Corporate Governance Cadbury Report
Corporate governance involves a set of relationships amongst the company’s management, its board of directors, its shareholders, its auditors and other stakeholders. These relationships, which involve various rules and incentives, provide the structure through which the objectives of the company are set, and the means of attaining these objectives as well as monitoring performance are determined. Thus, the key aspects of good corporate governance include transparency of corporate structures and operations; the accountability of managers and the boards to shareholders; and corporate responsibility towards stakeholders.
The principal stakeholders are the shareholders/members, management, and the board of directors. Other stakeholders include labor (employees), customers, creditors (e. g. , banks, bond holders), suppliers, regulators, and the community at large. In a broader sense, however, good corporate governance- the extents to which companies are run in an open and honest manner- is important for overall market confidence, the efficiency of capital allocation, the growth and development of countries’ industrial bases, and ultimately the nations’ overall wealth and welfare.
An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. It is a system of structuring, operating and controlling a company with a view to achieve long term strategic goals to satisfy shareholders, creditors, employees, customers and suppliers, and complying with the legal and regulatory requirements, apart from meeting environmental and local community needs.
Report of SEBI committee (India) on Corporate Governance defines corporate governance as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company. Issues involving corporate governance principles include:
- Internal controls and internal auditor
- The independence of the entity’s external auditors and the quality of their audits
- Oversight of the preparation of the entity’s financial statements
- Review of the compensation arrangements for the chief executive officer and other senior executives
The need for corporate governance is not something typical to our country or economy. Even in the countries where regulatory mechanisms are more demanding in their content and more vigilant in their implementation, flagrant violations under the veil of corporate impenetrability have generated a strident demand for better governance.
The advent of the information age has created an awakened shareholder, vigilant public and an almost predatory journalistic fervor. Depending upon the model of corporate disclosure followed by different legal frameworks, the right to information has forced corporate to divulge more than they ever did. The following definition should help us to understand the concept better: “Corporate Governance is not just corporate management; it is something much broader to include a fair efficient and transparent administration to meet certain well defined objectives. Read about Corporate Governance at Wipro
It is a system of structuring, operating and controlling a company with a view to achieve long term strategic goals to satisfy shareholders, creditors employees customers and suppliers, and comply with the legal and regulatory requirements, apart from meeting environmental and local community needs. When it is practiced under a well laid out system, it leads to building of a legal, commercial and institutional framework and democrats the boundaries within which these functions are performed.
DEFINITION OF CORPORATE GOVERNANCE
There is no universal definition of Corporate Governance.
However some of the definitions of Corporate Governance are given herein below:- “Corporate Governance is the system by which companies are directed and controlled” Sir Adrian Cadbury, UK Combined Code “Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. ” “Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. ” OECD Corporate Governance Principles, 2004
“Corporate Governance is about promoting Corporate fairness, transparency and accountability. ” James D Wolfensohn, President of World Bank “…fundamental objective of corporate governance is the ‘enhancement of the long-term shareholder value while at the same time protecting the interests of other stakeholders. ” SEBI (Kumar Mangalam Birla) Report on Corporate Governance, January, 2000 “The way a Company is organized and managed to ensure that all financial stakeholders (Shareholders and Creditors) receive their fair share of a Company’s earnings and assets. ”
Standard & Poor’s
ICSI has also defined the term Corporate Governance as under: “Corporate Governance is the application of best management practices, compliances of law 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” The Principles of Corporate Governance evolved by the ICSI are as under:- Sustainable development of all stakeholders – To ensure growth of all individual associate with or effected by the enterprise on sustainable basis.
Effective management and distribution of wealth – To ensure that enterprise creates maximum wealth and judiciously uses the wealth so created for providing maximum benefits to all stakeholders and enhancing its wealth creation capabilities to maintain sustainability. Discharge of social responsibility – To ensure that enterprise is acceptable to the society in which it is functioning. Application of best management practices – To ensure excellence in functioning of enterprises and optimum creation of wealth on sustainable basis.
Compliance of law in letter and spirit – To ensure value enhancement for all stakeholders guaranteed by the law for maintaining socio-economic balance. Adherence to ethical standards – To ensure integrity, transparency, independence and accountability in dealings with all stakeholders NEED FOR CORPORATE GOVERNANCE
- 1. A corporation is a congregation of various stakeholders, namely, customers, employees, investors, vendor partners, government and society. A corporation should be fair and transparent to its stakeholders in all its transactions.
This has become imperative in today’s globalized business world where corporations need to access global pools of capital, need to attract and retain the best human capital from various parts of the world, need to partner with vendors on mega collaborations and need to live in harmony with the community. Unless a corporation embraces and demonstrates ethical conduct, it will not be able to succeed.
- 2. Corporate governance is about ethical conduct in business. Ethics is concerned with the code of values and principles that enables a person to choose between right and wrong, and therefore, select from alternative courses of action.
Further, ethical dilemmas arise from conflicting interests of the parties involved. In this regard, managers make decisions based on a set of principles influenced by the values, context and culture of the organization. Ethical leadership is good for business as the organization is seen to conduct its business in line with the expectations of all stakeholders.
- 3. Corporate governance is beyond the realm of law. It stems from the culture and mindset of management, and cannot be regulated by legislation alone.
Corporate governance deals with conducting the affairs of a company such that there is fairness to all stakeholders and that its actions benefit the greatest number of stakeholders. It is about openness, integrity and accountability. What legislation can and should do, is to lay down a common framework – the “form” to ensure standards. The “substance” will ultimately determine the credibility and integrity of the process. Substance is inexorably linked to the mindset and ethical standards of management.
- 4. Corporations need to recognize that their growth requires the cooperation of all the stakeholders; and such cooperation is enhanced by the corporation adhering to the best corporate governance practices.
In this regard, the management needs to act as trustees of the shareholders at large and prevent asymmetry of benefits between various sections of shareholders, especially between the owner-managers and the rest of the shareholders.
- 5. Corporate governance is a key element in improving the economic efficiency of a firm.
Good corporate governance also helps ensure that corporations take into account the interests of a wide range of constituencies, as well as of the communities within which they operate. Further, it ensures that their Boards are accountable to the shareholders. This, in turn, helps assure that corporations operate for the benefit of society as a whole. While large profits can be made taking advantage of the asymmetry between stakeholders in the short run, balancing the interests of all stakeholders alone will ensure survival and growth in the long run.
This includes, for instance, taking into account societal concerns about labor and the environment.
- 6. The failure to implement good governance can have a heavy cost beyond regulatory problems.
Evidence suggests that companies that do not employ meaningful governance procedures can pay a significant risk premium when competing for scarce capital in the public markets. In fact, recently, stock market analysts have acquired an increased appreciation for the correlation between governance and returns.
In this regard, an increasing number of reports not only discuss governance in general terms, but also have explicitly altered investment recommendations based on the strength or weakness of a company’s corporate governance infrastructure.
- 7. The credibility offered by good corporate governance procedures also helps maintain the confidence of investors – both foreign and domestic – to attract more “patient”, long-term capital, and will reduce the cost of capital.
This will ultimately induce more stable sources of financing.
- 8. Often, increased attention on corporate governance is a result of financial crisis.
For instance, the Asian financial crisis brought the subject of corporate governance to the surface in Asia. Further, recent scandals disturbed the otherwise placid and complacent corporate landscape in the US. These scandals, in a sense, proved to be serendipitous. They spawned a new set of initiatives in corporate governance in the US and triggered fresh debate in the European Union as well as in Asia. The many instances of corporate misdemeanours have also shifted the emphasis on compliance with substance, rather than form, and brought to sharper focus the need for intellectual honesty and integrity.
This is because financial and non-financial disclosures made by any firm are only as good and honest as the people behind them. By this very principle, only those industrialists whose corporations are governed properly should be allowed to be a part of committees.
The Corporate Governance is governed by The Companies Act, 1956: The powers and duties of Board of Directors as per the Companies Act, 1956 for better Corporate Governance are as follows:
- Section 291 of Companies Act, General Powers Board is entitled to exercise all such powers and do all such acts and things, subject to the provisions of the Companies Act, as the company is authorized to exercise and do. However, the Board shall not exercise any power which is required whether by the Act or by the memorandum or articles of the company or otherwise to be exercised or done by the company in general meeting.
- Power of the individual directors – Unless the Act or the articles otherwise provide, the decisions of the Board are required to be the majority decisions only. Individual directors do not have any general powers.
