Corporate approach to the management and control of

Corporate
Governance has emerged as an important academic discipline in its own right, bringing
together contributions from accounting, finance, law and management. Corporate governance
now offers a comprehensive, interdisciplinary approach to the management and control
of companies. Corporate professionals of today and tomorrow must imbibe in themselves
the evolving principles of good corporate governance across the globe on a continual
basis. Excellence can be bettered only through continuous study, research and academic
and professional interaction of the highest quality in the theory and practice
of good corporate governance. The corporate world looks upon especially Company
Secretaries to provide the impetus, guidance and direction for achieving
world-class corporate governance. Company Secretaries are the primary source of
advice on the conduct of business. This can take into its fold everything from
legal advice on conflicts of interest, through accounting advice, to the
development of strategy/corporate compliance and advice on sustainability aspects.

             Today, the
corporate world as a whole is in the process of acquiring a moral conscience.
The new and emerging concepts in management like corporate governance, business
ethics and corporate sustainability are some of the expressions through which
this emerging ethical instinct in the corporate world is trying to express and
embody itself in the corporate life. In this study we examine the concept of
ethics and its importance for the business, corporate governance and governance
through inner conscience and sustainability.

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Definitions
of Corporate Governance:

There is no
universal definition of corporate governance. Some good definitions are given
hereunder:-

“Corporate
Governance is concerned with the way corporate entities are governed, as
distinct from the way business within those companies is managed. Corporate
governance addresses the issues facing Board of Directors, such as the interaction
with top management and relationships with the owners and others interested in
the affairs of the company” -Robert Ian (Bob) Tricker (who introduced
the words corporate governance for the first time in his book in 1984).

 

“Corporate
Governance is about promoting corporate fairness, transparency and
accountability”.

James D.
Wolfensohn (Ninth President World Bank) OVERNANCE
ETHICS

Corporate Governance Ethics:

Business
ethics and corporate governance of an organization go hand in hand. In fact, an
organization that follows ethical practices in all its activities will, in all
probability, follow best corporate governance practices as well. Corporate
governance is meant to run companies ethically in a manner such that all
stakeholders including creditors, distributors, customers, employees, the
society at large, governments and even competitors are dealt with in a fair
manner. Good corporate governance should look at all stakeholders and not just
the shareholders alone. Corporate governance is not something which regulators
have to impose on a management, it should come from within. A business
organization has to compete for a share in the global market on its own
internal strength, in particular on the strength of its human resource, and on
the goodwill of its other stakeholders. While its state-of-the-art technologies
and high level managerial competencies could be of help in meeting the quality,
cost, volume, speed and breakeven requirements of the highly competitive global
market, it is the value-based management and ethics that the organization has
to use in its governance. This would enable the organization to establish
productive relationship with its internal customers and lasting business
relationship with its external customers.

 

Characteristic Features of Corporate Governance:

Corporate
Governance is integral to the existence of the company. It is needed to create
a corporate culture of transparency, accountability and disclosure. It refers
to compliance with all the moral & ethical values, legal framework and
voluntarily adopted practices. It is useful in the below following ways:

1.     
Corporate Performance

2.     
Enhanced Investor Trust

3.     
Better access to global market

4.     
Combating Corruption

5.     
Easy Finance from Institutions

6.     
Enhancing Enterprise Valuation

7.     
Reduced Risk of Corporate Crisis and Scandals

8.     
Accountability

 

1.    
Corporate Performance:

Improved governance structures and processes ensure
quality decision-making, encourage effective succession planning for senior
management and enhance the long-term prosperity of companies, independent of
the type of company and its sources of finance. This can be linked with
improved corporate performance- either in terms of share price or
profitability.

2.    
Enhanced Investor Trust:

 Investors consider corporate governance as important as financial
performance when evaluating companies for investment. Investors who are
provided with high levels of disclosure and transparency are likely to invest
openly in those companies. The consulting firm McKinsey surveyed and determined
that global institutional investors are prepared to pay a premium of upto 40
percent for shares in companies with superior corporate governance practices.

3.    
Better Access to Global Market:

A good corporate governance system attracts investment
from global investors, which subsequently leads to greater efficiencies in the
financial sector.

4.    
Combating Corruption:

Companies that are transparent, and have sound system
that provide full disclosure of accounting and auditing procedures, allow transparency
in all business transactions, provide environment where corruption would
certainly fade out. Corporate Governance enables a corporation to compete more
efficiently and prevent fraud and malpractices within the organization.

5.    
Easy Finance from Institutions:

Several structural changes like increased role of
financial intermediaries and institutional investors, size of the enterprises,
investment choices available to investors, increased competition, and increased
risk exposure have made monitoring the use of capital more complex thereby
increasing the need of Good Corporate Governance. Evidences indicate that
well-governed companies receive higher market valuations. The credit worthiness
of a company can be trusted on the basis of corporate governance practiced in
the company.

 

 

6.    
Enhancing Enterprise Valuation:

Improved management accountability and operational
transparency fulfil investors’ expectations and confidence on management and
corporations, and in return, increase the value of corporations.

7.     
Reduced Risk of Corporate Crisis and Scandals:

Effective Corporate Governance ensures efficient risk
mitigation system in place. A transparent and accountable system makes the
Board of a company aware of the majority of the mask risks involved in a
particular strategy, thereby, placing various control systems in place to
facilitate the monitoring of the related issues.

8.    
Accountability:

Investor relations are essential part of good
corporate governance. Investors directly/ indirectly entrust management of the
company to create enhanced value for their investment. The company is hence
obliged to make timely disclosures on regular basis to all its shareholders in
order to maintain good investors relation. Good Corporate Governance practices
create the environment whereby Boards cannot ignore their accountability to
these stakeholders.

 

Approaches to Corporate Governance Theories:

The following
theories elucidate the basis of corporate governance:

1.      Agency
Theory

2.      Shareholder
Theory

3.      Stake
Holder Theory

4.      Stewardship
Theory

 

1.     Agency
Theory

According to
this theory, managers act as ‘Agents’ of the corporation. The owners set the
central objectives of the corporation. Managers are responsible for carrying
out these objectives in day-to-day work of the company. Corporate Governance is
control of management through designing the structures and processes. In agency
theory, the owners are the principals. But principals may not have knowledge or
skill for getting the objectives executed. Thus, principal authorizes the
mangers to act as ‘Agents’ and a contract between principal and agent is made.
Under the contract of agency, the agent should act in good faith. He should
protect the interest of the principal and should remain faithful to the goals.
In modern corporations, the shareholdings are widely spread. The management
(the agent) directly or indirectly selected by the shareholders (the
Principals), pursue the objectives set out by the shareholders. The main thrust
of the Agency Theory is that the actions of the management differ from those
required by the shareholders to maximize their return. The principals who are
widely scattered may not be able to counter this in the absence of proper
systems in place as regards timely disclosures, monitoring and oversight. Corporate
Governance puts in place such systems of oversight.

 

2.      Stockholder/shareholder Theory

According to
this theory, it is the corporation which is considered as the property of
shareholders/ stockholders. They can dispose off this property, as they like.
They want to get maximum return from this property. The owners seek a return on
their investment and that is why they invest in a corporation. But this narrow
role has been expanded into overseeing the operations of the corporations and
its mangers to ensure that the corporation is in compliance with ethical and
legal standards set by the government. So the directors are responsible for any
damage or harm done to their property i.e., the corporation. The role of
managers is to maximize the wealth of the shareholders. They, therefore should
exercise due diligence, care and avoid conflict of interest and should not
violate the confidence reposed in them. The agents must be faithful to
shareholders.

 

3.      Stakeholder Theory

According to
this theory, the company is seen as an input-output model and all the interest
groups which include creditors, employees, customers, suppliers,
local-community and the government are to be considered. From their point of
view, a corporation exists for them and not the shareholders alone. The
different stakeholders also have a self interest. The interest of these different
stakeholders is at times conflicting. The managers and the corporation are
responsible to mediate between these different stakeholders interest. The stake
holders have solidarity with each other. This theory assumes that stakeholders
are capable and willing to negotiate and bargain with one another. This results
in long term self interest. The role of shareholders is reduced in the
corporation. But they should also work to make their interest compatible with
the other stake holders. This requires integrity and managers play an important
role here. They are faithful agents but of all stakeholders, not just
stockholders.

 

4.      Stewardship Theory

The word
‘steward’ means a person who manages another’s property or estate. Here, the
word is used in the sense of guardian in relation to a corporation, this theory
is value based. The managers and employees are to safeguard the resources of
corporation and its property and interest when the owner is absent. They are
like a caretaker. They have to take utmost care of the corporation. They should
not use the property for their selfish ends. This theory thus makes use of the
social approach to human nature.

 

Role of Board of Directors

The Report introduced “The Code of Best Practice”
directing the boards of directors of all listed

companies, and also encouraging as many other
companies as possible aiming at compliance with the requirements. All listed
companies should make a statement about their

compliance with the Code in their report and accounts
as well as give reasons for any areas of non compliance. It is divided into
four sections:

1.     
Board
of Directors:

(a) The board should meet regularly, retain full and
effective control over the company and monitor the executive management.

(b) There should be a clearly accepted division of
responsibilities at the head of a company, which will ensure a balance of power
and authority, such that no one individual has unfettered powers of

decision.

(c) Where the chairman is also the chief executive, it
is essential that there should be a strong and

independent element on the board, with a recognized
senior member, that is, there should be a lead independent director.

(d) All directors should have access to the advice and
services of the company secretary, who is

responsible to the Board for ensuring that board
procedures are followed and that applicable rules and regulations are complied
with.

 

2.     
Non-Executive
Directors:

(a) The non-executive directors should bring an
independent judgment to bear on issues of strategy, performance, resources,
including key appointments, and standards of conduct.

(b) The majority of non-executive directors should be
independent of management and free from any business or other relationship
which could materially interfere with the exercise of their independent judgment,
apart from their fees and shareholding.

3.     
Executive
Directors:

There should be full and clear disclosure of
directors’ total emoluments and those of the chairman and highest-paid
directors, including pension contributions and stock options, in the company’s

annual report, including separate figures for salary
and performance-related pay.

4.     
Financial
Reporting and Controls:

It is the duty of the board to present a balanced and
understandable assessment of their company’s

position, in reporting of financial statements, for
providing true and fair picture of financial reporting.

The directors should report that the business is a
going concern, with supporting assumptions or

qualifications as necessary. The board should ensure
that an objective and professional relationship

is maintained with the auditors.

5.     
Role
of Auditors

The Report recommended for the constitution of Audit
Committee with a minimum of three nonexecutive members majority of whom shall
be independent directors. The Report recommended that a professional and
objective relationship between the board of directors and auditors should be
maintained, so as to provide to all a true and fair view of company’s financial
statements. Auditors’ role is to design audit in such a manner so that it
provide a reasonable assurance that the financial statements are free of
material misstatements. The Report recommended for rotation of audit partners
to prevent the relationships between the management and the auditors becoming
too comfortable.

The following disclosures shall be made in the section
on the corporate governance of the annual report.

1. A brief statement on listed entity’s philosophy on
code of governance.

 2. Board of directors:

·        
composition
and category of directors (e.g. promoter, executive, non-executive, independent
 non-executive, nominee director –
institution represented and whether as lender or as equity investor)

·        
Attendance
of each director at the meeting of the board of directors and the last annual
general meeting

·        
Number
of other board of directors or committees in which a directors is a member or chairperson

·        
Number
of meetings of the board of directors held and dates on which held

·        
Disclosure
of relationships between directors inter-se

·        
Number
of shares and convertible instruments held by nonexecutive directors

·        
Web
link where details of familiarisation programmes imparted to independent
directors is disclosed.

3.  Audit committee:

·        
Brief
description of terms of reference;

·        
Composition,
name of members and chairperson;

·        
Meetings
and attendance during the year.

4. Nomination and
Remuneration Committee:

·        
Description
of terms of reference;

·        
Composition,
name of members and chairperson;

·        
Meeting
and attendance during the year;

·        
Performance
evaluation criteria for independent directors.

5. Remuneration of
Directors:

·        
All
pecuniary relationship or transactions of the non-executive directors vis-à-vis
the listed entity shall be disclosed in the annual report;

·        
Criteria
of making payments to non-executive directors. alternatively, this may be
disseminated on the listed entity’s website and reference drawn thereto in the
annual report;

·        
Disclosures
with respect to remuneration: in addition to disclosures required under the
Companies Act, 2013, the following disclosures shall be made:

All elements of remuneration package of individual
directors summarized under major groups, such as salary, benefits, bonuses,
stock options, pension etc, Details of fixed component and performance linked
incentives, along with the performance criteria, service contracts, notice
period, severance fees, stock option details, if any and whether issued at a
discount as well as the period over which Accrued and over which exercisable.

 

Conclusion

Corporate Governance is managing, monitoring and
overseeing various corporate systems in such a manner that corporate
reliability, reputation are not put at stake. Corporate Governance pillars on
transparency and fairness in action satisfying accountability and
responsibility towards the stakeholders.

The long term performance of a corporate is judged by
a wide constituency of stakeholders. Various Stakeholders affected by the governance
practices of the company are Vendors, Customers, Employees, Society and
Government.