"Need of Corporate Governance and Ethics in Indian Companies"

Pawan Shanker Sharma Assistant Professor, Aishwarya Institute of Management and Information Technology, Udaipur (Raj.).

Abstract A corporation is a congregation of various stakeholders, namely, customers, employees, investors, vendor partners, government and society. A corporation should be fair and transparent to its stakeholders in all its transactions. This has become imperative in todays globalized business world where corporations need to access global pools of capital, need to attract and retain the best human capital from various parts of the world, need to partner with vendors on mega collaborations and need to live in harmony with the community. Unless a corporation embraces and demonstrates ethical conduct, it will not be able to succeed. The paper discusses the increasing power of the capital market to discipline the dominant shareholder by denying him access to the capital market. The newly unleashed forces of deregulation, disintermediation, institutionalization, globalization and tax reforms are making the minority shareholder more powerful and are forcing the companies to adopt healthier governance practices.

Keywords: Corporate Governance and Ethics.

Introduction

Corporate governance is about ethical conduct in business. Ethics is concerned with the code of values and principles that enables a person to choose between right and wrong, and therefore, select from alternative courses of action. Further, ethical dilemmas arise from conflicting interests of the parties involved. In this regard, managers make decisions based on a set of principles influenced by the values, context and culture of the organization. Ethical leadership is good for business as the organization is seen to conduct its business in line with the expectations of all stakeholders. What constitutes good Corporate Governance will evolve with the changing circumstances of a company and must be tailored to meet these circumstances. There is therefore no one single model of Corporate Governance. Historical Background The pioneering report on Corporate Governance was framed by the CADBURY Committee set up in May 1991 by the London Stock Exchange. This committee was set up to prevent the recurrence of corporate failures, which arose primarily out of poorly managed business practices. The committee investigated the accountability of the Board of Directors to Shareholders and to the society. It submitted its report and associated Code of Best Practices in December 1992, wherein it spelt out the method of governance needed to achieve a balance between the essential powers of the Board of Directors and their proper accountability. Following the corporate governance scandals in the US., the Sarbanes Oxley Act was enacted which brought about fundamental changes in virtually every area of corporate governance and particularly in auditor independence, conflict of interest, corporate responsibility and enhanced financial disclosures. Effective corporate governance enhances access to external financing by firms, leading to greater investment, as well as higher growth and employment. The proportion of private credit to GDP in countries in the highest quartile of creditor right enactment and enforcement is more than double that in the countries in the lowest quartile. As for equity financing, the ratio of stock market capitalization to GDP in the countries in the highest quartile of shareholder right
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enactment and enforcement is about four times as large as that for countries in the lowest quartile. Poor corporate governance also hinders the creation and development of new firms. Need Economic and Commercial activities the world over grew manifold after the Bretton Woods and formation of World Bank and the International Monetary Fund. Cross border trades and exchange rate mechanisms resulted in specialization within financial market. Several players in the field, International commerce and settlements grew manifold giving rise to standards and benchmarks. ISO 9000 and International best accounting practices are the culmination of the experience of the stakeholders in different fields of economics and commerce, the policymakers. Objective of study
1. To trace origin and development of Corporate Governance practices. 2. To examine the significance of Corporate Governance.

Legal environment, ownership patterns and Corporate Governance The legal system of a country plays a crucial role in creating an effective corporate governance mechanism in a country and protecting the rights of investors and creditors. The legal environment encompasses two important aspects the protection offered in the laws (de jure protection) and to what extent the laws are enforced in real life (de facto protection). Both these aspects play important roles in determining the nature of corporate governance in the country in question. Recent research has forcefully connected the origins of the legal system of a country to the very structure of its financial and economic architecture arguing that the connection works through the protection given to external financiers of companies creditors and shareholders. The Indian legal system is obviously built on the English common law system. Researchers have used two indices for all these countries a shareholder rights index ranging from 0 (lowest) to 6 (highest) and a rule of law index ranging 0 (lowest) to 10 (highest) to measure the effective protection of shareholder rights provided in the different countries studied. The first index
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captures the extent to which the written law protected shareholders while the latter reflects to what extent the law is enforced in reality. Companies & Corporate governance The term governance refers to the system of management and controls exercised in the stewardship of your organization. It includes the responsibilities of your organizations owners/shareholders, board of directors, and senior leaders. Regulators can facilitate the process by measures such as: enhancing the scope, frequency, quality and reliability of information disclosures; promoting an efficient market for corporate control; restructuring or privatizing the large public sector institutional investors; and reforming bankruptcy and related laws. In short, the key to better corporate governance in India today lies in a more efficient and vibrant capital market. Issues of corporate governance have been hotly debated in the United States and Europe over the last decade or two. In India, these issues have come to the fore only in the last couple of years. Naturally, the debate in India has drawn heavily on the British and American literature on corporate governance. There has been a tendency to focus on the same issues and proffer the same solutions. For example, the corporate governance code proposed by the Confederation of Indian Industry (Bajaj, 1997) is modeled on the lines of the Cadbury Committee (Cadbury, 1992) in the United Kingdom. This paper argues however that the crucial issues in Indian corporate governance are very different from those in the US or the UK. Consequently, the corporate governance problems in India require very different solutions at this stage of our corporate development. Corporate Governance in India a background The history of the development of Indian corporate laws has been marked by interesting contrasts. At independence, India inherited one of the worlds poorest economies but one which had a factory sector accounting for a tenth of the national product; four functioning stock markets (predating the Tokyo Stock Exchange) with clearly defined rules governing listing, trading and settlements; a well-developed equity culture if only among the urban rich; and a

banking system replete with well-developed lending norms and recovery procedures. In terms of corporate laws and financial system, therefore, India emerged far better endowed than most other colonies. The 1956 Companies Act as well as other laws governing the functioning of joint-stock companies and protecting the investors rights built on this foundation. Conclusion Development of norms and guidelines are an important first step in a serious effort to improve corporate governance. The bigger challenge in India, however, lies in the proper implementation of those rules at the ground level. More and more it appears that outside agencies like analysts and stock markets (particularly foreign markets for companies making GDR issues) have the most influence on the actions of managers in the leading companies of the country. But their influence is restricted to the few top (albeit largest) companies. More needs to be done to ensure adequate corporate. Even the most prudent norms can be hoodwinked in a system plagued with widespread corruption. Nevertheless, with industry organizations and chambers of commerce themselves pushing for an improved corporate governance system, the future of corporate governance in India promises to be distinctly better than the past.

References

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