Corporate Governance: Theories ,Principles ,Practices

P.S.Swathi SSIM

ROLE OF CORPORATE GOVERNANCE

Corporate governance broadly refers to the rules,

processes or laws by which businesses are operated, regulated and controlled.

Todays

corporate governance places a strong emphasis on both, economic efficiency and safeguarding the welfare of shareholders. of an effective corporate governance system, within a company and across an economy as a whole, helps to strengthen the economy, create investor confidence, and contribute to social wellbeing.

Presence

The role of good corporate governance is to: set right objectives; chart the right processes of operations and process of governance; ensure ethics in the corporate objectives and practice; develop right kind of people and talent in the organisation; inculcate the culture of ethics amongst people; obey the rules, laws and regulations concerning the business; adopt methods of measures and means to control and regulate within the rules and regulations; and adhere to the environmental laws and regulatory

PRINCIPLES OF CORPORATE GOVERNANCE

Rights and Equitable Treatment of Shareholders

Interests of Other Stakeholders

Role and Responsibilities of the Board Integrity and Ethical Behavior Disclosure and Transparency

CODES AND STANDARDS OF CORPORATE GOVERNANCE

Corporate governance principles and codes have

been developed in different countries and issued either from stock exchanges or corporations or by the associations (institutes) of directors and managers with the support of governments and international organisations.
The aim of these codes and guidelines has been to:

bring transparency and accountability in the functions and decisions; seek to establish accountability standards of the board and management of the company; protect investors interests; care for other stakeholders; and promote investor confidence in the business system.

The Cadbury Committee Report of 1992

The purpose of the Cadbury Report was to

establish corporate standards to control and report the functions of boards, and on the roles of auditors.
The Code of Best Practice was designed to

achieve the necessary corporate behavior.

high

standards

of

The report recognized that these codes have to

be reviewed as and when business circumstances change and a broader view of

The OECD Principles of Corporate Governance

As per some important highlights of the OECD principles, the corporate governance framework should:
1. Promote transparent and efficient markets, be

consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities.
2. Protect

and facilitate shareholders rights.

the

exercise

of

4. Recognize the rights of stakeholders established by

law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.
5. Ensure that timely and accurate disclosure is made

on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.
6. Ensure the strategic guidance of the company, the

effective monitoring of management by the board, and the boards accountability to the company and the shareholders.

The Combined Code of Corporate Governance

Here, the recommendations, codes or principles have mainly focused on the companys structure; its financial and non-financial disclosures; compliance with codes of corporate governance; competitive remuneration policy; shareholders rights and responsibilities; and financial reporting and internal controls.

New provisions in the Clause 49 of the SEBI guidelines on corporate governance

The board will lay down a code of conduct for all

board members and senior management of the company to compulsorily follow.

The CEO and CFO will certify the companys financial

statements and cash flow statements.

At least one independent director of the holding

company will be a member of the board of a material non-listed subsidiary.

The audit committee of the listed company shall

review the financial statements of the unlisted subsidiary, in particular its investments.

 If while preparing financial statements, the

company follows a treatment that is different from that prescribed in the accounting standards, it must disclose this in the financial statements and the management should also provide an explanation for doing so in the corporate governance report of the annual report.
The company will have to lay down procedures

for informing the board members about the risk management and minimization procedures.

 Where money is raised through public issues,

rights issues etc., the company will have to disclose the uses/applications of funds according to major categories as part of quarterly disclosures of financial statements.
The company will have to publish its criteria for

making its payments to non-executive directors in its annual report.

MODELS OF CORPORATE GOVERNANCE

The Anglo-American Model

The Coordinated Model

The Family-Owned Company Model

The Anglo-American Model

This is a typical liberal model of governance,

which is prevalent in the US, UK, and many English speaking countries of the erstwhile British Empire.
This model calls for governance by the board of

directors, which has the power to choose the CEO.

While the CEO has the power delegated by the

board to manage the company on a daily basis, he or she needs board approval for certain major

 In this model, the board of directors is responsible

towards the shareholders; however, the by-laws of many companies make it difficult for all but the largest shareholders to have any influence or say over the make up of the board.
Contrary

to the spirit of good corporate governance, individual shareholders are not given the opportunity to choose their nominees to the board.

The Coordinated Model

This model, prevalent in Europe and Japan,

acquiesces to shareholder interest but also gives priority to the interests of managers, employees, customers, suppliers and the community in general.
The coordinated model encourages innovation

and profit on a more incremental level.

The Family-Owned Company Model

This

is prevalent in Asian and Latin American countries, where companies owned by families often dominate the market. This business model views the transparency and disclosure norms of the Anglo-American model as exposing the core business financials and strategies to others, which would mostly benefit the competitors and regulators, with few tangible benefits to the organisation. The system is more amenable to self serving gains from business, and vulnerable with regard to ethics and social responsibility. Family-owned companies do not necessarily harm the interests of shareholders because they themselves

BEST PRACTICES IN CORPORATE GOVERNANCE

Adherence to a code of conduct and the practice of

whistle-blowing is important; but how they are communicated and practised across the organisation is even more important. It is vital for board members and senior managers to lead by example.
Following trusteeship in order to protect shareholders

including minority shareholders is essential. evaluate the functioning of the board.

An independent and transparent process is needed to

Integrity and ethical values should be emphasized as

being fundamental to the governance system.

 Focus on sustainability. Increased responsibility and empowerment of

independent directors.
Skills to listen to and understand stakeholders

their needs and interests.

Concern for purposeful corporate social

responsibility.

CORPORATE GOVERNANCE AND THE INDIAN ETHOS

The Holistic approach in governance

Equal importance to subjectivity/objectivity

Karma yoga Respect to each soul as potential God Cooperation