Corporate Governance: Shivani Mahajan

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Corporate Governance
Shivani Mahajan
I. I NTRODUCTION
Many management scholars have recognized that strong
corporate governance is vital to resilient and vibrant capi-
tal markets and is an important tool of investor protection.
According to The Institute of Company Secretaries of India,
“Corporate Governance is the application of best management
practices, compliance or jaw in true letter and spirit and
adherence to ethical standards for effective management and
Fig. 1. corporate governance
distribution of wealth and discharge of social responsibility
for sustainable development of all stakeholders”.[1] Cadbury
Committee (U.K.), 1992 has defined corporate governance as The Board accepts transparent procedures and practices and
“Corporate governance is the system by which companies are arrives at decisions on the strength of adequate information.[2]
directed and controlled. It encompasses the entire mechanics The Board has an effective mechanism to understand the
of the functioning of a company and attempts to put in place concerns of stakeholders. The Board keeps the shareholders
a system of checks and balances between the shareholders, informed of relevant developments impacting the company.
directors, employees, auditor and the management.” Other The Board effectively and regularly monitors the functioning
group of scholars explained the term corporate governance of the management team. The Board remains in effective
as “process and structure by which the business and affairs of control of the affairs of the company at all times.
the company are directed and managed in order to enhance
long term shareholder value through enhancing corporate CGI EVA
performance and accountability, whilst taking into account the 20 12345
interests of other stakeholders”. 30 -3456
Firms at global level recognising that better corporate gover- 40 8767
nance adds substantial value to their operational performance 50 4565
in the following ways: It improves strategic thinking at the top 60 3456
by inducting independent directors who bring a wealth of ex- 70 3450
perience, and a host of new ideas. It justifies the management
and monitoring of risk that a firm faces globally. It limits the
responsibility of senior management and directors, by carefully B. Elements of good Corporate Governance
articulating the decision making process It assures the integrity
of financial reports. It has long term reputational effects among It has been established in various management reports that
main stakeholders, both internally and externally. aspects of good corporate governance comprise of trans-
parency of corporate structures and operations, the account-
ability of managers and the boards to shareholders, and
A. Objectives corporate responsibility towards stakeholders. While corporate
The fundamental objective of corporate governance is to governance basically lays down the framework for creating
boost and maximize shareholder value and protect the interest long-term confidence between companies and the external
of other stake holders. World Bank described Corporate Gov- providers of capital. There are numerous elements of cor-
ernance as blend of law, regulation and appropriate voluntary porate governance which are mentioned below: Transparency
private sector practices which enables the firm to attract fi- in Board’s processes and independence in the functioning of
nancial and human capital to perform efficiently, prepare itself Boards. The Board should provide effective leadership to the
by generating long term economic value for its shareholders, company and management to realize sustained prosperity for
while respecting the interests of stakeholders and society all stakeholders. It should provide independent judgment for
as a whole. Corporate governance has various objectives to achieving company’s objectives. Accountability to stakehold-
strengthen investor’s confidence and intern leads to fast growth ers with a view to serve the stakeholders and account to
and profits of companies. These are mentioned below: A them at regular intervals for actions taken, through strong
properly structured Board proficient of taking independent and and sustained communication processes. Impartiality to all
objective decisions is in place at the helm of affairs. The stakeholders. Social, regulatory and environmental concerns.
Board is balanced as regards the representation of suitable Clear and explicit legislation and regulations are fundamen-
number of non-executive and independent directors who will tals to effective corporate governance. Good management
take care of the interests and well-being of all the stakeholders. environment that includes setting up of clear objectives and
2
suitable ethical framework, establishing due processes, clear

enunciation of responsibility and accountability, sound busi-
ness planning, establishing clear boundaries for acceptable
behaviour, establishing performance evaluation measures.
1) Need of Corporate Governance: A corporation is a
congregation of various stakeholders, namely customers, em-
ployees, 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 Fig. 2. corporate governance model
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 • It helps managers remain focused on improving perfor-
and demonstrates ethical conduct, it will not be able to mance and making sure that they are replaced when they
succeed. Corporate governance is about ethical conduct in fail to do so.
business. Ethics is concerned with the code of values and • It pressurises the organization to comply with the laws,
principles that enable a person to choose between right and regulations and expectations of society.
wrong and, therefore, select from alternative courses of action. • It assists the supervisor in regulating the entire economic
Further, ethical dilemmas arise from conflicting interests of sector without partiality and nepotism.
the parties involved. In this regard, managers make decisions • Corporate governance ensures the efficient use of re-
based on a set of principles influenced by the values, context sources.
and culture of the organization. Ethical leadership is good for • It makes the resources flow to those sectors or entities
business as the organization is seen to conduct its business in where there is efficient production of goods and services
line with the expectations of all stakeholders. and the return is adequate enough to satisfy the demands
of stakeholders.
Y = a + bx (1) • It provides for choosing the best managers to administer
scarce resources.
Corporate governance is beyond the realm of law. It stems • It helps managers remain focused on improving perfor-
from the culture and mindset of management and cannot be mance and making sure that they are replaced when they
regulated by legislation alone. Corporate governance deals fail to do so.
with conducting the affairs of a company such that there is • It pressurises the organization to comply with the laws,
fairness to all stakeholders and that its actions benefit the regulations and expectations of society.
greatest number of stakeholders. It is about openness, integrity • It assists the supervisor in regulating the entire economic
and accountability. What legislation can and should do is to lay sector without partiality and nepotism.
down a common framework – the “form” to ensure standards.
Corporate governance helps in establishing good rapport
The “substance” will ultimately determine the credibility and
with distributors providing not only better access to the market,
integrity of the process.[3]
but also reducing the cost of production.figure3
Substance is inexorably linked to the mindset and ethical
standards of management. 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 sec-
tions of shareholders, especially between the owner-managers
and the rest of the shareholders.
a) Role of Corporate Governance: The role of effective
corporate governance is of immense significance to the society
as a whole. It can be summarised as follows:
• Corporate governance ensures the efficient use of re-
sources.
• It makes the resources flow to those sectors or entities Fig. 3. corporate governance chart
where there is efficient production of goods and services
and the return is adequate enough to satisfy the demands
of stakeholders. II. R EVIEW OF CORPORATE GOVERNANCE IN I NDIA
• It provides for choosing the best managers to administer The notion of corporate governance has been incepted with
scarce resources. major objective of significant disclosure of information to the
3
shareholders. Since then, corporate governance has steered the

Indian companies. As the time changed, there was also need
for greater accountability of companies to their shareholders
and customers. The report of Cadbury Committee on the finan-
cial aspects of corporate Governance in the U.K. has given rise
to the discussion of Corporate Governance in India. Corporate
governance has been since olden times but it was in different
form. During Vedic times, kings used to have their ministers
and used to have ethics, values, principles and laws to run their
state but today it is in the form corporate governance having
same rules, laws, ethics, values, and morals which helps in
running corporate bodies in the more effective ways so that
they in the age of globalization become global giants. There
have been numerous corporate governance initiatives launched
in India since the mid-1990s.
Demand Price
10 1000
20 2000
30 3000
40 4000
50 5000
60 6000
The first was by the Confederation of Indian Industry (CII), In-

dia’s major industry and business association, which emerged
with the first voluntary code of corporate governance in
1998. figure2The second was by the SEBI, now enshrined as
Clause 49 of the listing agreement. SEBI in 2000 introduced
unparalleled corporate governance reforms via Clause 49 of
the Listing Agreement of Stock Exchanges. Clause 49, a
seminal event in Indian corporate governance, established a
number of governance requirements for listed companies with
a focus on the role and structure of corporate boards, internal
controls and disclosure to shareholders. The third was the
Naresh Chandra Committee, which submitted its report in
2002. The fourth was again by SEBI the Narayana Murthy
Committee, which also submitted its report in 2002.
R EFERENCES
[1] A. Kolk, “Sustainability, accountability and corporate governance: ex-
ploring multinationals’ reporting practices,” Business strategy and the
environment, vol. 17, no. 1, pp. 1–15, 2008.
[2] B. K. Behn and R. A. Riley Jr, “Using nonfinancial information to predict
financial performance: The case of the us airline industry,” Journal of
Accounting, Auditing & Finance, vol. 14, no. 1, pp. 29–56, 1999.
[3] M. Arayssi, M. Dah, and M. Jizi, “Women on boards, sustainability
reporting and firm performance,” Sustainability Accounting, Management
and Policy Journal, 2016.

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suitable ethical framework, establishing due processes, clear

shareholders. Since then, corporate governance has steered the

The first was by the Confederation of Indian Industry (CII), In-

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