What Is Corporate Governance?

Corporate governance is the system of rules, practices, and processes by which

a company is directed and controlled. Establishing and implementing these
practices involves balancing the interests of a company's many stakeholders,
including:
 Employees
 Shareholders
 Senior management
 Customers
 Suppliers
 Lenders
 Local, state, and federal governments
 Community members and groups
Corporate governance encompasses practically every sphere of management,
from action plans and internal controls to performance measurement and
corporate disclosure.
1. Corporate governance refers to the set of principles, policies, and
practices that guide the direction, control, and management of a company.
2. It encompasses the relationships and responsibilities among various
stakeholders, including shareholders, management, board of directors,
employees, customers, suppliers, and the broader community.
3. The fundamental objective of corporate governance is to ensure
transparency, accountability, fairness, and ethical conduct within the
organization.
4. By es
5. tablishing robust governance structures and processes, companies aim to
protect the interests of stakeholders and foster sustainable long-term
growth. Effective corporate governance cultivates trust, mitigates risks,
enhances decision-making, and promotes a culture of responsible
business practices.
Concept of Corporate Governance
Corporate governance is a multifaceted concept that encompasses more than
just corporate management. It entails the establishment of a fair, efficient, and
transparent administration that strives to meet well-defined objectives. In
essence, it is a system that governs the structure, operation, and control of a
company, while considering the interests of various stakeholders, such as
creditors, employees, customers, and suppliers. Moreover, it necessitates
compliance with legal and regulatory requirements and the pursuit of long-term
strategic goals to satisfy shared regulatory obligations. Furthermore, corporate
governance should address environmental concerns and the needs of the local
community and maintain a strong legal, commercial, and institutional
framework. Defining clear boundaries ensures that all functions and activities
are conducted within a well-laid-out system. When implemented effectively,
corporate governance contributes to the overall success and sustainability of a
company.

DEFINITION

According to the Institute of Company Secretaries of India (ICSI), corporate

governance can be defined as the application of management practices that
ensure compliance with laws, ethical standards, and the responsible and
effective management and distribution of wealth. It encompasses the
commitment to social responsibility and the pursuit of sustainable development
for the benefit of all stakeholders involved. In essence, corporate governance
seeks to establish a framework that promotes transparency, accountability, and
ethical conduct within an organization to ensure the holistic well-being of its
stakeholders.
The ICSI presents the annual National Award for Excellence in Corporate
Governance, evaluating companies based on key criteria:
1. Board independence, systems, and procedures : Assessing the
effectiveness of the board’s independence and the robustness of systems
and procedures.
2. Transparency and disclosure compliances: Evaluating the company’s
transparency in operations and adherence to disclosure requirements.
3. Consistent value enhancement for stakeholders : Recognizing the
company’s track record in consistently enhancing value for stakeholders.
 4. Corporate social responsibility: Considering the company’s commitment
to social and environmental causes.
5. Creative and contributive capabilities of top
management: Acknowledging the innovative and contributive abilities of
the company’s top management.
6. Sustainable relationship building with stakeholders: Assessing efforts in
fostering sustainable relationships with stakeholders.

Benefits of Corporate Governance

Corporate governance that is carefully thought out and implemented creates
transparent rules and controls. It can serve as a guide to leadership, aligning the
interests of shareholders, directors, management, community members, and
employees. When implemented across all company levels of management and
operations, good corporate governance can:
 Build trust with investors, the community, and public officials
 Give investors and other stakeholders a clear idea of a company's
direction and business integrity
 Promote long-term financial viability, opportunity, and returns
 Facilitate the raising of capital
 Contribute to rising share prices
 Improve a company's reputation and customer retention
 Reduce the potential for financial loss, waste, risks, and corruption
Good corporate governance should be part of any company's game plan for
resilience and long-term success. Bad corporate governance, on the other hand,
can have the opposite effect, eroding relationships and trust both internally and
externally. This can damage a company's reputation, lead to regulatory or ethical
scandals, reduce both employee and customer retention, cause stock prices to
fall, and ultimately erode a company's profitability.

Significance of Corporate Governance

Good corporate governance has assumed greater importance and urgency in
India give the following reasons:
 Changing Ownership Structure: The corporate landscape has witnessed a
notable shift in ownership structures, particularly in large private-sector
corporations. The traditional model of concentrated ownership by a few
individuals or families has given way to a more diverse ownership base.
This evolution has been driven by factors, such as the threat of hostile
takeovers and the emergence of institutional investors. As a result,
corporate governance has gained heightened significance in ensuring
accountability, transparency, and protection of the rights of all
shareholders. It plays a crucial role in preventing undue influence,
promoting fair decision-making, and safeguarding the interests of
minority shareholders.
 Social Responsibility: Corporate governance serves as a driving force in
fostering social responsibility among companies. Integrating ethical
practices and considering the interests of various stakeholders, including
 customers, lenders, suppliers, and the local community, helps
organizations contribute positively to society. Effective corporate
governance ensures that directors act in the best interests of the
company while considering the broader impact of their decisions. It
provides a framework for responsible management and distribution of
resources, ultimately enhancing value for all stakeholders and
facilitating sustainable development.
 Scams: Instances of corporate fraud have eroded public confidence and
underscored the need for robust corporate governance practices.
Scandals, such as the Harshad Mehta case and CRB Capital fraud have
inflicted substantial losses on small investors and highlighted the
importance of transparency, accountability, and risk management. By
implementing effective governance mechanisms, including independent
audits, internal controls, and board oversight, companies can detect and
prevent fraudulent activities. Strong corporate governance acts as a
safeguard, protecting the interests of shareholders, upholding ethical
standards, and maintaining the trust of the investing public.
 Corporate Oligarchy (a small group of people having control of a country
or organization): In India, the promotion of shareholder activism and
democracy remains an ongoing challenge. Corporate governance
practices need to address the issue of concentrated power and promote
transparency, accountability, and shareholder participation. Encouraging
diverse representation on boards, allowing proxies to speak at meetings,
and fostering shareholder associations are vital steps toward countering
corporate oligarchy. Effective corporate governance ensures a level
playing field, promotes equitable decision-making, and helps establish a
culture of inclusivity and fairness within organizations.
 Globalization: The integration of Indian companies into global markets
and the pursuit of international listings have underscored the importance
of robust corporate governance practices. Strong governance frameworks
are vital for establishing trust among global investors, complying with
international regulations, and fostering transparency and accountability.
By adhering to global governance standards, companies can enhance their
competitiveness, attract capital, and ensure the confidence of international
stakeholders. Effective corporate governance facilitates strategic
decision-making, risk management, and integrity in financial reporting.
The Principles of Corporate Governance
The principles of corporate governance encompass a range of essential elements
that underpin effective governance practices some of the principles include:
 Integrity and Fairness: Upholding integrity and fairness lies at the heart of
sound corporate governance. It entails embracing ethical standards,
promoting transparency, and ensuring equitable treatment of all
stakeholders. Cultivating a culture of honesty, trustworthiness, and ethical
behaviour at every level of the organization is vital.
 Transparency: Transparency is a fundamental principle that drives
corporate governance. It involves providing stakeholders with timely,
accurate, and comprehensive information, including financial reports,
performance updates, and significant disclosures. Transparent reporting
builds trust, enables informed decision-making, and showcases a
commitment to accountability.
 Accountability: Accountability is a cornerstone of effective corporate
governance. It necessitates holding directors, executives, and
management teams responsible for their actions, decisions, and
performance. Establishing clear lines of responsibility and decision-
making, along with robust oversight and control mechanisms, ensures
accountability to both shareholders and stakeholders.

 Independence: Independence is a critical principle, particularly about the

board of directors. Independent directors bring objectivity and impartial
judgment to board deliberations and decision-making. They act in the
best interests of the company and its stakeholders, devoid of conflicts of
interest or undue influence.

Principles of corporate governance

While corporate governance structure may vary, most organizations incorporate
the following key elements:
• All shareholders should be treated equally and fairly. Part of this is making
sure shareholders are aware of their rights and how to exercise them.
• Legal, contractual and social obligations to non-shareholder stakeholders
must be upheld.
• This includes always communicating pertinent information to employees,
investors, vendors and members of the community.
• The board of directors must maintain a commitment to ensure accountability,
fairness, diversity and transparency within corporate governance.
• Board members must also possess the adequate skills necessary to review
management practices.
• Organizations should define a code of conduct for board members and
executives, only appointing new individuals if they meet that standard.
• All corporate governance policies and procedures should be transparent or
disclosed to relevant stakeholders.

Why Corporate Governance?

Corporate governance is about enabling organisations to achieve their goals,
control risks and assuring compliance. Good corporate governance incorporates
a set of rules that define the relationship between stakeholders, management and
the board of directors of a company and influence how the company is
operating.
76

CORPORATE GOVERNANCE – HISTORY IN INDIA

Introduction
Corporate governance is concerned with set of principles, ethics, values, morals,
rules regulations, & procedures etc. Corporate governance establishes a system
whereby directors are entrusted with duties and responsibilities in relation to the
direction of the company’s affairs. The term “governance” means control i.e.
controlling a company, an organization etc or a company & corporate
governance is governing or controlling the corporate bodies i.e. ethics, values,
principles, morals. For corporate governance to be good the manager needs to
meet its responsibilities towards its owners (shareholders), creditors, employees,
customers, government and the society at large. Corporate governance helps in
establishing a system where a director is showered with duties and
responsibilities of the affairs of the company. Corporate governance concept
emerged in India after the second half of 1996 due to economic liberalization
and deregulation of industry and business.
With the changing times, there was also need for greater accountability of
companies to their shareholders and customers. The report of Cadbury
Committee on the financial aspects of corporate Governance in the U.K. has
given rise to the debate of Corporate Governance in India.
Need for corporate governance arises due to separation of management from the
ownership. For a firm success, it needs to concentrate on both economical and
social aspect. It needs to be fair with producers, shareholders, customers etc. It
has various responsibilities towards employees, customers, communities and at
last towards governance and it needs to serve its responsibilities at the best at all
aspects.
The “corporate governance concept” dwells in India from the Arthshastra time
instead of CEO at that time there were kings and subjects. Today, corporate and
shareholders replace them but the principles still remain same, unchanged i.e.
good governance. 20th century witnessed the glossy of Indian Economy due to
liberalization, globalization, and privatization. Indian economy for the 1st time
here was together with world economy for product, capital and labour market
and which resulted into world of capitalization, corporate culture, business
ethics which was found important for the existence of corporation in the world
market place.
For effective corporate governance, its policies need to be such that the directors
of the company should not abuse their power and instead should understand
their duties and responsibilities towards the company and should act in the best
interests of the company in the broadest sense. The concept of ‘corporate
governance’ is not an end; it’s just a beginning towards growth of company for
long term prosperity.
GOVERNANCE AND MANAGEMENT
• Governance is the job of the governing body, such as a committee or board, to
provide direction, leadership and control.
• Management is typically the job of a management or executive team, led by a
coordinator or chief executive and his/her staff and volunteers.
• The governing body's role is to oversee management, not to manage. It must
be satisfied that the management team is doing its job in accordance with policy
and resources.
Corporate governance differs from corporate management in that governance is
primarily about protecting a business, while management is more about growing
it.
Governance refers to the policies and procedures set in place to ensure a
business operates within the law and for the optimal benefit of all stakeholders.
Management refers to the techniques executives use to help the company
operate and flourish.
Aspect Management Corporate Governance
Primary Focus Daily operations Strategic Oversight
Objective Operational efficiency
Accountability and
Compliance
Decision Making Short term to Medium Long term strategic
term
Scope Execution focused Oversight focused
Accountability To senior management To SHs/StkHs
Role Implement Policies Set Policies
Key Actors Managers Board of Directors
Level of Authority Operational Strategic
Nature Administrative Governing
Orientation Task-oriented Principle- oriented
Primary Responsibility Achieving targets Ensuring compliance
Outcome Measurement Performance metrics Compliance and ethical
standards