Chapter 7

Chapter 7
Copyright © 2019 Pearson India Education Services Pvt. Ltd

Corporate Ethics: Good Governance
Business Ethics, 3e Author: A C Fernando

What is corporate governance?
• Corporate governance is typically perceived by academic

literature as dealing with “ problems that results from the

separation of ownership and control”

Desiderata of Corporate governance
• Rights of shareholders
• Equitable treatment of shareholders

• Role of stakeholders in corporate governance
• Disclosure and transparency
• Responsibilities of the Board

4 priorities that developing countries should
concentrate while practicing corporate
governance

• Good and effective communication
• Ensure individual players maximum autonomy
• If there is a hierarchical set up to regulate private sector
activities with a view to promote public interest, new
countervailing powers should be set-up to fill the role
• The role of state and how government officials are appointed
to carry out the role, should be clearly defined in the interest
of sustainable development.

Functions of the board of a listed company has
the following functions:
• Select, decide the remuneration and evaluate on a regular

basis and if necessary, change the CEO

• Oversee the conduct of company’s business to evaluate
whether or not it is being correctly managed
• Review and where necessary approve company’s financial
objectives and major corporate plans and objectives
• Provide advice and counsel to top management
• Select and recommend candidates to shareholders for electing
them to the board of directors
• Review the adequacy of systems to comply with all applicable
laws and regulations
• Review any other function required by law to be performed

Major thrust of corporate governance
• Call upon government to put in place an effective institutional

and legal framework

• Call for a corporate governance framework that protect and
facilitates the exercise of shareholder’s rights
• Strongly support equitable treatment of all shareholders
• Recognize the importance of the role of stakeholders in
corporate governance
• Stress the importance of timely, accurate and transparent
disclosure mechanism
• Proper dealing with board structures, responsibilities and
procedures

Strategies and techniques basic to sound
corporate governance
• Corporation should cultivate values, develop codes of conduct,

ethical behaviour and other standards of appropriate practices

• A proper corporate strategy has to be built and against which
success can be measured
• Well –defined responsibilities and assignment of decision
making authorities also specifying the hierarchy of required
approvals from the level of employees to the board of
directors.

Strategies and techniques basic to sound
corporate governance (Contd)
• Setting up a system to ensure interaction and proper

communication

• Establishing strong internal control system
• Ensuring system monitoring of risk exposures
• Instituting a scheme of financial and managerial incentives
• Ensuring required information flows internally and to the
public at large

Benefits to the society:
• In developing countries, where stocks of most firms are not actively

traded on stock exchanges, adopting standards for transparency in
dealing with investors and creditors is a major benefit to all stake

holders
• Research had proved that, in countries where corporate governance
is in place, then the rights of the stakeholders is protected
• Strong corporate governance strengthens the market system for
any business
• It is a effective instrument for combating corruption
• Better corporate governance can improve the management of the
firm
• It also brings in improvement in the management and the way the
system works

Recommendations by the Task force:
• Greater role and influence for non-executive, independent
directors
• Stringent punishment for executives directors for failing to comply

with listing and other requirements
• Limitations on the nature and number of directorship of managing
and whole-time dealers
• Proper disclosure to the shareholder and investing community
• Interested shareholders to obtain from voting on specified matters
• Tougher listing and compliance regimen through a centralized
National listing authority
• Highest and toughest standards of corporate governance for listed
companies
• A code of public behavior for public sector units

Why India falls behind in corporate governance?
• India still has poor bankruptcy laws and procedures

• Indian accounting standards still do not mandate consolidation

• Indian stock market are still inefficiently run
• The Indian bond market is in its infancy

Impetus for the growth of Corporate governance
in India
• Competition: Competition will force companies to drastically

restructure their ways of doing business

• New player’s professionalism: Companies should have
professional boards and disclosure standards that measure up
to the best in the world.
• Growth in market capitalization: There is a phenomenal growth
in market capitalization, which triggered the growth of larger
slices of small pie
• Foreign portfolio investor: Foreign investors had steadily raised
their demands for better corporate governance, more
transparency and grater disclosure

Impetus for the growth of Corporate governance
in India (Contd..)
• Media Influences: In the last five years, the press and financial
analysts have induced a level of disclosure that was

inconceivable a decade ago.
• Influence of Banks and financial Institutions: Due to FI’s debt
of Indian banks are getting converted to equity and this will
get intensified over a period time, especially with advent of
Universal Banking.
• Realization of the benefits of corporate governance: It makes
good business sense to be transparent, well governed
company and incorporating internally accepted accounting
standards.

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Chapter 7

Copyright © 2019 Pearson India Education Services Pvt. Ltd

Business Ethics, 3e Author: A C Fernando

• Corporate governance is typically perceived by academic

Copyright © 2019 Pearson India Education Services Pvt. Ltd

Business Ethics, 3e Author: A C Fernando

Copyright © 2019 Pearson India Education Services Pvt. Ltd

Business Ethics, 3e Author: A C Fernando

Copyright © 2019 Pearson India Education Services Pvt. Ltd

Business Ethics, 3e Author: A C Fernando

• Select, decide the remuneration and evaluate on a regular

Copyright © 2019 Pearson India Education Services Pvt. Ltd

Business Ethics, 3e Author: A C Fernando

• Call upon government to put in place an effective institutional

Copyright © 2019 Pearson India Education Services Pvt. Ltd

Business Ethics, 3e Author: A C Fernando

• Corporation should cultivate values, develop codes of conduct,

Copyright © 2019 Pearson India Education Services Pvt. Ltd

Business Ethics, 3e Author: A C Fernando

• Setting up a system to ensure interaction and proper

Copyright © 2019 Pearson India Education Services Pvt. Ltd

Business Ethics, 3e Author: A C Fernando

• In developing countries, where stocks of most firms are not actively

Copyright © 2019 Pearson India Education Services Pvt. Ltd

Business Ethics, 3e Author: A C Fernando

Copyright © 2019 Pearson India Education Services Pvt. Ltd

Business Ethics, 3e Author: A C Fernando

• India still has poor bankruptcy laws and procedures

Copyright © 2019 Pearson India Education Services Pvt. Ltd

Business Ethics, 3e Author: A C Fernando

• Competition: Competition will force companies to drastically

Copyright © 2019 Pearson India Education Services Pvt. Ltd

Business Ethics, 3e Author: A C Fernando

Copyright © 2019 Pearson India Education Services Pvt. Ltd

Business Ethics, 3e Author: A C Fernando

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