Corporate governance refers to the manner in which corporation is directed, and laws and customs affecting that direction. It includes the laws governing the formation of firms; the bylaws established by the firm itself, and the structure of the firm. The corporate governance structure specifies the relations, and the distribution of rights and responsibilities, among primarily three groups of participants: the board of directors, managers, and shareholders. This system spells out the rules and procedures for making decisions on corporate affairs; it also provides the structure through which the company objectives are set, as well as the means of attaining and monitoring the performance of those objectives.
The fundamental concern of corporate governance is directors and managers act in the interests of the firm and its shareholders, and to ensure the means by which managers are held accountable to capital providers for the use of assets. Issues of fiduciary duty and accountability are often discussed within the framework of corporate governance. Corporate governance principles and codes have been developed in different countries and issued from stock exchanges, corporations, institutional investors, or associations of directors and managers with the support of governments and international organizations. As a rule, compliance with these governance recommendations is not mandated by law, although the codes linked to stock exchange listing requirements may have a coercive effect.
Corporate Governance - Competition, Emerging Markets:
The quality of corporate governance has been shown to have wide-ranging implications, e.g., on the performance of stock markets and on exchange rates. This study investigates whether the quality of corporate governance in a country impacts investment decisions made at the micro level of the firm. The focuses on Asian emerging markets and they have widely varying standards of corporate governance.
Corporate governance and a poor competitive environment in the affected Countries.
Ownership is by far the exception in developing countries.
Fast long-term growth with different governance systems, in developed countries.
Corporate financing patterns in emerging markets in the 1990s were broadly similar to those observed in the 1980s. Unlike their counterparts in advanced Countries, large developing countries firms continued to rely overwhelmingly on external sources to finance their growth of total assets.
Conglomerates are inefficient, financially precarious and necessarily create moral hazard. It also indicates that contrary to widely held beliefs, product market competition in emerging countries is no less intense than in advanced economies.
Main reasons for the upsurge of Corporate Governance:
There is awareness on the part of lending institutions which are now being subjected to rigorous accounting norms, particularly with regard to income rendition and provisions against non-performance loans so they are giving much more emphasis to good and efficient corporate governance. There is the integration of India into the world economy which depends that Indian industry should pay the game by a standard set of international rules rather than continue their anachronistic practices.
The recent interest about Corporate Governance is primarily a product of four factors.
Assertion of Rights by the shareholders,
Significant presence of Foreign Institutional Investors,
Awareness on the part of lending institution
Integration of India into the World Economy,
Strong Media presence.
Participants involvement in Corporate Governance
Shareholders have not been able to fulfill the historic role effectively for the reasons that they are widely spread and many of them find it difficult to travel to the meeting place. But in the context of complex nature of modern business, the scope of areas requiring shareholder's approval has enlarged.
The significant presence of foreign institutional investors who demand greater professionalism in the management of Indian corporate has also led to the keen interest in the corporate Governance.
Need for Good Corporate Governance
A commitment to good corporate governance in terms of, say, well-defined shareholder rights, a solid control environment, high levels of transparency and disclosure, an empowered board of directors etc. make a company both more attractive to investors and lenders, and more profitable. Investors always look for this that attracts premium valuations in every respect. A study reveals that well-governed firms in Korea traded at a premium of 160 percent to poorly governed firms. A study of Russian firms concludes that a worst-to-best improvement in corporate governance predicted an astronomical 700-fold (70,000%) increase in firm value. The study's sample size was small (21 firms), so it's unlikely that such a huge increase would occur in a larger, more representative sample.
However, the study still demonstrated a correlation between improved corporate governance and firm value. Another study of S&P 500 firms by Deutsche Bank showed that companies with strong or improving corporate governance outperformed those with poor or deteriorating governance practices by about 19% over a two-year period. A Harvard/Wharton study showed that if an investor purchased shares in US firms with the strongest shareholder rights, and sold shares in the ones with the weakest shareholder rights, that investor would have earned abnormal returns of 8.5 percent per year. In McKinsey survey, institutional investors said they would pay premiums to own well-governed companies on an average of 30% in Eastern Europe and Africa; and 22% in Asia and Latin America.
A study of the 100 largest emerging market companies by Credit Lyonnais Securities Asia (CLSA) showed that companies with the best corporate governance in each of a large number of emerging market countries had eight percentage points higher measures of economic value added (EVA) than firms in their country average. U.S. based firms with better governance have faster sales growth and were more profitable than their peers. Brazilian firms with above-average corporate governance had ROEs that were 45% higher and net margins that were 76% higher than those with below-average governance practices. Thus for an integrated success, GCG has no alternative.
The role of auditing to promote Good Governance
The United Nations has identified the basic characteristics for good governance in the public sector as portrayed. Among these core elements of good governance in the public sector, the IAF can emphatically focuses on the functioning and performance of the public sector. The four related characteristics of good governance are transparency, public accountability, effectiveness/efficiency and responsiveness. As a result, the IAF has always been viewed as an integral part of the government financial management and increasingly as an instrument for improving the performance of the government sector.
Government auditing is a cornerstone of good public sector governance. By providing unbiased, objective assessments of whether public resources are responsibly and effectively managed to achieve intended results, auditors help government organizations achieve accountability and integrity, improve operations, and instill confidence among citizens and stakeholders. The government auditor's role supports the governance responsibilities of oversight, insight, and foresight. Oversight addresses whether government entities are doing what they are supposed to do and serves to detect and deter public corruption.
Relevance of Corporate Governance to Indian Context
There is a need to bring better corporate Government in India in the context of liberalization, Privatization and globalization (LPG) of Indian economy. The following factors underline the relevance of corporate Government to Indian context.
Indian Boards are not in tune with times.
Holders of limited stake determine the destiny of major shareholders.
Family feuds result on stalemate and confusion.
Changing business environment.
Shift in Government attitude.
Vision development
Brand building
Competitive edge
Professional managers and independent auditors did not help much
Strategic management is the theme for survival for corporate in the present competitive environment. Strategic Management is depending on - clear understanding regarding company's mission, objectives and strategic, proper environment analysis and corporate analysis. Important issues in Corporate Governance are:
Sound Management
Fiduciary relationship
Responsibility
Accountability
Return on Integrity
Confederation of Indian Industry issued many recommendations for Board of directors for efficient and effective performance in Corporate Governance for the Indian Industrial Development.
Corporate Governance and Economic Development
Effective Corporate Governance is now widely seen as essential for the creation of a coherent and efficient global financial architecture. But corporate governance is merely one, albeit an important, mechanism in a country's policy menu to stimulate economic development. In terms of social and economic development, it has been argued that corporate governance is a powerful micro-economic instrument to support macro-economic policies.
While all of this is true in the case of private companies, the same can also be said about the public sector. It is not only incumbent on government institutions to put in place the necessary frameworks for good corporate governance and mechanisms to ensure compliance but also to set the tone by conducting its affairs in a socially responsible manner.
In the case of South Africa, government departments and constitutional institutions are required to operate in a manner which is open to public scrutiny and which places their actions above question. This not only relates to matters of ethics but also to the effective use of public resources to ensure accelerated social and economic development. There can be little doubt that public perceptions of government performance are more likely to be positive if the citizens are convinced that the state's corporate governance structures are transparent and accountable.
A lot has been written about the disclosure of assets, receipt of gifts, and tender processes. It suffices to say that the public sector is often held to a higher standard, and that the importance of an active and questioning legislative authority and of diligent constitutional institutions cannot be overemphasized.
Corporate Governance and Globalization
Now the Corporate Governance, ethics and spirituality onto the global agenda. The second struggle - determining a management model - is playing out in global institutions such as the World Trade Organization, the United Nations, and the World Bank. Two of the major areas in which globalization have a significant influence are economics and human rights.
Economics:
The integration of world affairs has created a world economy that is interdependent and interconnected. A prime example is the attack on the World Trade Centre: this event in a single modern state wiped millions of dollars off global stock values and continues to impact upon thousands of air travelers around the world. Yet another example of the extent of economic integration is the ability companies have to undertake and locate their work in different countries, either in whole or in part. This is largely due to information and communication technologies facilitating a virtual 24-hour workday.
Human rights:
The development of human rights is one of the areas that support the anthropological view of globalization: the history of the evolutionary process of human civilization is one in which the strengthening of individual rights, as opposed to group rights, is a definite trend. In more recent times, the ease and extent to which information is capable of being spread has increased awareness of global human behavioral patterns and quality of life. The global population is now more aware of what behaviour is acceptable and what is not, and who is enjoying what quality of life and where. As an example, internal resistance is increasing in countries and societies where women and children's rights are abused or non-existent.
Global characteristics of Corporate Governance:
Fundamental paradigm shift by all participants in the construction industry to enterprise development and management, a shift based solidly on probity and respect. The paper argues that such a commitment by industry participants could lead to an enabling environment for effective delivery and for growth, improved performance and continuous development of the industry. Good corporate governance is after all, about the values supporting excellence as well as the creation of an ethical culture.
Globalization trends are currently enhancing the strength of market forces relative to that of governments, and in both developed and developing nations a growing proportion of economic activity is taking place in firms organized as corporations. Societies around the world are thus placing greater reliance on the private sector as the engine of economic growth, with privatization and liberalization movements constantly adding to the power of these corporations. Research has shown that corruption hinders a county's ability to absorb the beneficial side of globalization, and makes it more vulnerable to its risks such as the increasing likelihood of currency crises. This high cost is translated by FDI flight or reduction.
The growing importance of the private sector has also raised concerns with the direction and control of these corporations. Following the Asian financial crisis, corporate governance came to the forefront of the international financial, and development policy agenda; and crises, such as in Russia, have moreover highlighted this issue. At the core of both the Asian and Russian crises were corporations and governments that failed to create a system of transparent, market based principles of business practices. The collapse of companies like Enron and Andersen last year, have brought furthermore to the fore the significance of good corporate governance. In the Arab region last year's banking debacle in Jordan, the under-performing Egyptian banking sector and the rising number of cases featuring weak corporate performance in the Gulf as well as the entrenched corruption have highlighted the need to start a debate on the subject of corporate governance.
Issues in Corporate Governance in India
The word 'corporate governance' has become a buzzword these days because of two factors. The first is that after the collapse of the Soviet Union and the end of the cold war in 1990, it has become the conventional wisdom all over the world that market dynamics must prevail in economic matters. The concept of government controlling the commanding heights of the economy has been given up. This, in turn, has made the market the most decisive factor in settling economic issues.
This has also coincided with the thrust given to globalization because of the setting up of the WTO and every member of the WTO trying to bring down the tariff barriers. Globalization involves the movement of four economic parameters namely, physical capital in terms of plant and machinery, financial capital in terms of money invested in capital markets or in FDI, technology, and labour moving across national borders. The pace of movement of financial capital has become greater because of the pervasive impact of information technology and the world having become a global village. When investments take place in emerging markets, the investors want to be sure that not only are the capital markets or enterprises with which they are investing, run competently but they also have good corporate governance. Corporate governance represents the value framework, the ethical framework and the moral framework under which business decisions are taken. In other words, when investments take place across national borders, the investors want to be sure that not only is their capital handled effectively and adds to the creation of wealth, but the business decisions are also taken in a manner which is not illegal or involving moral hazard.
Corporate governance therefore calls for three factors:
Transparency in decision-making
Accountability which follows from transparency because responsibilities could be fixed easily for actions taken or not taken, and
The accountability is for the safeguarding the interests of the stakeholders and the investors in the organization
Implementation of corporate governance has depended upon laying down explicit codes, which enterprises and the organizations are supposed to observe. The Cadbury's code in United Kingdom was the starting point, which led to a number of other codes. In India itself we have the Kumaramangalam Birla code as a result of the committee headed by him at the behest of the SEBI. Earlier we had the CII coming up with the code for corporate governance recommended by the committee headed by Shri Rahul Bajaj. The codes, however, can only be a guideline. Ultimately effective corporate governance depends upon the commitment of the people in the organization. The very first issue of corporate governance in India is, do the India managements really believe in corporate governance?
Corporate governance depends upon two factors. The first is the commitment of the management for the principle of integrity and transparency in business operations. The second is the legal and the administrative framework created by the government. If public governance is weak, we cannot have good corporate governance. The dramatic Enron case has highlighted how companies, which were the darlings of the stock market and held up as models for vigorous and innovative growth, can, ultimately collapse like a house of cards as they were based on fraud and dishonesty. The association of the accounting firm also raised a doubt about the credibility of even well regarded global players.
In the Indian context, the need for corporate governance has been highlighted because of the scams we have been having almost as an annual feature ever since we had liberalization from 1991. We had the Harshad Mehta Scam, Ketan Parikh Scam, UTI Scam, Vanishing Company Scam, Bhansali Scam and so on. Right now the Enron issue is examined by a number of committees at different levels in the United States. At the end of all these examinations, they are likely to come with a better model. In the Indian corporate scene we must be able to induct global standards so that at least while the scope for scams may still exist, we can reduce the scope to the minimum.
The legal and administrative environment in India provides excellent scope for corrupt practices in business. As a result unless a management is committed to be honest and observe the principles of propriety, the atmosphere is too tempting to observe good corporate governance in practice. We should approach the corporate governance issue in India not merely from the point of view of the Companies' Act or the guidelines which can be issued like the Kumaramangalam code or the Bajaj code but look at the entire network of various rules and regulations impinging on business so that there is a integrated wholistic system created for ensuring that transparency and good corporate governance prevail.
The ethical temperature of any business or capital market depends on three factors. The first is the individual's sense of values. The second is the social values accepted by the business and industry. Let us not forget that when Harshad Mehta Scam took place, it was claimed that the manner in which the bank receipts were being treated was the prevailing norm. Perhaps a similar argument would have been given in the Ketan Parikh Scam. In other words, practices, which are later on found to be highly objectionable, become acceptable because that was the prevailing market practice. Social values will depend upon the standards set up by professional bodies like the Association of Chartered Accountants or Cost Accounts of India and so on. The third and perhaps the most decisive factor is the system. It is here we face the main challenge. Our system encourages lack of corporate governance. Some of the specific steps that should be taken to improve corporate governance are the following:
The Sick Industries Companies Act (SICA) has become so convenient for the unscrupulous managements that we find in our country industries become sick, the industrialist do not become sick. Mere tinkering with the system by making amendments is not going to improve the situation.
The entire banking system and the Banking Secrecy Act call for a review. It is high time that practice of disclosing the name of willful defaulters is made more practical and timely. Publishing the names in the case of suits, which have been filed, is of no value at all because by that time the matter is all but over.
In India today we have a system where the level of public governance is very poor. There is no fear of punishment at all. In such a situation it is only a saint who will be observing strictly the rules of corporate governance.
It is not deny that there are very honourable companies in India, which are following ethical practices but if the general environment is such that there is no fear of punishment, people are bound to be tempted to indulge in corrupt practices and moral hazards, which go totally against corporate governance. So far as the public sector enterprises are concerned, a lot of transparency has brought into the system of disinvestment. Nevertheless, we can expect at least for the ten years or so, the public sector will remain. It is necessary to bring in a sort of hands off relationship between the administrative ministries and the public sector. If today really want to bring in better corporate governance in the public sector, introduction and strict observance of the code mentioned above is necessary.
Conclusion:
Corporate India needs to make giant steps in order to take the full advantage of globalization and information technology. The leadership of the centre comprising of board of directors and top management would have to be truly processional and responsible. There should be code of corporate governance. The centre should focus more ion their core activities like giving direction, vision, empowering others.
Business Body like CII should form a consensus on arriving at a code of corporate governance and ethical practices. Financial Institutions should insist on professionalisation and sound corporate governance for providing financial support to any organization. The rating agencies should give specific attention on corporate governance. The movement for better corporate governance is not just for the lending institutions or for investor protection, but, it is a movement for survival and growth of Corporates in the era of globalization and liberalization.
