Ethics & Integrity: Concept of Corporate Governance

In early 1990s, the Bank of Credit and Commerce International (BCCI) went ruined and lost billions of dollars for its depositors, shareholders and employees in U K similar to the Watergate scandal of USA. At that time the ‘Cadbury Committee’ of London, UK was set up in 1991 with a view to address the problems of scams occurring in the corporate sector in the late 1980s and the early 1990s.

This committee was formed by the London Stock of Exchange, with the main aim of addressing the financial aspects of Corporate Governance followed by Paul Ruthman, Greenbury committee and united code on corporate governance. All the recommendations were based on the constantly evolving corporate governance that reflects the current corporate economic and legal environment.

Concept of corporate governance

• 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.”
• As per Standard and Poor – “Corporate Governance is the way a company is organized and managed to ensure that all financial stakeholders receive a fair share of the company’s earnings and assets.”

World Bank report on corporate governance recognizes that corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. It focused on the principles such as transparency, accountability, fairness and responsibility that are universal in their applications.

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.

Factors influencing the quality of Corporate Governance

• Integrity of the Management
• Ability of the Board
• Adequacy of the Process
• Quality of Corporate Reporting
• Participation of Stakeholders
• Quality of Corporate Reporting

Corporate governance and Increase in performance

• It expands strategic thinking of newly admitted independent directors with wide experience and new ideas.
• It rationalizes the management and monitoring of risk of any organisation locally and globally.
• The decision making process is articulated carefully to limit the liability of top management.
• Assures integrity of reports.
• Builds and earns reputation from key stakeholders, both internally and externally.

OECD Principles with respect to Corporate Governanace

The OECD set a trend of code of best practices in association with Cadbury report. It includes the following principles.

• The rights of shareholders
• Equitable treatment of shareholders
• Role of stakeholders in corporate governance
• Disclosure and Transparency
• Responsibilities of the board

Corporate Governance & Ethics

Corporate governance is an instrument to ensure accountability and responsibility. Corporate governance and ethics are strong pillars of distinction in any business organisation and places importance on integrity, understanding, excellence, unity and responsibility. The concept of business ethics is a set of standards by which a corporate entity regulates its behaviour in terms of what is legitimate and acceptable in the quest of its corporate goals.

Need for the Ethics Code for Corporate Governance

The Business organisations are faced with new challenges in building on the trust, due to increasing pressures, expectations of stakeholders, competition, aspirations of individuals and societies, and the lag in the fulfilment of such aspirations. Against this backdrop, to ensure that business runs successfully, there is a need that the trust is continuously reinforced, to balance the aspirations, and pressures.

Organizational challenges in institutionalizing ethics in Corporate

• Diverse socio-cultural environment.
• Rapid performance delivery.
• Very high performance expectations.
• Increasing competitive pressure.
• Entry into new sectors with different types of ethical concerns.
• Diverse value systems.
• Diverse regulatory environment.
• Diverse enforcement environment.
• Very high employee turnover.

According to a World Bank report, “A company remains a key component of modern society and have become a more immediate presence to many citizens and modern democracies. Proper governance of companies is as crucial for sustained public trust and wealth generation as is proper governance of countries for socio economic development. Corporate governance is used as a mechanism to ensure accountability and responsibility.

In the changed paradigm, good governance encompasses not just Board Practices but also a clear demonstration of commitment to social responsibility, business ethics and balancing value for all stakeholders. Corporate governance is considered an important instrument of investor protection, and it is therefore a priority on SEBI’s agenda. This would ensure that Indian investors are in no way less informed and protected as compared to their counterparts in the best-developed capital markets and economies of the world.