Corporate Governance has been in place for ages and still in modern day corporate world

we see fiascos like Satyam taking place in modern India, which really raises doubt about
our financial and commercial ethics, and make us look bad in front of the world. For a
nonprofessional corporate governance is almost an alien concept but even they
understand something called corporate social responsibility (CSR) and they expect the
corporations to be honest and maintain very high level of integrity. Today large number
of retail investors are entering in stock market in order to search for better returns or
some even invest to earn their bread & butter or may be even for getting future security
and in this scenario a big IT and outsourcing player like Satyam gets involved in creative
accounting practices or in other words cooking their financial statements, which hurts
the financial position of millions of small time investors who not only loose their hard
earned money, savings but even their faith in corporate houses and their hope for better
future. I term this failure as failure of Corporate Social Responsibility and this happened
due to not following corporate governance code. We simply cannot over look the
importance of governance of the company and say that it is the governance of country
which is more important neither we can term failure of Satyam as failure of central or
state government failure the company is more responsible for this fiasco as they were
responsible for using public resources and they had the economic responsibility to
enhance economic wealth in addition to generate stockholder value, this quote puts the
situation more accurately 'The governance of companies is more important for world
economic growth than the government of countries.'

The discussion seemed to be only about stock market, investments and to revolve
around financial statements plus money and to a layman corporate governance may
seem as a measure only related to protect their money in addition to financial future but
it is not so The Corporate Governance is a wider concept and its coverage and scope
touches almost all working socio-economic facets of a business. I consider corporate
governance to be more of social relevance than economic aspects as well as it is a much
wider concept than realised so before we dwell into relevance of corporate governance
for modern day business houses especially for corporations let us try to understand what
exactly is the concept of social governance and how it is a tool to bring in socio-
economic discipline to corporate houses.

Introduction to the concept of Corporate Governance

The concept of corporate governance is poorly defined because it potentially covers a

large number of distinct economic phenomenons. As a result, different people have come
up with different definitions that reflect their special interest in the field. We will start
with widely accepted explanation and will try to develop one of comprehensive
explanation of the term. Internationally corporate governance is considered as an -

• International term for responsible corporate management and supervision

oriented toward creating long-term added value.

• "Corporate governance deals with the ways in which suppliers of finance to

corporations assure themselves of getting a return on their investment", The
Journal of Finance, Shleifer and Vishny.

• In simple terms, it includes the practices, principles and values that guide a
company and its business every day, at all levels of the organization, it is the
framework of rules, relationships, systems, and processes within and by which
authority is exercised and controlled in corporations.  To be more precise it
involves series of principles and recommendations to be followed by the
management of listed companies.
In this sense, it encompasses the mechanisms by which companies and those in control
are held to account. This highlights one fact that in wider sense corporate governance at
least covers set of relationships between a company's management, its board, its
shareholders and other stakeholders. Based upon this we can easily draw the reference
that it is a control measure that can result into overall economic growth and
development of an economy plus will generate social justice, if implemented and
executed correctly.

Corporate governance provides a firm foundation for the development of economies. A

good corporate governance mechanism improves the health of the corporate sector, thus
enhancing national competitiveness. The self-regulatory organizations of various
countries have extensive experience in promoting corporate governance and creating a
positive corporate governance culture but unfortunately, in India it is not the case.

Features of Corporate Governance

 Started as economic or financial concept

 Involves lot of parties
 Involves organisational & social objective
 Guiding practices, process & principles
 Used to motivate management to perform better
 Universal approach (world wide acceptance)
 framework of rules, relationships, systems, and processes
 Implemented at all levels in an organisation
 Tool for benchmarking & controlling performance
 Focuses on long term value addition (profitability, goodwill, brand recognition
etc.)

Objectives of corporate governance - As discussed the concept of corporate

governance is multi faceted and involves lot of dimensions therefore it covers several
objectives rather a wide range of objectives ranging from managing & maintaining
Operational transparency to something as simple as following legal mandatory disclosure
norms.  Next diagram gives us an overview of corporate governance objectives.

Parties to corporate governance – Parties to corporate governance covers various

stakeholders and many more as it has wider coverage and influences society up to a
very great extent plus we should not forget that business has greater social obligation as
these business houses uses the resources of the society and common  men to generate
wealth and to earn riches for their shareholders, lastly it should not be forgotten that
only those who are directly involved with the business are not the parties whose life is
being impacted by decisions of business there are lot of others who may not hold any
direct interest in the business but their lives indirectly get influenced and the simple
reason for this is the limited availability of resources and opportunity cost so the
resources that business is using could have been used for much productive cause and
which must have generated more value and benefit for these common men (shadow
pricing).

Corporate Governance- Dimensions

Diagram following indicates the several dimensions of corporate governance it also

indicates how implementation of corporate governance can help an organisation in
improving its operational performance. These dimensions are backbone of corporate
governance as well as they are outcomes or working elements of corporate governance
process. Corporate Social Responsibility is one of the most important dimensions as it is
integral part of corporate governance in addition to being value-enhancing tool for
corporate house it is also deliver satisfaction to all parties involved in corporate
governance. Corporate governance must encompass and deliver effective resource
allocation as by adopting corporate governance a company becomes accountable to
society as well as towards other pressure groups. Ethical behavior and entrepreneurial
development along with generating economic growth are other dimensions whose
importance neither one can ignore nor question.

Economic Vs. Social Process

The arguments are levelled on corporate governance as only being financial, economic
and commercial process but the discussion above especially dimensions of CSR, effective
resource allocation, entrepreneurial growth and last but not the least the emphasis on
economic growth all indicate that this process is not purely a economic concept or tool
though a business is a commercial activity generating profits therefore the emphasis
must have been given on commercial or economic aspects of the business in the initial
stages of the concept but with time Corporate Governance has been moulded and
adequate emphasis on social aspects has also been placed. Presence of various social
interest groups in parties of corporate governance and in-depth coverage of social
objectives in objectives of corporate governance also proves the point that this concept
as on date is no longer a purely economic tool but now it is a mix of economic-social
efforts and it is target towards bringing economic social discipline in the arena of
business. Inclusion of social elements has made this tool more developed and wider in
application. Corporate governance is now a more balanced concept that considers not
only economic cost benefit but also uses the social cost benefit analysis as well as use
fundamentals like shadow pricing, human resource accounting and social capital audits. 
It is also important to note that corporate governance is evolutionary; implying that
corporate governance practices will evolve in the light of the changing circumstances of a
company and must be tailored to meet those circumstances. Corporate governance
practices are also bound to be flexible enough to adapt influences of both domestic and
international developments.

Instruments of corporate governance - Alian Cadbury reports listed the followings

tools as instruments for corporate governance

 Codes
 Principles
 Standards

These instruments provide wider coverage and cover the following areas:

 Share holders rights and protection

 Shareholders instruments
 Employees and stakeholders right protection
 Company board responsibility
 Transparency of corporate structures and operations, and disclosure of it on time.

Process of corporate governance - The process of corporate governance involves four

principal activities, which are scheduled as the following:

 Direction – formulating the strategic direction for the future of the enterprise in
the long-term ( policy and objective ) 
 Executive action – involvement in crucial executive decisions.
 Supervision – monitoring and oversight of management.
 Accountability – recognizing responsibilities to those making a legitimate demand
for accountability.

Importance of corporate governance - Corporate governance is a key element in

enhancing investor confidence, promoting competitiveness, and ultimately improving
economic growth. It is at the top of the international development agenda.

The positive effect of good corporate governance on different stakeholders will ultimately
result in a strengthened economy, and hence good corporate governance is a tool for
socio-economic development.

Principles of corporate governance –

 Rights and equitable treatment of shareholders

 Interests of other stakeholders
 Role and responsibilities of the board
 Integrity and ethical behaviour
 Disclosure and transparency
These principles are universal in application and try their level best to provide
comprehensive coverage along with complete protection.

Corporate governance and firm performance

In its 'Global Investor Opinion Survey' of over 200 institutional investors first undertaken
in 2000 and updated in 2002, McKinsey found that 80% of the respondents would pay a
premium for well-governed companies.

They defined a well-governed company as one that had mostly out-side directors, who
had no management ties, undertook formal evaluation of its directors, and was
responsive to investors' requests for information on governance issues.

Conclusion

With this changing times the need to corporate governance cannot be over emphasised
over and above that these troublesome times are the best times to check the
effectiveness and efficiency of this practice, this tools has to be provided with razor
sharp teeth so incidents like Satyam can not be repeated and trust of millions of
innocent investors and other stakeholders can be maintained in this system.

It has to be remembered that key elements of good corporate governance principles

include HONESTY, TRUST, INTEGRITY, OPENNESS, PERFORMANCE ORIENTATION,
RESPONSIBILITY along with ACCOUNTABILITY, MUTUAL RESPECT, and COMMITMENT TO
THE ORGANIZATION. Most important thing is to recognise the fact that corporate
governance has succeeded in attracting a good deal of public interest because of its
apparent importance for the economic health of corporations and society in general. 

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