Corporate governance and the role of stakeholders Mohd. Abdul.

Muqeet Assistant Professor Chate Business School Satara Parisar Aurangabad Email Id : abdul_r1962@yahoo.com

Corporate governance and the of role of stakeholders

Good governance is something which is much broader and includes fair, efficient and transparent administration designed to meet certain well defined objectives in an organization. Good corporate governance is a framework which ensures effective accountability of management towards all its stakeholders. It is a system of structuring operating and controlling an organization with a view to achieve long term strategic goals to satisfy the stakeholder, and compliance with the legal and regulatory requirement. Good governance therefore ensure that all the stake holders, be they shareholders employees customers , supplier government and the community all the get fair and adequate attention to meet their justified requirement. It also involves the corporate to ensure that environmental and societal requirement of the community in which they operate are adequately addressed. Good corporate governance recognizes a diverse interest of shareholders, lenders, employees govt. etc. The financial institutions and Banks are also demanding effective and efficient corporate governance in order to justify their performance for borrowing in a market driven economy. For institutional investors would also demand greater transparency and disclosure and internationally recognized sound corporate practices. The new concept of governance to bring about quality corporate governance is not only a necessity to serve the divergent corporate interest but also a key requirement in the best interest of the corporate themselves and the economy. Good governance demands that a corporate house must have responsibility exemplary standards of ethical behaviors in its internal and external relationship, thereby achieving value addition in terms of stability and growth, confidence and long term sustenance of stakeholders relationship, brand equity and excellent governance. a few years ago the subject of corporate governance was little known ,discussed or read. Most of the stakeholders were not aware of the governance system to be introduced in corporate management. Emphasis has been heightened in the most industrially countries of the world due to serious high profile corporate failures frauds and malpractices in some the renowned corporate houses. Let us take the examples of the U.S.A despite being the champion in implementation of the principles of the governance system with all its dynamism and accountability the USA had to take the blame for serious non governance due to a series of frauds misdemeanor and corruption in some of its renowned companies namely Enron , world com Qwest, global crossing, Xerox, AOL, TIME WARNER, etc and the exposure of auditing lacunae leading to the collapse of Arthur Anderson. These scandals triggered another vigorous comprehensive phase of reforms in US corporate governance accounting practices and disclosures. Let us take example of the UK the collapse of Polly peck international, Maxwell COLOROLL, BCCI, EXCO, etc. Due to corporate failures frauds and malpractices in these companies raised the serious issues of corporate accountability both in the public mind and the house of commons in the late 1980 and the early 1990 similarly there were no o such scandal in Germany France rocking the corporate world involving various types o corporate frauds and misdemeanors in India also pre liberalization there were no systematic process by which the cos were directed to control to enhance their wealth generating capacity the so called governance process hardly ensures that co. would be managed in a manner that would meet the aspirations interest and social expectations of shareholders and others stakeholders. Ethical behaviors of many firms in honoring and protecting the rights of all stake holders and local community were virtual non existent. Empowerment was never combined with accountability adequately in majority of Indian cos. the lack of trust ship , transparency and disclosures , empowerment and accountability and control lead to ultimate corruption in the management and mismanagement in the affairs of many cos namely UTI involvement in reliance shares, ms shoes and crb caps recent sat yam fraud as also the capital market scam perpetuated by Harshad Mehta ketan parekh and so on. Consequent to the several incidents of corporate failures many countries felt the need for corporate governance code to be developed and implemented in the governance affairs of the corporate. In pursuit of bringing an effective corporate governance practices in corporate world, various renowned international committees were formed to recommend code of best practices for implementation in the cos . Accordingly the codes or principles have been drawn up on various aspects of corporate governance such as establishing directors, and CEOs accountability defining the roles and responsibilities of the board of directors and stakeholders and setting out guideline for effective and improve performance. In India the question of corporate governance came up mainly in the wake o economic liberalization n deregulation of industry and business as well as demand for new corporate ethos and

stricter compliance with the legislation the economic policies adopted b the govt of India consequent o the liberalization of the economy post 1991 necessitate a demand for introduction and implementation of a proper corporate governance policy in day to day management of companies. This will be in the interest of stake holders as well as for the development of the economy. Accordingly a number of national committees were set up by the industry association by Indian government and SEBI. Being a regulatory authority to the government of India to suggest the code and principles of corporate governance. Beside, considerable amendments have been made in the years 1999 and 2000 to the Indian cos act 1956 enacting various regulations on corporate governance. SEBI also formulate clause 49 of the listing agreement containing various requirement of the corporate governance. By implementing the cog codes the boards are now challenged to bring changes in the operating system and improve face of relationship between supervisory and executive bodies. While, going through the various works that has been done in connection with formulations and implementation of good governance standards in the corporate sector all over the world, it has been observed that no in depth study has been made in the corporate governance system , standard and practically followed by the industrially develop countries could be made in order to understand various approaches being followed by them to their governing process. Secondly, no detailed study has been made to analyze how far the regulatory authorities of these countries are proactive and successful in implementing the codes of best practices in the corporate. Thirdly no comprehensive study has been made in India to assess the extent of corporate governance principles recommended by national committees have been adopted by the Indian industries sectors wise and company wise . objectives of the study The present study seeks to critically examine the governance system in the corporate sector of some of the industrialized countries in the light of notable international practices with a view to suggesting ways and means for its improvement as best as possible of the stakeholders within the regularatory framework. Structures and processes for corporate governance Board of directors The main responsibility of governing a company is upon the board of directors the directors are appointed by the shareholders of the company. The board appoints one or more of them as managing directors. The directors have the ultimate responsibility for the governance of the company. A significant trend that has characterized the boards over the last 20 years has been the rise of the independent or outside directors, particularly after the corporate scandals that has shaken the corporate world, viz. Enron, WorldCom, AOL etc. In order to be independent a director must be independent and he will have no material or pecuniary relationship, a director must be independent and he will have no material or pecuniary relationship with the company. The role of non-executive or outside directors is to act as fully participating members of the board for performance of its duty: To direct the company as well as to bring wider experience, technical expertise, independent judgment and new ideas to its discussion. To monitor and challenge the performance of executive directors and management and To ensure that there are adequate control systems in place to protect the companys interests as also the interest of the shareholders and stakeholders as they enjoy the investors confidence. Shareholders The shareholders are the true owner of the company. But shareholders are a body of individuals who are scattered over the real control lies with promoter group holding substantial stake and with certain organized shareholders like financial institutions. Postal ballots for voting by the shareholders have received wider acceptance throughout the corporate world.

Institutional Investors Rise of big Institutional Investors was one of the main reason why corporate governance became a burning topic for debate in 1990s. Over the past fifty years, the share market has witnessed a shift towards increased institutional ownership especially in U.S.A and U.K. In Germany and Japan banks and inter corporate investments continue to dominate equity shareholdings and Institutional investors do not play any major role. In India, majority of the equity shareholdings of Indian corporate around 40 % rests with the family controlled large business groups. Institutional investors is a broad umbrella which covers mutual funds, foundations, endowments, trustee departments of banks, insurance companies and private as well as public pensions funds. All these bodies invest funds on behalf of others and so have a fiduciary role. They should play an active role in monitoring the corporate governance of the company and their voting right should be view as an asset. Institutional investors should have a firm and lasting relationship with the management of companies in which they have a large interest. They should intervene if the actions of the company are likely to jeopardize the interest of shareholders. Auditors The statutory auditors of the company are appointed by the shareholders in annual general meeting every year to audit the accounts and financial statements and express their opinion on them. Since the voting power is concentrated in hands of large shareholders or promoters, in reality it is they who appoint auditors of their choice and consequently auditors also come into close contact with management and promoters during the conduct of their audit. Because of this proximity, sometimes the public and minority shareholders suspect whether auditors are discharging their duty properly or not. The responsibilities of the auditing profession are increasing in many spheres. The auditors are now supposed to certify on compliance by the board on the code of corporate governance since it has become mandatory by the companies Act as also by Listing Agreements, on the companies for compliance all over the corporate world. The professional skill and independence of the auditors are of equal importance. The audit firms have very strong commercial reasons for preserving an unblemished reputation for independence. When we look at the history of corporate debacles of many renowned companys of the world viz. Enron, world com, AOL, Time-Warner, Xerox, Global crossing, we observe that one of the main reasons for downfall of these co.s was the auditing lacunae. A good number of auditors are showing lackadaisical attitude in overseeing the compliance of the conditions of corporate governance practices. Another issue is the growing expectation gap on the role of auditors, is that whether the prime responsibility for prevention and detection of fraud is of the auditors or the fiduciary responsibility of the board. Banks Banks have played a major role in the implementation of corporate governance systems in various corporate throughout the world. However, the roles of the banking system have been different in different countries depending upon corporate governance system. In Germany and Japan Banks provide long term finance and play an active role in corporate governance. In India also banks are important source of finance for industry but, they do not play any significant role in corporate governance affairs of the companies. In Germany there are bearer shares which are deposited by the shareholders with the bank and bank can exercise proxy votes at company meetings on shareholders behalf. Corporate scandals In USA, Arthur Anderson, a well respected and world renowned audit firm was held responsible for non-disclosure of vital financial information relating to Enron fiasco and faced serious criminal charges from government for obstruction of justice. Several high profile executives of Enron and WorldCom, who were responsible for the collapse resulting in thousands of lost jobs and billions of dollars of shareholders losses, are now in judicial net.

Many technical analyst have lost their jobs are now facing prosecution for selling bogus issues with a rosy picture to ordinary investors. A number of leading Wall Street bankers had to pay hundreds of million dollars each in settlement with Securities and Exchange Commission because their research analysts wrote biased company research reports to induce ordinary investors to subscribe for such shares. WorldCom a telecom giant had artificially inflated its earning by US $3.8 billion rocked the corporate world and shook investors confidence in stock markets. WorldComs accounting irregularities involved the deliberate misreporting of expenses as capital expenditures, in order to inflate its cash flows. These corporate scandals in USA has exposed the audit profession to strong criticism about its role for nondisclosure of vital financial information for public scrutiny and for blindly providing support and assistance to these scam tainted corporate entities and thereby tarnished its image and reputation considerably. In India also, we have been witnessing many unethical practices and a variety of financial scams of different kinds such as, capital market scams, scams in co-operative sugar factories, scams in co-operative banks, land scams, fake stamp printing scams etc Involving various people by way of gross misuse of public funds affecting ordinary people. The future course of corporate responsibility will to a large extent be determined by how business obligation to involve itself in major societal issues, such as climate change, demographic change, and global poverty, are defined and realized. No single institution will dictate how business responds rather, as with other areas of corporate responsibility, the trends that emerge will be decided in various arenas of conflict, contestation and collaboration. References: Corporate governance by Kesho Prasad 5th Edition Corporate governance codes, systems standard practices Subhas Chanda Das 1 st edition Corporate responsibility a critical introduction Michael Blowfield Alan Murray