Corporate Governance

Governance refers to all processes of governing via various laws, norms, power or language. This term is very broad and includes all formal and informal organizations. The word can be used as suffix to a wide array of processes of governing such as Public governance, Private governance, Global governance, corporate governance, Non-profit governance, Project governance, Environmental Governance, Internet Governance and so on.

What is Corporate Governance?

Corporate governance is about promoting corporate fairness, transparency and accountability. Corporate Governance deals with how a corporate is governed.

In other words, corporate governance influences how the objectives of an organisation are set and achieved, the risk is monitored and assessed and the performance is optimized.

What are the Stakeholders versus Shareholders concepts?

The traditional governance concept puts management as accountable to only investors. The purpose of the corporate as per this model is to maximise the shareholder’ value. However, in the modern concept, corporate governance encompasses all the processes, relationships, customs, policies, laws and institutions, which affect the direction, administration and control of a corporate. Company management is responsible not only to the shareholders, but also to other stakeholders i.e. people who have an interest in the conduct of the business of the company. The stakeholders include shareholders, management, board of directors, employees, suppliers, customers, lenders, regulators (government), the environment and the community at large. These relationships involve various rules, regulations, incentives which help to set objectives of the corporate and through light on means of attaining these objectives as well as monitoring performance are determined.

What are Objectives of Corporate Governance?

The objectives of the corporate governance inter alia include:

  • Attaining disclosure and transparency in corporate structures as well as organizations. This is the central objective of Corporate Governance.
  • Fixing accountability of the controllers and managers towards the shareholders and others. This also includes bringing the interests of investors and manager into line and ensuring that firms are run for the benefit of investors.
  • Fixing the corporate responsibility towards various stakeholders
  • Create a framework for long term trust between the corporate and external providers of capital
  • Rationalize the management and risk monitoring
  • Efficient decision making
  • Integrity and probity in the financial reports.

The term corporate governance and corporate ethics are intertwined. Principled goal setting, effective decision-making and appropriate monitoring of compliance and performance across the organization – these are the global standards of corporate ethics, which come into the organization run in an open and honest manner.

The overall objectives of corporate governance are to maintain overall market confidence, avoid corporate frauds; bring efficiency of capital allocation and use and economic growth and development that leads to a nation’s overall wealth and welfare. While objective of the corporation is to maximise the shareholder value; the corporate governance makes sure that “share holder primacy” is not at the cost of “stake holder” primacy. It encourages the corporate to foster long-term relationships with stakeholders by taking their interests into account.

What are features of Good Corporate Governance?

Good corporate governance has the following major characteristics:

  • It is participatory, consensus oriented and accountable to all stakeholders
  • it is transparent, responsive, effective and efficient
  • It is equitable and inclusive
  • It follows the rule of law

Select Historical Bits

United States

The Watergate scandal of 1970s in United States exposed various control failures which allowed several corporations to make illegal political contributions and to bribe government officials. In 1977, the government over there enacted the Foreign and Corrupt Practices Act embodying specific provisions regarding the establishment, maintenance and review of systems of internal control. In 1979, the United States Securities and Exchange Commission are proposed mandatory reporting on internal financial controls. In 1980s, United States saw a series of failures of some high profile businesses. This was followed by creation of Tradway Commission to identify the causes. The report of this commission was published in 1987 and it highlighted the need for set of proper control environment and internal audit.

United Kingdom

Similarly, in United Kingdom, the Bank of Credit and Commerce International (BCCI) Scandal and some other corporate failures led to birth of modern corporate governance.  The 1992 report of the Committee of Sponsoring Organizations (COSO) suggested a control framework. This was endorsed a refined in four subsequent UK reports viz. Cadbury Report, Ruthman Report, Hampel Report and Turbull report.

World Bank and OECD

World Bank is one of the earliest economic organizations to study the issue of corporate governance and bring out some guidelines. These include focussing on the principles such as transparency, accountability, fairness and responsibility that are universal in their applications. Similarly, the OECD spelled out the principles and practices that should govern corporate. These principles called “Code of Best practices” are associated with Cadbury report of UK and are considered to be the trendsetters in the global Corporate Governance. The OCED principles are:

  • The rights of shareholders
  • Equitable treatment of shareholders
  • Role of stakeholders in corporate governance
  • Disclosure and Transparency
  • Responsibilities of the board
Sarbanes- Oxley Act, 2002

The Sarbanes-Oxley Act (SOX) is one of the landmark legislations enacted by US government. This act attempted to address all the issues associated with corporate failure to achieve quality governance and to restore investor’s confidence. One of the major provisions of this act was to establish a Public Company Accounting Oversight Board (PCAOB) to regulate the auditing profession, which had been self-regulated prior to the law. This act made it clear that the company’s senior officers are accountable and responsible for the corporate culture they create and must be faithful to the same rules they set out for other employees.

Corporate Governance and INDIA

The Corporate Governance initiative was launched in India in the mid 1990’s. Confederation of Indian industry came up with the first voluntary code of corporate governance, followed by Kumar Mangalam Birla committee constituted by SEBI, Naresh Chandra committee report 2002 and Narayana Murthy committee report submitted in 2003.