UNIT-5

CORPRATE GOVERNANCE S. Concept of corporate governance !ta"e#o$%er!. AND BUSINESS ETHIC

&ec#an'!( of corporate governance Pr'nc'p$e! 'nc$)%'ng *P+! of corporate governance. R)$e! of corporate governance. So)rce! of et#'ca$ ,e#av'o)r. Co%e of con%)ct for goo% (anage(ent pract'ce!. Benef't! of et#'ca$ co%e!. Soc'a$ re!pon!','$'t- of ,)!'ne!!.

CORPORATE GOVERNANCE. Corporate governance is the process whereby people in power direct, monitor and lead corporations, and thereby either create, modify or destroy the structures and system under which they operate. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. OBJECTIVES OF CORPORATE GOVERNANCE. Corporate governance has the following objectives: 1. To align corporate goals with goals of its stakeholders (society, shareholders etc. . !. To strength corporate functioning and discourage mismanagement. ". To achieve corporate goals by making investment in profitable investment outlets. #. $pecify responsibility of the board of directors and manager in order to ensure good corporate performance. 1

NEED FOR CORPORATE GOVERNANCE. Corporate governance is needed for the following reasons% 1. Separation of Ownership fro owners (shareholders . #. F$ow of G$o%a$ Capita$: 'n the globali(ed world of today, global capital flows in markets which are well)regulated and have high standards of efficiency and transparency. *ood corporate governance gains credibility and trust of global market players. &. In'estor Prote(tion: 'nvestors are educated and enlightened of their rights. They want their rights to be protected by companies in which they have invested money. Corporate governance is an important tool for protecting investors+ interest by improving efficiency of corporate enterprise. ). Finan(ia$ Reportin" an* A((o+nta%i$it,: *ood corporate governance ensures sound, transparent and credible financial reporting and accountability to investors and lenders so that funds can be raised from capital markets. -. Ban.s an* Finan(ia$ Instit+tions: ,anks and financial institutions give financial assistance to companies- .They are interested in financial soundness of companies. This can be done through good corporate governance. /. G$o%a$isation of E(ono ,0 The economy today is globali(ed. 'ntegration of 'ndia with the world economy demands that 'ndian industries should conform to the standards of international rules. Corporate governance helps in doing this. I!PORTANCE OF CORPORATE GOVERNANCE Corporate governance is important for the following reasons: 1. !. 't shapes the growth and future of capital markets of the economy. 't helps in raising funds from capital markets. $ound governance practices contribute to investors+ confidence in corporations to attract long)term capital. 2 !ana"e ent: & company is run by its managers.

Corporate governance ensures that managers work in the best interests of corporate

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't links company+s management with its financial reporting system. 't enables management to take innovative decisions for effective functioning of the enterprise within the legal framework of accountability. The effectiveness of legal and regulatory framework is indispensable to assess corporate governance impact on overall economic performance.

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*ood corporate governance enhances the structures through which objectives of the corporations are set, means of attaining such objectives are determined and performance is monitored.

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't supports investors by making corporate accounting practices transparent. Corporate enterprises disclose financial reporting structures. 0. 't provides ade1uate and timely disclosure reporting re1uirements, code of conduct etc. Companies present material price sensitive information to outsiders and ensure that till this information is made public, insiders abstain from dealing in corporate securities. 't, thus, avoids insider)trading, 2. 't improves efficiency and effectiveness of the enterprise and adds to wealth of the economy. Corporate governance is, thus, fin instrument of economic growth. 3. 't improves international image of the corporate sector and enables home companies to raise global capital.

PRINCIP1ES OF CORPORATE GOVERNANCE 'ssues involving corporate governance principles include: 1. 4versight of preparation of the entity+s financial statements !. 'nternal controls and independence of the entity+s auditors ". 5eview of the compensation arrangements for the chief e6ecutive officer and other senior e6ecutives #. the way in which individuals are nominated for positions on the board 7. the resources made available to directors in carrying out their duties /. 4versight and management of risk 0. 8ividend 9olicy The aim of corporate governance principles is to align .the interest of individuals and community goals, corporations and society in the following ways: 3

1. Transparen(,0 Companies have to be transparent. Transparency means accurate, ade1uate and timely+ disclosure of relevant information to the stakeholder. Transparency and disclosure provides information to the stakeholders that their interests are being taken care of. !. A((o+nta%i$it,0 Chairman, board of director and chief e6ecutive of the company must fulfill their accountability to the shareholders, customers, workers, society and the *overnment. $ince they have considerable authority over company+s resources, they should accept accountability for all their decisions and actions. ". In*epen*en(e0 :or ethical reasons, corporate governance seems to be independent, strong and non)participatory body where all decision)making is based on business and not personal biases. #. Reportin": *ood corporate governance involves ade1uate reporting to the shareholders and other stakeholders, for e6ample, a company should publish its 1uarterly, half yearly and yearly performance and operating results in newspapers. 't should also report the functioning of various committees set by the board of directors for efficient administration. 't is important on ethical grounds of the society.

RO1E OF STA2E3O1DERS IN CORPORATE GOVERNANCE. The corporate governance framework should recogni(e the rights of stakeholders established by law or through mutual agreements and encourage mutual agreements and encourage active co)operation between co)operations and stakeholders in creating wealth, jobs and the sustainability of financially sound enterprise. The rights of stakeholders that are established by law or through mutual agreements are to be respected. ;here stakeholder interests are protected by law, stakeholders should have the opportunity to obtain effective redress for violations of their rights. 9erformance enhancing mechanisms for employee participation should be permitted to develop. ;here stakeholders participate in the corporate governance process, they should have access to relevant, sufficient and reliable information on a timely and regular basis.

$takeholders, including individual employees and their representative bodies should be able to freely communicate their concerns about illegal or unethical practices to the board and their rights should not be compromised for doing this.

The corporate governance framework should be complemented by an effective, efficient insolvency framework and by effective enforcement of creditor rights.

) P4s OF CORPORATE GOVERNANCE

Corporate *overnance can also be e6plained on the basis of #9-s (9eople, 9urpose, 9rocesses and 9erformance . ,usiness cannot be run with only profits but there must be recognition for human aspects too. This is possible by corporate governance. Corporate *overnance has the integrated framework, where the people are formally either trained or helped to develop to work for a definite purpose in applying the systematic processes consistently to give the constant growth by better performance. The above defined #9-s plays a vital role in modern management. The purpose and the process are well defined and e6plained to achieve better performance by the people. Corporate *overnance highlights the foci of the entire business in a corporation. This is centrali(ation to people. 9eople work for the people. Corporate governance also emphasi(es the structure that 6

should be formally defined and organi(ed. ;ith the consistent process, having a common goal, the performance that is e6pected from the people is planned and oriented in order to get the overall insight of development of the business and the company respectively. PEOP1E 9eople are the heart of any organi(ation in general and Corporate *overnance in particular. 9eople associated with any organi(ation include 'nvestors, <mployees, 9artners, Customers, $uppliers, =enders, *overnment and $ociety. <1uity, <thics and 5elationship are the parameters on which 9eople orientation of corporate governance can be measured. <1uity means fair and e1uitable treatment to all. <1uity has ! aspects) positive and negative. 'n positive sense, e1uity means same behaviour, award, appreciation etc to all on achievement of the objectives. 'n negative sense, e1uity talks about same e6tent and kind of punishment on commitment of an act of commission or omission of any misconduct or contravention of any rule or regulation. <1uity also means e1uitable distribution of wealth among the people. 9rotection of human rights of people is also an important aspect of it. P5RPOSE &nother >9- of corporate governance is >9urpose-. The 9urpose should be <stablished, ?easurable, &ctionable and Communicated. 8ifferent aspects of 9urpose are @ision)?ission and $trategy. The @ision and ?ission are decided based on Anified and $hared @alues of the 4rgani(ation. $takeholders- policies and 4rgani(ation Commitment, the $trategy leads to $trategic &ction 9lan, 9erformance ?etrics, Capacity ,uilding 9lanning and $trategic ?anagement Team. PROCESS This >9- of corporate governance includes 9rocess ?anagement, 9rocess Compliances and 9rocess 'nnovation. The 9rocess should be <stablished, 'ntegrated, 8ocumented, &utomated, 'mplemented and ?aintained. 9rocess ?anagement has different aspects such as 4rgani(ation ?anagement, 5esource ?anagement, $upply Chain ?anagement, ?arketing and ,rand 9romotion, 4utsourced 9rocess management, <nvironment and <nergy ?anagement, 5elationship ?anagement, 'nformation $ystem ?anagement, 5isk and Crisis ?anagement. The 9lantBAnitB 4rganisation has to comply with various rules, regulations, statutes and laws enforced by the state and central government which includes compliance management. PERFOR!ANCE 9erformance should be measured, analy(ed and communicated in order to achieve *rowth through <fficiency. <fficiency can be segregated into different types as 4perational <fficiency. &sset or 'nfrastructure, <fficiency and ?anagement 9rocess <fficiency. *rowth in any 7

organi(ation brings in increase in income of organi(ation and stakeholder, increase in net worth or market share, e6pansion and diversification and increase in opportunities in stakeholders

CORPORATE SOCIA1 RESPONSIBI1IT6. Corporate social responsibility is an organisations obligation to benefit society in ways that transcend the primary business objective of ma6imi(ing profits. 1EVE1S OF CORPORATE SOCIA1 RESPONSIBI1IT6. & hierarchy of the e6tent to which business units discharge social responsibilities is developed by 5. Coseph ?onsen. $tarting from the lowest level, there are four levels of hierarchy: 1. O%e,an(e of the $aw0 ?anagers feel they are discharging social responsibility by merely obeying the law. !. Caterin" to p+%$i( e7pe(tations0 $ocial responsibility goes beyond merely obeying the law. 'n addition to abiding by legal framework of the country, $ocial responsibility also caters to public e6pectations from the business enterprises (for e6ample, provide mg job opportunities, 1uality goods, controlling pollution etc. . ". Anti(ipation of p+%$i( e7pe(tations0 &t a still higher level, business firm-s .not only fulfill what society e6pects from them but also anticipate needs of the society and devise programmes to fulfill those needs. #. Creation of p+%$i( e7pe(tations. &t the highest level of hierarchy, managers not only cater to public demands but also set standards of social responsibilities and ;:A't the society+ to be benefited by those standards. ,usiness enterprises are moving from lower to higher levels of this hierarchy 3ISTORICA1 PERSPECTIVES OF SOCIA1 RESPONSIBI1IT6 <6pectations of society from business firms as regards corporate socialD responsibility has gone through three phases: 1. Profit a7i i8ation0 Eistorically, public viewed business enterprises as

institutions Fwhich mainly looked after the interests of their owners. $ocial responsibility was discharged to the e6tent of ma6imi(ing profits within the legal framework of the country. !. Tr+steeship ana"e ent0 8uring later years, the concept of social responsibility got

widened from mere satisfactions of owners+ interest to the interests of other stakeholders 8

also, like employees, consumers, creditors etc. 9roviding good working conditions, goods of the tight 1uality and 1uantity, timely repayment of loans to creditors etc. were viewed as essential aspects of social responsibility. ,usiness managers were trustees of business property, holding it in trust for the welfare of society. ". 9+a$it, of $ife ana"e ent0 & still wider perspective of social responsibilities

developed in 13/Gs. 't viewed business enterprises as institutions to remove social ills and promote upliftment of society. ,usiness enterprises were supposed to change the 1uality of society.

APPROAC3ES TO SOCIA1 RESPONSIBI1IT6 5anging from lowest to highest degree of socially responsible practices, four approaches to social responsibility are discussed below: 1. So(ia$ o%str+(tion0 Though few in number, firms which follow this approach to social responsibility do the least possible to solve social problems. They oppose the concept of social responsibility and do not consider the conse1uences of business decisions on social environment. !. So(ia$ o%$i"ation0 Though a step ahead of social obstructionH, socially obliged firms discharge social responsibility to the e6tent .that avoids *overnment interference. The organi(ation does everything that is legally re1uired of it. & cigarette manufacturing company, for e6ample, prints Cigarette .smoking is injurious to, health+ on the cigarette packets but despite the product being harmful for health, it does e6tensive research to promote its sale. ". So(ia$ response0 & step .further ahead of social obligation, firms perform legal, ethical and social obligations only if they are asked to do so. They do not seek socially responsible activities their own. 8onations to charitable institutions for a social cause are an e6ample of $ocial response. Companies make donations when they are approached by these institutions. 't is, thus, discharging social responsibilities in response to demand. #. So(ia$ (ontri%+tion0 $ocially responsive firms which favour the concept of social responsibility follow the social contribution approach where they seek opportunities to perform activities that contribute to social goals. The firms identify areas where they can be of help to the society. *ranting scholarships and opening career counseling centers are the common%% e6amples of social contribution approach to social responsibility.

&ll these approaches are not distinct in nature: They lie on a single continuum. :irms may follow two or more approaches at different points of time PRINCIP1ES OR CORPORATE SOCIA1 RESPONSIBI1IT6 'n introducing C$5, companies must adhere to the following principles: 1. S+pp$, (hain responsi%i$ities0 & company+s social responsibilities should cover all those with whom companies come in contact with, irrespective of the relationship (formal or informal , product or service, or geographic location. These may include suppliers, contractors, alliances etc. Companies must do everything they can in promoting C$5 practices throughout their chain of operation. !. Sta.eho$*er in'o$'e ent0 .Companies must be ready to engage in dialogues with stakeholders (workers, suppliers, local population, consumers, social organisations, public authorities etc.This will help the companies. know the concerns of stakeholders regarding conse1uences of company behaviour. There should be ongoing e6change of information between company and its stakeholders regarding company+s C$5 policies where companies arrive at a mutually accepted agreement about company norms, values, rights and obligations. ". Transparen(, an* reportin": Companies must be transparent and open with respect to their policies and social conduct. 5eporting re1uires companies to inform stakeholders about the effects of their conduct and the conse1uences of these effects on other stakeholders. 'nformation can be made available to stakeholders through (a regular public reports, (b assessment reports, annual reports and meetings, (c publication of data and consultation. #. In*epen*ent 'erifi(ation0 Companies must verify, that is, internally monitor its C$5 policies, 1uality of its reports and management systems and processes. This verification should be carried out by organisations that are not linked to the companies and have full trust of shareholders involved. 4utcome of the verification procedures should be made public in a proper manner. CODE OF COND5CT FOR !ANAGERS '. The ?anager) The person 1. Eave high regard for the interest of the society. !. 8o not attempt to injure maliciously, directly or indirectly the professional reputation of others. ". 5espect the confidentiality of information #. <ngage a continual learning. 10

7. &ccept only such work that you are competent to perform. /. ;hen asked for professional opinion provided objective. ''. ?anager and the 4rgani(ation 1. <ffective and economic utili(ation of all resources. !. Training and development of the employees. ". Creation of a healthy and satisfying working environment. #. 8evelopment of effective communication. 7. 9ractice delegation of authority whenever possible. /. :air and e1uitable treatment of employees. 0. :re1uent review of management objectives. '''. ?anager with the environment 1. ?aking endeavor to conserve the environment. !. <nsuring that all contracts and terms of business are clear. ". <6clusion of corrupt. #. 5especting cultural and moral standards and dignity of individual. 7. 9articipating in public affairs utili(ing professional capacity. 2e, feat+res of a we$$ written (o*e 1. <asy to read and easy to understand. !. <ngaging the employees. ". ?oving to digital versions. #. $hould be visible to global audience. 7. $hould be comprehensive and communicable. R51ES FOR CORPORATE GOVERNANCE 1. 5ethink your strategy 'ndustrial age) physical assets 11

$ervice age) people employed 'nformation age) software code and data $ocial age) si(e of organi(ational network. !. 5e)think people 'deas of all people are taken in to consideration ". 5e)think process Iinside out #. 5e)think technology 7. 5e)think leadership Top to down(before Jow, hori(ontally, confidence to all employees and even customers advice are even considered. /. 5e)think of finance 0. 5e)thinking of *overnance )Jetwork alignment ) Capita l allocation to new sources of value and technology and business model strategies.

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