CORPORATE GOVERNANCE

CORPORATE GOVERNANCEBrief historySeries of business scandals in UK in late 1980s.Pensions fund fraud, bankruptcy of Bank of Credit and Commerce IntnlAppointment of Cadbury Committee ;Adrian Cadbury,1991. India-Harshad Mehta in banking, Satyam in IT industry etc. Basic principles of good corporate governance; -Clear responsibilities,-Precise distinction between direction and management- Checks and balances in governance- effective control and transparency.Concept of corp. governance Corporate governance is not just about corporate management, It is broader in sense to include a fair,efficient and transparent administration to meet certain objectives and 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. Definition of Corp GovernanceThe ICAI (Institute of Chartered Accountants of India) suggested, A corporate governance system is an embedded configuration of values, ethics and appropriate and expected behaviour which provide the coordinates for the organisations performance of its role as a societal entity in all its aspects. A code of corporate governance makes explicit both the auditable and desirable aspects of such a configuration. The Cadbury committee of UK defined corporate governance as the system by which companies are directed and controlled. Main features of corporate governance1.Corporate governance is concerned with how companies are controlled and managed .2.It involves appropriate supervision and control over the top management.3.It requires fair, transparent and efficient administration and effective internal monitoring.4.It is meant to serve the interests of all the stakeholders in a company.5.It requires a legal and institutional framework within which companies are to be managed.Corporate governance goes beyond law, it requires high level of business ethics and a sense of corporate social responsibility.Corporate govenance embraces as to how the set systems and processes and how are the things are done wihin certain structural and organisational systems.It is an interplay between a company, its stakeholders,the capital market and corporate laws.Need and significance of c. governanceChanging ownership structure-complex ownership structure involving promoters,public financial instns., institutional shareholders (foreign in terms of their FDI and Indian),banks, insurance companies and small private investors. It is a challenge for management of companies.Social Responsibility-An effective corporate governance provides for regulating the duties of directors so that they act in the best interest of customers, lenders, suppliers and local community .Need & significance of corp. governance contd.Scams-Corporate scams like Harshad Mehta ,Satyam etc have shaken the public confidence, hence need for corporate governance.Corporate oligarchy-i.e. Only a small group of people govern an organisation.It has given rise to need for mechanisms and systems for corporate governance.Also, shareholders activism and shareholders democracy have also developed.Globalisation- Rise of international markets and need to get listed on intnl stock exchanges have prompted corporate to focus on corp. governance.Intnl orgns like EC,GATT and WTO have all contributed to rising awareness.Fundamental Principles of Corp GovernanceTransparency - disclosure of adequate, accurate and timely information related to business processes to stakeholders.AccountabilityMeritorious management/board of directors- Known for sound business prudence ,integrity and responsibility to shareholders.Sound parameters of reporting, accounting and control systems in the company.Promoting corp. governance in IndiaMinistry of Corporate Affairs has set up National Foundation of Corporate Governance (NFCG) as a non-profit body to deliberate and advise on good corp. governance.NFCG has made action plan for corp. governance norms on 3 themes-i. For institutional investors.ii. For Independent directors on board.iii.For AuditCII & SEBI have developed codes for corp.gov.