Corporate Governance

Prof. S.N.Misra

Meaning
Corporate governance is "the system by which companies are directed and controlled. It involves regulatory and market mechanisms, and the roles and relationships between a companys management, its board, its shareholders and other stakeholders, and the goals for which the corporation is governed.

Lately, corporate governance has been comprehensively defined as "a system of law and sound approaches by which corporations are directed and controlled, focusing on the internal and external corporate structures with the intention of monitoring the actions of management and directors.

In contemporary business corporations, the main external stakeholder groups are shareholders, suppliers, customers and communities affected by the corporation's activities. Internal stakeholders are the board of directors, executives, and other employees.

Much of the contemporary interest in corporate governance is concerned with mitigation of the conflicts of interests between stakeholders. Ways of mitigating or preventing these conflicts of interests include the processes, customs, policies, laws, and institutions which have an impact on the way a company is controlled. An important theme of corporate governance is the nature and extent of accountability of people in the business.

SEBI
India's SEBI Committee 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.

CG Principles
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.

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. 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 and gain credibility in the market. Unfortunately, corporate governance often becomes the centre of discussion only after the exposure of a large scam.

Why was it in the news recently?

Corporate governance has most recently been debated after the corporate fraud by Satyam founder and Chairman Ramalinga Raju. In fact, trouble started brewing at Satyam around when Satyam announced its decision to buy stakes in Maytas Properties and Infrastructure for $1.3 billion. The deal was soon called off owing to major discontentment on the part of shareholders and plummeting share-price.

 However, in what has been seen as one of the largest corporate frauds in India, Raju confessed that the profits in the Satyam books had been inflated and that the cash reserve with the company was minimal. Ironically, Satyam had received the Golden Peacock Global Award for Excellence in Corporate Governance in September 2008 but was stripped of it soon after Raju's confession.

Features of CG
CG is the set of processes, customs, policies, laws and institutions affecting the way a company is directed, administered or controlled. CG also includes the relationships among many stakeholders. 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. CG has a strong impact on economic efficiency and at the same time emphasizes shareholder welfare.

4 Ps of Corporate Governance
PurposeProcessVision, Mission, Strategy Management, Compliances, Innovation Performance- Efficiency, Growth PeopleEthics, Relationship

Prerequisites of Good Governance

It is a well-known fact that management plays a vital role in shaping the future of any organization as the optimum utilization of all resources hinges upon the efficacy of the management.

 The core of a successful management lies in its Clarity of Vision, Plan of Action and more importantly Execution of the Plan of Action and it is here that the importance of Corporate Governance and Ethics comes into being. Our Honble Prime Minister, Dr. Manmohan Singh has said that whereas our policies and systems are good but the implementation needs much to be desired.

Organizations are managed by Policies, Guidelines and Systems.

These are dynamic instruments, and therefore need to be reviewed from time to time to gauge their efficacy to the said organization.

1. Experience has taught us that it is the Economic Downturn, as we witness worldwide today, rather than Up Swing, which raises sharp focus on issues relating to Ethics & Corporate Governance. 2. 2. The two Major Reasons for Corporate failures have been Greed and Excess Leverage. The point is whether these two need to be completely done away with? If so, what is the Incentive for Aggressive growth and competition? If not, how are these to be kept within controllable limits and yet higher growth achieved? It is here that Business Ethics & Corporate Governance need to be focused on.

3. Whether it was abroad in the U.S. earlier, or more recent, and nearer home, it is seen that a slip in Corporate Governance is always initiated by the Promoters themselves. 4. Independent Directors are expected to be Watch Dogs.

5. Each Member of the Board has a Key Role to play and an Sacred Responsibility to deliver, and therefore they need not get unduly overawed by size of the Company or any tough situation that they are faced with. They need to bring their Special Expertise and Experience on Corporate issues to the Board, and always to keep Broad Stakeholder Interest in mind. 6. They need to Set & Follow Policies pertaining to Conflict of Interest. All Directors must therefore be above Board.

7. They would be required to diligently & keenly watch the changes in Assets & Liabilities in the Balance Sheet, to ensure quick corrective action if needed. 8. The Board Agenda should be circulated well in time. The Directors of the Board must have sufficient time to go through the papers and to apply their mind, and come duly prepared to the Board Meeting. The various issues deliberated upon, queries raised, clarifications given must be precisely minuted in a chronological manner.

9. There must be adequate time for discussion of the Table Agenda to ensure an in-depth deliberation. 10. It is extremely important to ensure Auditor Independence. The Audit firm assigned to the company should fulfill its mission in a Competent & Independent manner.

11.The Independent Directors understand the Impact and Consequences of the proposals they are clearing in the Board Meetings. The Promoters have got the Independent Directors on Board to add value and to contribute with their distinct individual expertise and experience. The goals of the Promoters and Directors being the Long Term Sustainable Well Being of the Company. Of late, since January 2009, we have been hearing that some Independent Directors have chosen to resign. This is certainly not a healthy trend and should be discouraged.

12. Finally, Board Members must embrace Corporate Ethics by creating a climate of Integrity and Responsibility within the company, expressed in both the written code and by living example i.e. both Directors & Promoters need to come together to Build a strong Ethical Culture for the Company, that would ensure Correct Behaviour/ the Right Behaviour.

Sum up
Ethics & Corporate Governance is not just Moral or Compliance Issues. In the long term they are Essential Behavioural Traits for the Organization that strengthen the Organizations Brand Equity and help ensure Stable Sustainable Growth.

Thank You