Meaning of corporate governance. Corporate Governance is a set of processes, customs , policies , laws and institutions affecting the way a corporation is directed , administered or controlled . Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed . The principal stakeholders are the shareholders , management, and board of directors. Other stakeholders include employees, customers, creditors, suppliers, regulators and the community at large.
The term "Corporate Governance" is used in Listed Public Companies as they need to comply with the "Corporate Governance" commitments agreed with the Stock Exchanges. The term "Corporate Governance" is specifically used under clause 49 of the model listing agreement to be entered into with the Stock Exchanges and the violation of which may lead an action by the Stock Exchange to de-list the company's shares.
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.
Impact of Corporate Governance
The positive effect of corporate governance on different stakeholders ultimately is a strengthened economy, and hence good corporate governance is a tool for socio-economic development.
Parties of Corporate Governance
Parties involved in corporate governance include the regulatory body(e.g. the chief executive officer, the board of directors, management shareholders and auditors) Other stakeholders who take part include suppliers, employees, creditors, customers and the community at large.
A board of directors often plays a key role in corporate governance. It is their responsibility to endorse the organisation's strategy, develop directional policy, appoint, supervise and remunerate senior executives and to endorse accountability of the organisation to its owners and authorities.
All parties to corporate governance have an interest, whether direct or indirect, the effective performance of the organisation. Directors, workers and management receive salaries, benefits and reputation, while shareholders receive captain return. Customer receive goods and services, suppliers receive compensation for their goods and services. In return these individual provide value in the form of natural, human, social and other forms of capital.
Principals Of Corporate Governance
Key elements of good corporate governance principals include honesty, trust and integrity, openness, performance orientation, responsibility and accountability, mutual respect, and commitment to the organization.
Commonly accepted principals of corporate governance include.
Rights and equitable treatment of shareholders:- organizations should respect the rights of shareholders and help shareholders to exercise those rights.
Interest of other stakeholders:- organization should recognize that they have legal and other obligations to all legitimate shareholders.
Role and responsibility of the board :-The board needs a range of skills and understanding to be able to deal with the various business issues and have the ability to review and challenge management performance.
Integrity and ethical behaviour :-Ethical and responsible decision making is not only important for public relations, but it is also necessary element in risk management and avoiding lawsuits. Organization should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making.
Disclosure and transparency:-Organization should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with the level of accountability.
Internal corporate governance controls
Internal corporate governance controls monitor activities and then took corrective actions to accomplish organizational goals. Example include:-
Monitoring by the board of directors:- The board of directors, with its legal authority to hire, fire and compensate top management, safeguards investment capital. Regular board meetings allowed potential problems to be identified, discussed and avoided Executive directors posses superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decision that lead to financial performance outcomes.
Internal control procedures and internal auditors:- Internal control procedures are policies implemented by an entity's board of directors, audit committee, management, and other personnel to provide reasonable assurance of the entity achieving its objectives related to reliable financial reporting, operating efficiency, and compliance with laws and regulations.
Balance of power:- The simplest balance of power is very common, require that the president be a different person from the treasurer. This application of separation of power further developed in the companies where separate division check and balance each other's actions. One group may purpose company - wide administrative changes, another group review and veto the changes, a third group check that the interests of people (customers, shareholders, employees) outside the group are being met.
Remuneration:- Performance-based remuneration is designed to relate some proportion of salary to individual performance. It may be in the form of cash or non- cash payments such as shares and share options, superannuation or other benefits.
External corporate governance controls
External corporate governance controls encompass the controls external stakeholders exercise over the organization. Examples include:-
Competition
Debt covenants
Demand for and assessment of performance information
Government regulations
Managerial labour market
Media pressure
Takeovers
Reforms In Corporate Governance
Corporate governance represents the value framework, the ethical framework and the moral framework under which business decisions are taken. 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.
Yet things happening in the companies show that directors and institutional investors clearly agree that too little reform has taken place to improve meaningfully board governance. If we consider why corporate governance suddenly has become a popular subject of debate we will realize that it is the direct result of globalization. Globalization involves the movement of four elements of the economy very fast across national borders. These are physical capital in terms of plant and machinery, financial capital as invested in capital markets, technology and labour.
For long time, most matters relating to the rights of shareholders were governed by the company law. Over the last few decades, in many countries, the responsibility for protection of investors has shifted to the securities law and the securities regulators at least in case of large listed companies. In India, the Securities and Exchange Board of India (SEBI) was set up as a statutory authority in 1992, and has taken a number of initiatives in the area of investor protection.
The SEBI is planning to come out with a corporate governance rating index. The proposed index, first of its kind, is still at a conceptual stage. The objective is to gauge the level of corporate governance in a company. The index will be based on three principles: the level of wealth creation by a corporate, the quality of wealth management and sharing of the wealth with all stake holders. The corporate governance rating index will be the second attempt by the capital market regulator to raise the standard of corporate governance in listed companies.`
Listing agreement provided for the following major aspects of corporate governance:-
Changes have been made to the definition of 'independent directors'; strengthening the responsibilities of audit committee; improving the quality of financial disclosures and finally; the board as a whole has been tasked with the adoption of a formal code of conduct for senior management and the certification of financial statements issued by the CEO.
Accordingly, companies are now required to constitute various committees like a 'nomination committee', 'compensation committee', 'governance committee' and other committees to adhere to corporate governance.
Strengthening of disclosure norms for Initial Public Offering following the recommendation of Malegam Committee.
Providing information in the director's report for utilization/end use of funds and variation between projected and actual use of funds.
Declaration of unaudited quarterly results.
Mandatory appointment of Compliance Officer for monitoring the share transfer process and ensuring compliance with rules and regulations.
Dispatch of a copy of complete balance sheet to every investor household and arbitrage copy of balance sheet to all shareholders.
Fixing of norms relating to Non-executive directors' compensation and disclosures
Obligation on the Board of Directors to lay down a Code of Conduct for all Board members and senior management of the Company.
Fixation of the term of Non-executive Directors to a maximum of nine years
Requirement of all members of the Audit Committee being financially literate
Increase in the powers of the Audit Committee
Additional duty on the Audit Committee to review of certain information by the Audit Committee
Requirements relating to Audit reports and Audit Qualifications
Disclosure of contingent liabilities
Additional Disclosures
Certification by CEO/CFO
Change in the Format of reporting to Stock Exchanges relating to Corporate Governance
Corporate Governance Is a Myth
The concept of corporate governance implies consistent and effective laws, methods, and metrics for governing our nation's public companies. The sad fact is that there is no such thing. It's a myth. Here's why:
People talk about the fiduciary responsibility of boards of directors. What that means, in plain speak, is that boards are supposed to:
1) Hire and fire the CEO and appoint other corporate officers
2) Compensate the CEO and other corporate officers
3) Oversee corporate strategy
4) Represent shareholders in the transparent and effective governance of the company
Reality of corporate governance:-
The new reality of corporate governance is that capitalisation of companies has changed. From the providers of capital being the wealthy families of the world, the individual has become the provider of capital indirectly through pension funds. A beneficial download of dematerialised scrip indicates throughout the world that on the great stock exchanges, the major shareholder is, in fact, the pension fund.
The other change in corporate governance is that corporate reporting is not what it used to be. The stakeholder is a much wider body than it was in the 18th and 19th centuries and the first half of the 20th century. The individual has become not only the provider of capital, but also the customer and citizen of the country in which the company operates. If each citizen expects his or her neighbour to act as a good citizen, so today stakeholders expect companies to be and to be seen to be good corporate citizens.
Another reality of corporate governance is that the judicial system has not kept up with commerce. Commerce is carried on in a flat, borderless world and capital moves 24/7 with the click of a mouse. Consequently, part of a director's duty of care today is to make sure that when a dispute arises, those disputes are resolved as expeditiously, efficiently and effectively as possible. This can only be done with an adequate dispute resolution clause in major procurement contracts. This is recommended in King III and a precedent clause will be included in the practice notes of King III.
In regard to share options, America and Canada insist that directors, executive and non-executive, receive share options, whereas the EU and the Commonwealth countries have inclined to non-executive directors not receiving share options, because from the outside looking in, it appears to dilute their objectivity. King II recommended share options provided it was approved by shareholders in general meeting. This recommendation has been followed in the new Companies Act, but King III has followed the trend of the EU and Commonwealth countries, which are our major trading partners, and recommended that share options should not be granted after 31 March 2010, when King III becomes operative.
Because of the millions of stakeholders linked to companies which have become the medium with the greatest pool of human and monetary capital in the world, King III contains a chapter on stakeholder relationships.
In conclusion, the new reality of corporate governance is that boards have to take account of financial capital provided by shareholders, human capital provided by employees, natural capital provided by land, air and water and social capital provided by the community and society in which the company operates.
Difference Between Good And Bad Corporate Governance
Are investors willing to pay more for a company with good board governance practices? Suppose you are considering investing in two well-known companies. Both have performed well in the past, but are currently going through difficult times. However, their board governance practices differ:
Company A - 'Poor' governance
Company B - 'Good' governance
Minority of outside directors
Majority of outside directors
Outside directors have financial ties with management
Outside directors are truly independent, no management ties
Directors own little or no stock
Directors have significant stockholdings
Directors compensated only with cash
Large proportion of director pay is stock/options
No formal director evaluation process
Formal director evaluation in place
Corporate Governance Tools
Among the many corporate governance improvement resources available to IFC investment staff are seven key tools tailored to each of the five types of companies IFC invests in (listed companies, family companies, financial institutions, privatized transition economy companies, and state-owned enterprises).
The seven tools used for these companies are:
Instruction Sheets - These describe each of the key corporate governance tools, how they should be used and who should be interviewed in the course of the corporate governance analysis.
Progression Matrices - These relate the five areas of governance (Commitment to good corporate governance, the Board of Directors, Control Environment and Processes,Transparency and Disclosure, and Shareholders Rights) to four levels of achievement.
Information and Document Request List* - This list of questions and requests for documentation forms the basis for the corporate governance analysis of an IFC client. For a CGA the Information and Document Request List are separate. For the CGR both are combined into a single tool. Each Investment Officer must select the tools appropriate for their particular client project.
Explanatory Note: "Why Corporate Governance?" This note explains IFC's approach to corporate governance.
Independent Director Definition - This definition is often used during discussions with the client to clarify the assessment of the current Board and its future needs.
Supervision Checklist - This is a list of key issues that should be considered by investment staff while supervising IFC investee companies, particularly, companies undertaking CG Improvement Programs.
4 Ps of Corporate Governance - Turning Rhetoric into Reality
Corporate Governance is an integrated framework whereby people formally organise themselves for a defined purpose, and they apply critical processes consistently to achieve predicted performance for sustainable development.
Much debated principles of corporate governance like independent directors, audit committees, control on related party transactions and Investor protection cannot ensure corporate sustainability and hence corporate governance has remained a rhetoric only far from reality.
Recognising the criticality of the theme, Life Development Foundation (LifeDF) has redefined corporate governance and developed a comprehensive Corporate Governance System Standard based on 4Ps (People, Purpose, Process and Performance) after an extensive research on world greatest organisations, large Indian corporates, statutory bodies, public sector undertakings, trusts, societies, partnership firms, sole proprietorships and associations.
Companies Those Are Using Corporate Governance
ONGC Company
ONGC management continues to strive for excellence in good governance and responsible management practices, benchmarking with best of global companies.
ONGC has been practicing corporate governance principles much before it became mandatory. Your company believes that for a company to be successful it must maintain global standards of corporate conduct towards its stakeholders. The company believes that it is rewarding to be better managed and governed and to identify its activities with national interest. To that end, your company has always focused on good corporate governance which is the key driver of sustainable corporate growth and long term value creation.
It is not merely compliance and simply a matter of creating checks and balances; it is an ongoing measure of superior delivery of company's objectives with a view to translate opportunities into reality. It involves leveraging its resources and aligning its activities to national need, shareholders benefit and employee growth, thereby delighting all its stakeholders, while minimizing the risks. The primary objective is to create and adhere to a corporate culture of conscience and consciousness, transparency and openness, fairness, accountability, propriety, equity, sustainable value creation, ethical practices and to develop capabilities and identify opportunities that best serve the goal of value creation, thereby creating an outperforming organization
Infosys named best Indian company in Corporate Governance
Bottom of Form
Technology behemoth Infosys Technologies has been named as the best company in India in terms of Corporate Governance .Dwelling on the theme that Corporate Governance is both an art and a science., The Asset, for the past ten years, has been emphasising on the 'art' part by canvassing the opinion of institutional investors, sellside analysts and The Asset's board of editors. This year, The Asset has drilled down further into understanding corporate governance practices in companies in the region by comparing these with international best standards.
Infosys has said that its basis for corporate governance standards is the Combined Code Principles of Good Governance and Code of Best Practice derived by the committee on its final report and from the Cadbury and Greenbury Reports. Besies, the White Paper on Corporate Governance in Asia produced by the Organization for Economic Cooperation and Development (OECD) has also been a base for the initiatives.
Companies were invited to present their annual results in complying with best practices. In addition, participating companies were asked to submit their compliance to best practices in such areas such as composition of board of directors, which was 20 per cent weighted; audit committee (15 per cent); remuneration committee (15 per cent), risk management committee (15 per cent), nomination committee (15 per cent), corporate social responsibility (10 per cent), investor relations (5 per cent) and digital communication (5 per cent). The scores are then weighted and combined with the score achieved in the presentation part of the process with an 85 per cent /15 per cent weighting between compliance and voting by the board of editors.
Maruti Suzuki, NTPC awarded excellence in corporate governance by ICSI
Maruti Suzuki India Ltd. and NTPC Ltd., the two best governed companies were presented the "ICSI National Award For Excellence in Corporate Governance 2009" at Mumbai by Vilasrao Deshmukh, Union Minister for Heavy Industries & Public Enterprises in the presence of Justice R.C. Lahoti, Former Chief Justice of India and Chairman of the Jury for the Award.
Shinzo Nakanishi, Managing Director & CEO of Maruti Suzuki India Limited and R S Sharma, Chairman and Managing Director, NTPC Limited received the awards.
The Company Secretaries of awardee companies, S. Ravi Aiyar, Maruti Suzuki India Ltd. & A.K.Rastogi, NTPC Ltd., were also honoured for their contribution in adhering to good corporate governance practices..
Vilasrao Deshmukh, in his addressing speech said that, "Corporate governance is related to maximization of shareholders value and at the same time ensuring equitable treatment to all stakeholders. The corporate governance is of particular relevance for developing countries like India as it is related to economic development as well as discharge of social responsibilities."
Appreciating the efforts made by the ICSI towards good corporate governance, he expressed that there is need for a multi pronged proactive effort in generating consciousness and systematic work towards social and environmental sustainability.
He expressed that good corporate governance should be upper most in boardrooms to ensure rapid, sustained and inclusive growth and it should cover social and economic aspects of human endeavour.
DLF Using Corporate Governance
DLF Limited and its subsidiaries ('hereinafter referred to as the 'Company') is a leading professionally managed Company emerging as the one of the foremost enterprise in real estate development. It has over 60 years of experience, an established brand name, a highly experienced, qualified and motivated management team with a high reputation for project execution. The formation and management of many subsidiary and partnership companies is considered necessary in real estate development to ensure effective governance in dealing with legal and commercial requirements.
The Company's philosophy on Corporate Governance is built on a rich legacy of fair, transparent and effective governance. This includes respect for human values, individual dignity and adherence to honest, ethical and professional conduct. This enables customers and all stake holders to be partners in the Company's growth and prosperity.
This code of conduct document has been created in furtherance of the Company's commitment to building a strong culture of corporate governance by promoting the importance of ethical conduct and transparency in the conduct of its operations.
Corporate governance characteristics of growth companies
High growth companies face many challenges, encompassing the numerous demands of new product innovation, market shares and customer satisfaction. This paper studied the hypothesis that, due to time and resource constraints, high growth companies will find it exigent to formulate and disseminate an elaborate, structured policy of corporate governance. To test this hypothesis, a corporate governance scoring system was developed and computed for 500 firms, based on the guidelines of accountability, responsibility, internal controls, and audit procedures. A life cycle analysis was also performed to identify differences in corporate governance characteristics of "initial growth" and "revival" firms, since both groups face the same challenges of dealing with increasing sales, customers, products and innovation.
The results indicate that initial growth firms had lower corporate governance scores when compared to other firms. Revival firms showed higher scores, indicating that a well developed system of corporate governance added a much needed synergy for growth. Finally, a regression analysis indicated that certain fundamental characteristics such as Board development and Audit Committee role were equally well -detailed for growth and revival firms, but other corporate governance features such as ethics policy, shareholder value, reporting transparency and corporate citizenship were much better elaborated for revival firms.
Corporate Governance:- Keeping Organizations Accountable
When you see company scandal, corruption, and fraud splashed across the headlines, you can be pretty sure that the term 'corporate governance' will follow. It's a phrase we've been familiar with since the high-profile collapse of energy company Enron and communications giant WorldCom in 2001 and 2002, which exposed the inner workings of these companies to public scrutiny. Their downfall also shone the spotlight on how other companies are governed - and how managers are kept accountable.
Companies are typically governed according to a set of rules and regulations - rules that have been subject to tighter control since the Enron scandal. These rules are expected to protect the assets and resources of the company - and hold top managers and executives accountable for their decisions and actions.
CONCLUSION
In this, I would like to conclude that we are still in the journey towards achieving quality in management of companies. So, according to me, corporate governance is a reality. Those companies which are using good corporate governance are going very systematically with proper rules and regulations. Initial growth firms had lower corporate governance as compared to the other companies. Big companies show that a well developed system of corporate governance added a much needed synergy growth. With the help of good corporate governance their is development in shareholder's value, reporting transparency, ethics policy and corporate citizenships.
When we see scandals, corruption and fraud in the companies then we follow the term "corporate governance". Companies are typically governed according to a set of rules and regulations. Rules that have been subject to tighter control on the scandals, frauds and corruption. These rules are expected to protect the assets and resources of the company.
Good corporate governance would help to maintain the confidence of investors. It is the direct result of the globalization. In world, there are many companies which are globalized through the good corporate governance. Like, In above I give many examples of the companies which are globalized through the good corporate governance. In modern times,
If the company follow the corporate governance then the company can develop at global level. Today investors want to be sure that not only is their capital handled effectively but also add to the creation of wealth. Reality of corporate governance is that boards have to take account of financial capital provided by the shareholders, human capital provided by the employees, natural capital provided by the community and society in which the company operates.
Those companies which are at initial growth and they have not good corporate governance prove that this all is myth. But this all is wrong because these companies are not apply proper rules and regulation and the system of these companies is not good.
So, according to me, corporate governance is a reality.
