What is corporate governance?

Lisa Mary Thomson, ET Bureau Jan 18, 2009, 12.19am IST

Corporate governance refers to the set of systems, principles and processes by which a company is governed. They provide the guidelines as to how the company can be directed or controlled such that it can fulfil its goals and objectives in a manner that adds to the value of the company and is also beneficial for all stakeholders in the long term. Stakeholders in this case would include everyone ranging from the board of directors, management, shareholders to customers, employees and society. The management of the company hence assumes the role of a trustee for all the others.

What are the principles underlying corporate governance? Corporate governance is based on principles such as conducting the business with all integrity and fairness, being transparent with regard to all transactions, making all the necessary disclosures and decisions, complying with all the laws of the land, accountability and responsibility towards the stakeholders and commitment to conducting business in an ethical manner. Another point which is highlighted in the SEBI report on corporate governance is the need for those in control to be able to distinguish between what are personal and corporate funds while managing a company. Why is it important? Fundamentally, there is a level of confidence that is associated with a company that is known to have good corporate governance. The presence of an active group of independent directors on the board contributes a great deal towards ensuring confidence in the market. Corporate governance is known to be one of the criteria that foreign institutional investors are increasingly depending on when deciding on which companies to invest in. It is also known to have a positive influence on the share price of the company. Having a clean image on the corporate governance front could also make it easier for companies to source capital at more reasonable costs. Unfortunately, corporate governance often becomes the centre of discussion only after the exposure of a large scam.

http://articles.economictimes.indiatimes.com/2009-01-18/news/28462497_1_corporategovernance-satyam-books-fraud-by-satyam-founder

Corporate Governance
The Coca-Cola Company is committed to good corporate governance, which promotes the long-term interests of shareowners, strengthens Board and management accountability and helps build public trust in the Company. The Board is elected by the shareowners to oversee their interest in the long-term health and the overall success of the business and its financial strength. The Board serves as the ultimate decision making body of the Company, except for those matters reserved to or shared with the shareowners. The Board selects and oversees the members of senior management, who are charged by the Board with conducting the business of the Company. The Board of Directors has established Corporate Governance Guidelines which provide a framework for the effective governance of the Company. The guidelines address matters such as the Boards mission, Director responsibilities, Director qualifications, determination of Director independence, Board committee structure, Chief Executive Officer performance evaluation and management succession. The Board regularly reviews developments in corporate governance and updates the Corporate Governance Guidelines and other governance materials as it deems necessary and appropriate.

The Companys corporate governance materials, including the Corporate Governance Guidelines, the Companys Certificate of Incorporation and Bylaws, the charters for each Board committee, the Companys Codes of Business Conduct, information about how to report concerns about the Company and the Companys public policy engagement and political contributions policy, can be accessed by clicking on the links above. Learn more about Governance & Ethics

At The Coca-Cola Company, we aim to lead by example and to learn from experience. We set high standards for our people at all levels and strive to consistently meet them.
We are guided by our established standards of corporate governance and ethics. We review our systems to ensure we achieve international best practices in terms of transparency and accountability. The foundation of our approach to corporate governance is laid out in ourCorporate Governance Guidelines and in the charters of our Board of Directors committees. Corporate Responsibility Corporate responsibility is managed through the Public Policy and Corporate Reputation Council, a crossfunctional group of senior managers from our Company and bottling partners. The Council identifies risks and opportunities faced by our business and communities and recommends strategies to address these challenges. Ethics & Compliance The core of the ethics and compliance program at The Coca-Cola Company is our Code of Business Conduct. The Code guides our business conduct, requiring honesty and integrity in all matters. All of our associates and directors are required to read and understand the Code and follow its precepts in the workplace and larger community. The Code is administered by our Ethics & Compliance Committee. This cross-functional senior management team oversees all our ethics and compliance programs and determines Code violations and discipline. Our Ethics & Compliance Office has operational responsibility for education, consultation, monitoring and assessment related to the Code of Business Conductand compliance issues. Associates worldwide receive a variety of ethics and compliance training courses administered by the Ethics & Compliance Office. We regularly monitor and audit our business to ensure compliance with the Code and the law. We also maintain a consistent set of best-in-class standards around the world that govern how we investigate and handle Code issues. In 2008, we revised the Code to further improve its effectiveness. To ensure an ongoing commitment to and understanding of our Code of Business Conduct, we offer online training to all associates with Company-provided computers discussing topics related to ethics and compliance, including our Anti-Bribery Policy. All newly hired associates receive the training upon hire and all others receive the training at least once every three years. In 2010, approximately 22,000 employees (management and non-management) certified their compliance with the Code of Business Conduct and the Company's anti-bribery requirements. In addition to a number of optional training courses on various topics, associates are requested to participate in ethics training on an annual basis, resulting in an average of 60 minutes of ethics training perassociate per year. Our associates, bottling partners, suppliers, customers and consumers can ask questions about our Code and other ethics and compliance issues, or report potential violations, throughEthicsLine, a global Web and

telephone information and reporting service. Telephone calls are toll-free, and EthicsLine is available 24 hours a day, seven days a week, with translators available.

http://www.coca-colacompany.com/our-company/leading-the-industry-refreshing-the-worldresponsibly

Corporate governance is the 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 the board of directors. Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large.

Corporate governance is a multi-faceted subject.[1] An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. A related but separate thread of discussions focus on the impact of a corporate governance system in economic efficiency, with a strong emphasis on shareholders welfare. There are yet other aspects to the corporate governance subject, such as the stakeholder view and the corporate governance models around the world (see section 9 below).

There has been renewed interest in the corporate governance practices of modern corporations since 2001, particularly due to the high-profile collapses of a number of large U.S. firms such as Enron Corporation and Worldcom. In 2002, the US federal government passed the Sarbanes-Oxley Act, intending to restore public confidence in corporate governance.

In A Board Culture of Corporate Governance business author Gabrielle O'Donovan defines corporate governance as 'an internal system encompassing policies, processes and people, which serves the needs of shareholders and other stakeholders, by directing and controlling management activities with good business savvy, objectivity and integrity. Sound corporate governance is reliant on external marketplace commitment and legislation, plus a healthy board culture which safeguards policies and processes'.

O'Donovan goes on to say that 'the perceived quality of a company's corporate governance can influence its share price as well as the cost of raising capital. Quality is determined by the financial markets, legislation and other external market forces plus the international organisational environment; how policies and processes are implemented and how people are led. External forces are, to a large extent, outside the circle of control of any board. The internal environment is quite a different matter, and offers companies the opportunity to differentiate from competitors through their board culture. To date, too much of corporate governance debate has centred on legislative

policy, to deter fraudulent activities and transparency policy which misleads executives to treat the symptoms and not the cause.'[2]

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.

Report of SEBI committee (India) on Corporate Governance defines corporate governance as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company." The definition is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution. Corporate Governance is viewed as ethics and a moral duty.

Impact of Corporate Governance

The positive effect of good corporate governance on different stakeholders ultimately is a strengthened economy, and hence good corporate governance is a tool for socio-economic development.[4] After East Asian economies collapsed in the late 20th century, the World Bank's president warned those countries, that for sustainable development, corporate governance has to be good. Economic health of a nation depends substantially on how sound and ethical businesses are.

Parties to corporate governance

Parties involved in corporate governance include the regulatory body (e.g. the Chief Executive Officer, the board of directors, management and shareholders). Other stakeholders who take part include suppliers, employees, creditors, customers and the community at large.

In corporations, the shareholder delegates decision rights to the manager to act in the principal's best interests. This separation of ownership from control implies a loss of effective control by shareholders over managerial decisions. Partly as a result of this separation between the two parties, a system of corporate governance controls is implemented to assist in aligning the incentives of managers with those of shareholders. With the significant increase in equity holdings of investors,

there has been an opportunity for a reversal of the separation of ownership and control problems because ownership is not so diffuse.

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 ensure accountability of the organisation to its owners and authorities.

The Company Secretary, known as a Corporate Secretary in the US and often referred to as a Chartered Secretary if qualified by the Institute of Chartered Secretaries and Administrators (ICSA), is a high ranking professional who is trained to uphold the highest standards of corporate governance, effective operations, compliance and administration.

All parties to corporate governance have an interest, whether direct or indirect, in the effective performance of the organisation. Directors, workers and management receive salaries, benefits and reputation, while shareholders receive capital return. Customers receive goods and services; suppliers receive compensation for their goods or services. In return these individuals provide value in the form of natural, human, social and other forms of capital.

A key factor in an individual's decision to participate in an organisation e.g. through providing financial capital and trust that they will receive a fair share of the organisational returns. If some parties are receiving more than their fair return then participants may choose to not continue participating leading to organizational collapse.

Internal corporate governance controls

Internal corporate governance controls monitor activities and then take corrective action to accomplish organisational goals. Examples include:

Monitoring by the board of directors: The board of directors, with its legal authority to hire, fire and compensate top management, safeguards invested capital. Regular board meetings allow potential problems to be identified, discussed and avoided. Whilst non-executive directors are thought to be more independent, they may not always result in more effective corporate governance and may not increase performance.[5] Different board structures are optimal for different firms. Moreover, the ability of the board to monitor the firm's executives is a function of its access to information. Executive directors possess superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial

performance outcomes, ex ante. It could be argued, therefore, that executive directors look beyond the financial criteria.

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. Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behaviour, and can elicit myopic behaviour.

External corporate governance controls

External corporate governance controls encompass the controls external stakeholders exercise over the organisation. Examples include:

1. demand for and assessment of performance information (especially financial statements)

2. debt covenants

3. government regulations

4. media pressure

5. takeovers

6. competition

7. managerial labour market

8. telephone tapping

Codes and guidelines

Corporate governance principles and codes have been developed in different countries and issued from stock exchanges, corporations, institutional investors, or associations (institutes) 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.

For example, companies quoted on the London and Toronto Stock Exchanges formally need not follow the recommendations of their respective national codes. However, they must disclose whether they follow the recommendations in those documents and, where not, they should provide explanations concerning divergent practices. Such disclosure requirements exert a significant pressure on listed companies for compliance.

In the United States, companies are primarily regulated by the state in which they incorporate though they are also regulated by the federal government and, if they are public, by their stock exchange. The highest number of companies are incorporated in Delaware, including more than half of the Fortune 500. This is due to Delaware's generally business-friendly corporate legal environment and the existence of a state court dedicated solely to business issues (Delaware Court of Chancery).

Most states' corporate law generally follow the American Bar Association's Model Business Corporation Act. While Delaware does not follow the Act, it still considers its provisions and several prominent Delaware justices, including former Delaware Supreme Court Chief Justice E. Norman Veasey, participate on ABA committees. http://www.articlesbase.com/accounting-articles/corporate-governance-637944.html

Features of Corporate Governance The characteristics or features of corporate governance are listed below.

1. Transparency : This means that the Board of Directors must release all relevant information to the stakeholders. They must show all the necessary financial and operational data to the stakeholders. They must not hide any important information or maintain any secrecy. 2. Protection of Shareholders' Rights : The Board of Directors must protect the rights of the stakeholders. They must protect all the stakeholders, especially the minority stakeholders. 3. More Powers to CEO : The CEO must be given more powers so that he can approve the companies plans and strategies independently. 4. Accountability : The CEO and the Board of Directors must be made accountable for their actions to the stakeholders and to the entire society. 5. Based on Ethics : Corporate governance is based on ethics, moral principles and values. So, the Board of directors must avoid unfair practices, cheating, exploitation, etc. 6. Universal Application : Corporate governance has universal application. That is, it is used by companies all over the world. It is given a legal recognition in many countries. All companies must use corporate governance voluntarily. 7. Systematic : Corporate governance is very systematic. It is based on laws, procedures, practices, rules, etc. All these laws are made to increase the wealth of the shareholders and to protect the rights of all the stakeholders of the company. http://kalyan-city.blogspot.com/2011/10/features-of-corporate-governance.html

Seven Characteristics of Corporate Governance

1.
Discipline Corporate discipline is a commitment by a companys senior management to adhere to behavio r that is universally recognized and accepted to be correct and proper. This encompasses a companys awareness

of, and commitment to, the underlying principles of good governance, particularly at senior management level. All involved parties will have a commitment to adhere to procedures, processes, and authority structures established by the organization.

2.

Transparency Transparency is the ease with which an outsider is able to make meaningful analysis of a companys actions, its economic fundamentals and the non-financial aspects pertinent to that business. This is a measure of how good management is at making necessary information available in a candid, accurate and timely manner not only the audit data but also general reports and press releases. It reflects whether or not investors obtain a true picture of what is happening inside the company. All actions implemented and their decision support will be available for inspection by authorized organization and provider parties.

3.

Independence Independence is the extent to which mechanisms have been put in place to minimize or avoid potential conflicts of interest that may exist, such as dominance by a strong chief executive or large share owner. These mechanisms range from the composition of the board, to appointments to committees of the board, and external parties such as the auditors. The decisions made, and internal processes established, should be objective and not allow for undue influences. All processes, decision-making, and mechanisms used will be established so as to minimize or avoid potential conflicts of interest.

4.

Accountability Individuals or groups in a company, who make decisions and take actions on specific issues, need to be accountable for their decisions and actions. Mechanisms must exist and be effective to allow for accountability. These provide investors with the means to query and assess the actions of the board and its committees. Identifiable groups within the organization - e.g., governance boards who take actions or make decisions are authorized and accountable for their actions.

5.

Responsibility With regard to management, responsibility pertains to behavior that allows for corrective action and for penalizing mismanagement. Responsible management would, when necessary, put in place what it would take to set the company on the right path. While the board is accountable to the company, it must act responsively to and with responsibility towards all stakeholders of the company. Each contracted party is required to act responsibly to the organization and its stakeholders.

6.

Fairness The systems that exist within the company must be balanced in taking into account all those that have an interest in the company and its future. The rights of various groups have to be acknowledged and respected. For example, minority share owner interests must receive equal consideration to those of the dominant share owner(s). All decisions taken, processes used, and their implementation will not be allowed to create unfair advantage to any one particular party.

7.

Social responsibility A well-managed company will be aware of, and respond to, social issues, placing a high priority on ethical standards. A good corporate citizen is increasingly seen as one that is non-discriminatory, non-exploitative,

and responsible with regard to environmental and human rights issues. A company is likely to experience indirect economic benefits such as improved productivity and corporate reputation by taking those factors into consideration.

http://www.swview.org/blog/seven-characteristics-corporate-governance What is Corporate Governance? Corporate Governance refers to the way a corporation is governed. It is the technique by which companies are directed and managed. It means carrying the business as per the stakeholders desires. It is actually conducted by the board of Directors and the concerned committees for the companys stakeholders benefit. It is all about balancing individual and societal goals, as well as, economic and social goals. Corporate Governance is the interaction between various participants (shareholders, board of directors, and companys management) in shaping corporations performance and the way it is proceeding towards. The relationship between the owners and the managers in an organization must be healthy and there should be no conflict between the two. The owners must see that individuals actual performance is according to the standard performance. These dimensions of corporate governance should not be overlooked. Corporate Governance deals with the manner the providers of finance guarantee themselves of getting a fair return on their investment. Corporate Governance clearly distinguishes between the owners and the managers. The managers are the deciding authority. In modern corporations, the functions/ tasks of owners and managers should be clearly defined, rather, harmonizing. Corporate Governance deals with determining ways to take effective strategic decisions. It gives ultimate authority and complete responsibility to the Board of Directors. In todays market- oriented economy, the need for corporate governance arises. Also, efficiency as well as globalization are significant factors urging corporate governance. Corporate Governance is essential to develop added value to the stakeholders. Corporate Governance ensures transparency which ensures strong and balanced economic development. This also ensures that the interests of all shareholders (majority as well as minority shareholders) are safeguarded. It ensures that all shareholders fully exercise their rights and that the organization fully recognizes their rights. Corporate Governance has a broad scope. It includes both social and institutional aspects. Corporate Governance encourages a trustworthy, moral, as well as ethical environment. Benefits of Corporate Governance 1. Good corporate governance ensures corporate success and economic growth. 2. Strong corporate governance maintains investors confidence, as a result of which, company can raise capital efficiently and effectively. 3. It lowers the capital cost. 4. There is a positive impact on the share price.

5. It provides proper inducement to the owners as well as managers to achieve objectives that are in interests of the shareholders and the organization. 6. Good corporate governance also minimizes wastages, corruption, risks and mismanagement. 7. It helps in brand formation and development. 8. It ensures organization in managed in a manner that fits the best interests of all. http://www.managementstudyguide.com/corporate-governance.htm

Importance of Corporate Governance

The need, significance or importance of corporate governance is listed below.

1. Changing Ownership Structure : In recent years, the ownership structure of companies has changed a lot. Public financial institutions, mutual funds, etc. are the single largest shareholder in most of the large companies. So, they have effective control on the management of the companies. They force the management to use corporate governance. That is, they put pressure on the management to become more efficient, transparent, accountable, etc. The also ask the management to make consumer-friendly policies, to protect all social groups and to protect the environment. So, the changing ownership structure has resulted in corporate governance.

2. Importance of Social Responsibility : Today, social responsibility is given a lot of importance. The Board of Directors have to protect the rights of the customers, employees, shareholders, suppliers, local communities, etc. This is possible only if they use corporate governance. 3. Growing Number of Scams : In recent years, many scams, frauds and corrupt practices have taken place. Misuse and misappropriation of public money are happening everyday in India and worldwide. It is happening in the stock market, banks, financial institutions, companies and government offices. In order to avoid these scams and financial irregularities, many companies have started corporate governance. 4. Indifference on the part of Shareholders : In general, shareholders are inactive in the management of their companies. They only attend the Annual general meeting. Postal ballot is still absent in India. Proxies are not allowed to speak in the meetings. Shareholders associations are not strong. Therefore, directors misuse their power for their own benefits. So, there is a need for corporate governance to protect all the stakeholders of the company. 5. Globalisation : Today most big companies are selling their goods in the global market. So, they have to attract foreign investor and foreign customers. They also have to follow foreign rules and regulations. All this requires corporate governance. Without Corporate governance, it is impossible to enter, survive and succeed the global market. 6. Takeovers and Mergers : Today, there are many takeovers and mergers in the business world. Corporate governance is required to protect the interest of all the parties during takeovers and mergers. 7. SEBI : SEBI has made corporate governance compulsory for certain companies. This is done to protect the interest of the investors and other stakeholders.