get maximum return from this property. The owners seek a return ontheir investment and that is why they invest in a corporation. But this narrowrole has been expanded into overseeing the operations of the corporations andits mangers to ensure that the corporation is in compliance with ethical andlegal standards set by the government. So the directors are responsible for anydamage or harm done to their property i.
e., the corporation. The role ofmanagers is to maximize the wealth of the shareholders. They, therefore shouldexercise due diligence, care and avoid conflict of interest and should notviolate the confidence reposed in them. The agents must be faithful toshareholders. 3. Stakeholder TheoryAccording tothis theory, the company is seen as an input-output model and all the interestgroups which include creditors, employees, customers, suppliers,local-community and the government are to be considered. From their point ofview, a corporation exists for them and not the shareholders alone.
Thedifferent stakeholders also have a self interest. The interest of these differentstakeholders is at times conflicting. The managers and the corporation areresponsible to mediate between these different stakeholders interest. The stakeholders have solidarity with each other. This theory assumes that stakeholdersare capable and willing to negotiate and bargain with one another. This resultsin long term self interest. The role of shareholders is reduced in thecorporation.
But they should also work to make their interest compatible withthe other stake holders. This requires integrity and managers play an importantrole here. They are faithful agents but of all stakeholders, not juststockholders. 4. Stewardship TheoryThe word’steward’ means a person who manages another’s property or estate. Here, theword is used in the sense of guardian in relation to a corporation, this theoryis value based. The managers and employees are to safeguard the resources ofcorporation and its property and interest when the owner is absent. They arelike a caretaker.
They have to take utmost care of the corporation. They shouldnot use the property for their selfish ends. This theory thus makes use of thesocial approach to human nature.
Role of Board of DirectorsThe Report introduced “The Code of Best Practice”directing the boards of directors of all listedcompanies, and also encouraging as many othercompanies as possible aiming at compliance with the requirements. All listedcompanies should make a statement about theircompliance with the Code in their report and accountsas well as give reasons for any areas of non compliance. It is divided intofour sections:1. Boardof Directors:(a) The board should meet regularly, retain full andeffective control over the company and monitor the executive management.(b) There should be a clearly accepted division ofresponsibilities at the head of a company, which will ensure a balance of powerand authority, such that no one individual has unfettered powers ofdecision.
(c) Where the chairman is also the chief executive, itis essential that there should be a strong andindependent element on the board, with a recognizedsenior member, that is, there should be a lead independent director.(d) All directors should have access to the advice andservices of the company secretary, who isresponsible to the Board for ensuring that boardprocedures are followed and that applicable rules and regulations are compliedwith. 2.
Non-ExecutiveDirectors:(a) The non-executive directors should bring anindependent judgment to bear on issues of strategy, performance, resources,including key appointments, and standards of conduct.(b) The majority of non-executive directors should beindependent of management and free from any business or other relationshipwhich could materially interfere with the exercise of their independent judgment,apart from their fees and shareholding.3. ExecutiveDirectors:There should be full and clear disclosure ofdirectors’ total emoluments and those of the chairman and highest-paiddirectors, including pension contributions and stock options, in the company’sannual report, including separate figures for salaryand performance-related pay.4.
FinancialReporting and Controls:It is the duty of the board to present a balanced andunderstandable assessment of their company’sposition, in reporting of financial statements, forproviding true and fair picture of financial reporting.The directors should report that the business is agoing concern, with supporting assumptions orqualifications as necessary. The board should ensurethat an objective and professional relationshipis maintained with the auditors.5. Roleof AuditorsThe Report recommended for the constitution of AuditCommittee with a minimum of three nonexecutive members majority of whom shallbe independent directors.
The Report recommended that a professional andobjective relationship between the board of directors and auditors should bemaintained, so as to provide to all a true and fair view of company’s financialstatements. Auditors’ role is to design audit in such a manner so that itprovide a reasonable assurance that the financial statements are free ofmaterial misstatements. The Report recommended for rotation of audit partnersto prevent the relationships between the management and the auditors becomingtoo comfortable.The following disclosures shall be made in the sectionon the corporate governance of the annual report.1. A brief statement on listed entity’s philosophy oncode of governance. 2. Board of directors:· compositionand category of directors (e.
g. promoter, executive, non-executive, independent non-executive, nominee director -institution represented and whether as lender or as equity investor)· Attendanceof each director at the meeting of the board of directors and the last annualgeneral meeting· Numberof other board of directors or committees in which a directors is a member or chairperson· Numberof meetings of the board of directors held and dates on which held· Disclosureof relationships between directors inter-se· Numberof shares and convertible instruments held by nonexecutive directors· Weblink where details of familiarisation programmes imparted to independentdirectors is disclosed.3. Audit committee:· Briefdescription of terms of reference;· Composition,name of members and chairperson;· Meetingsand attendance during the year.4. Nomination andRemuneration Committee:· Descriptionof terms of reference;· Composition,name of members and chairperson;· Meetingand attendance during the year;· Performanceevaluation criteria for independent directors.
5. Remuneration ofDirectors:· Allpecuniary relationship or transactions of the non-executive directors vis-à-visthe listed entity shall be disclosed in the annual report;· Criteriaof making payments to non-executive directors. alternatively, this may bedisseminated on the listed entity’s website and reference drawn thereto in theannual report;· Disclosureswith respect to remuneration: in addition to disclosures required under theCompanies Act, 2013, the following disclosures shall be made:All elements of remuneration package of individualdirectors summarized under major groups, such as salary, benefits, bonuses,stock options, pension etc, Details of fixed component and performance linkedincentives, along with the performance criteria, service contracts, noticeperiod, severance fees, stock option details, if any and whether issued at adiscount as well as the period over which Accrued and over which exercisable. ConclusionCorporate Governance is managing, monitoring andoverseeing various corporate systems in such a manner that corporatereliability, reputation are not put at stake.
Corporate Governance pillars ontransparency and fairness in action satisfying accountability andresponsibility towards the stakeholders.The long term performance of a corporate is judged bya wide constituency of stakeholders. Various Stakeholders affected by the governancepractices of the company are Vendors, Customers, Employees, Society andGovernment.