CHAPTER 2 Corporate Governance:An Overview

Introduction
Corporate governance refers to actions taken by organisations to improve
relationships and interactions with various stakeholders of corporations such
as investors, workers, government, consumers and business partners, NGOs
engaging in community activities and promoting good environmental practices.
The concept of corporate governance covers a set of rules, procedures and
operational structure that guides the short-term and the long-term actions of The concept of corporate
companies. These actions include establishing codes of conduct for employees governance covers a set
and balancing the interests of all stakeholders. 'It is a system by which the organs of rules, procedures and
operational structures
of corporations such as the board, managers, shareholders and other stakeholders that guides the short-term
spell out the rules and procedures for making decisions on corporate affairs. and long-term actions of
By doing this, it also provides a structure through which the company objectives companies.
are set and the means of attaining those objectives and monitoring performance.

Corporate Stakeholders
Corporate stakeholders are those groups without whose support the corporate
organisation would cease to exist. They are broadly grouped into (1) internal
stakeholders and (2) external stakeholders.
1. Internal stakeholders are those who engage in economic transactions with the
organisation such as owners, employees, managers.
2. External stakeholders are those who do not engage in direct economic transaction
but their actions can affect the business. e.g. Government, Suppliers, Creditors.
These stakeholders have certain interest in the organisation without which
some conflict will arise.

Main Stakeholders and Their Concern in a Company

Corporate stakeholders Concerns

Shareholders Value maximization-Profitability, Liquidity-growth-market
price

Employees Benefit maximization

Government Tax, employment, true reporting, diversity.

Creditors Liquidity, debt servicing

Customers Quality, price, care

Community Job, environment protection, equity

Trade unions Quality of work (worker's) life

Competitors Fair play, ethical business

What is Corporate Governance?

Corporate governance is typically perceived by academic literature as dealing
control." From
with V'problems that result from the separation of ownership and structure
this perspective, corporate governance would focus on: the internal
audit committees;
and rules of the board of directors; the creation of independent of
rules for disclosure of information to shareholders and creditors; and, control
the management, Figure 2,1 explains how a corporation is structured,
 COrporate Governancc

Figure 2.1 Definitions of Corporate Governance

Separation of ownership The concept of corporate governance sounds simple and unambiguous
and management but when one attempts to define it and scan.available literatu
to look for precedence, one comes across a bewildering Variety
of perceptions behind available definitions. The definition varies
according to the sensitivity of the analyst, the context Ofvarying.
degrees of development and from the standpoint Ofacademics versus
Shareholders corporate managements. However, there is an underlying uniformity
in the thinking of all analysts that there is a definite need to eradicate
corporate misgovernance and promote corporate governance at all
costs. It is not only the stakeholders who are keenly interested
ensuring adoption of the best governance practices by corporate in
but also societies and countries worldwide. s

Management From the Academic Point of View

From the academic standpoint, corporate governance is seen as one that
addresses "the problems that result from the separation of ownership
and control."l Viewed from this perspective, corporate governance
Employees focusses on some structures and mechanisms that would ensure a proper
internal structure and the rules of the board of directors; the creation
of independent committees; the rules for disclosure of information
to shareholders and creditors; a transparency of operations and an
impeccable process of decision-making and the control of management.
A recent academic survey of corporate governance defined it as'
follows: "Corporate governance deals with the ways in which suppliers of finance
to corporations assure themselves of getting a return for their investment. How
do the suppliers of finance get the managers to return some of the profits to them?
How do they make sure that the managers do not steal the capital they supply
or invest it in bad projects? How do suppliers of finance control the
From this point of view, the corporate governance tends to focus on a simple
model:
1. Shareholders elect directors who represent them.
2. Directors vote on key matters and adopt the majority decision.
3. Decisions are made in a transparent manner so that the shareholders and
others can hold directors accountable.
4. The company adopts the accounting standards to generate the information
necessary for directors, investors and other stakeholders to make decisions.
5. The company's policies and practices adhere to applicable national, stateand
local laws. 3
A McKinsey & Company Report published in 2001 under the title "Giving New
Life to the Corpora te Governance Reform Agenda for Emerging Markets" suggests
that by using a two-version "governance" chain model, we can illustrate the
governance practices throughout the world.

Model 1
In the first version of McKinsey's model called "The Market Model" governance
chain, there are efficient,well-developed equity markets and dispersed ownership,
something common in the developed industrial nations such as the US, the UK/
Canada and Australia, Corporate governance is basically how companies deal fairly
with problems that arise from "separation of ownership and effective control." This
model illustrates conditions and governance practices that are better understood
and appreciated and as such highly valued by sophisticated global investors.
 CHAPTER 2 Corporate Governance: An Overview

Model 2
In the second version of McKinsey's model called "The Control Model,"
governance chain is represented by underdeveloped equity markets, concentrated
(family) mvnership, less shareholder transparency and inadequate protection of
minority and foreign shareholders, a
paradigm mom familiar in Asia, Latin Figure 2.2
America and some east European
nations. In such transitional and The "market model" governance chain
developing economies there is a (more common in the US, the UK,Canada and Australia)
need to build, nurture and grow Shareholder environment Independence and performance
supporting institutions such as a
strong and efficient capital market
regulator and judiciary to enforce Dispersed Non-executive
contracts or protect property rights. ownership majority boards

From the Angle of Sophisticated

institutional
Aligned
o incentives
Developed Versus ownership o
O
Developing Countries O
o
Active equity High
o
The concept of corporate governance markets disclosure o
can also be viewed from the context
of economic development achieved Active Shareholder
by countries. While the principles takeover equality
underlying the concept are the market
same and there is no question of the
norms governing it being different, Capital market liquidity Transparency and accountability
the evolution of the systems and
procedures that are required to
implement it are at varying degrees of maturity. The earlier definitions quoted
assume that in all societies an efficient and functioning legal system is in place,
which is unfortunately, not so.
The Anglo-American, German, Japanese and other mature and developed
economies have all well-functioning market systems and highly developed legal
institutions, although there are considerable differences between them as there
are in other features of democracy. In fact, it is these well-developed and mature
institutions that have played a significant role in ushering in faster economic
development of these countries. Therefore, in such economies, proper checks and
balances exist to ensure good corporate behaviour. Even if any aberration occurs
and corporate misdemeanour is noticed, quick remedial action can be taken to
arrest the spread of such virus throughout the system, as was promptly done in
the US by the Bush administration through the enactment of the Sarbanes—Oxley
Act in the wake of corporate failures in 2002,
In the context of developed societies, the essence of corporate governance as
expressed in the words of Patricia A, Nodoushani and OmiclNodoushani is as
follows; 4'Jt is a relationship among various participants in determining the direction
and performance of a corporation. However, corporate governance goes beyond
the simple concept of who is in charge and who has the power, Chief among its
goals are improving shareholder value and supporting a continuing commitment
to growth." 'i
Providing the foundation to this more traditional" view of corporate
governance are three basic assumptions: Primacy of the shareholder; diversity Ofthe
shareholder group; and the maximisation of shareholder wealth as a fundamental
raison d'étre of a company' This view is consistent with both the Anglo-American
 COrporate Governance

Figure 2.3 system and the Continental European

or German systems. Yet another
The "control model" governance chain crisp definition was from -the
(mote common in Asia, Latin America, pads of Europe) former President of World Bank
Shareholder
J. Wolfensohn, who expressed 'the
Independence
environment and performance
view that "corporate governance is
about promoting corporate fairness
transparency and accountability."5
Concentrated '"Insider
ownership boards" In such a scenario, in the absence
of mature supporting institutions,
governance practices tend to be
Reliance on Incentives
family, bank, aligned with coro
designed as more ad hoc to suit the
public finance shareho\ders needs of controlling or influencing
the shareholders. According to
McKinsey, "the Market Model is a
Under developed
New issue
Limited natural goal or target for any reform
disclosures 8 process of developing or (transition
market
economies which will however
Limited Inadequate require fundamental institutional
takeover minority reform" to usher in material changes
market protection
in the functioning of corporates.
Transparency and
According to some other experts:
Capital market
liquidity accountability "Corporate governance means
doing everything better to improve
relations between companies and
their shareholders; to improve the quality of outside directors; to encourage
people to think of long-term relations; information needs of all stakeholders
are met and to ensure that executive management is monitored properly in the
interest of shareholders."
Sir Adrian Cadbury, chairman of the Cadbury Committee, defined the
concept thus: "Corporate governance is defined as holding the balance between
Defining corporate economic and social goals and also between individual and communal goals.
governance is not an easy The governance framework is there to encourage the efficient use of resources
task It varies according to
the sensitivity of the analyst, and equally to require accountability for the stewardship of those resources. The
the contextof the degree of aim is to align as nearly as possible the interest of individuals, corporations and
development of the country society. The incentive to corporations is to achieve their corporate aims and to
to which it is referred and attract investment. The incentive for states is to strengthen their economiesannd
the different standpoints
of the analysts, though discourage fraud and mismanagement. "6
there is an underlying unity Experts at the Organisation of Economic Co-operation and Development
in all these definitions. (OECD)have defined corporate governance as "the system by which business
The Cadbury Report was
a forerunner and made a
corporations are directed and controlled." According to them, "the corporate
significant contribution to governance structure specifies the distribution of rights and responsibilities
the understanding of the among di_fferentparticipants in the corporation, such as, the Board, managers,
concept, shareholders and other stakeholders, and spells out the rules and procedures
for making decisions on corporate affairs" (OECD,April 1999).By doing this,
it provides the structure through which the company objectives are set, and also
provides the means of attaining those objectives and monitoring performance.
OECD's definition, incidentally is consistent with the one presented by Cadbury
Committee.
All these definitions which are shareholder-centric capture some of the most
inlportant concerns of governnnentsin particular and the society in general.
These are; (i) management (ii) providing adequate investments to
management, (iii) disciplining ancl replacement of bad management, (iv) enhancing
corporate performance, (v) transparency, (vi) shareholder activism, (vii)investor
protection, (viii) improving access to capital markets, (ix) promoting long-term
investment, and (x) encouraging innovation,
 CHAPTER 2 Corporate Governance: An Overview
All these traditional views reflect the necessity of corporate governance for
improved performance of corporates themselves. However, there is a growrng
school of thought that maintains that this traditional theory does not go far enough.
Good governance is critical not only for the success or failure of companies, but
also for industries and economies as well. Besides, there is a need to extend the
concept of governance to corporates of developing and transitional economies
and standardise it to accommodate "well-entrenched " local and regional customs,
traditions and business practices, which may be very different from what are
obtainedin advanced societies.
Of late, corporate governance has become the cynosure of all issues connected
with corporations. National business communities are gradually realising the fact
that there is no substitute for getting the basic business and management systems
in place in order to be competitive in the global market and to attract investment.
From the standpoint of developingeconomiesand transition societies,ensuring
corporate governance becomes difficult in the absence of a well-developed
corporate culture, capital market, money market, regulatory systems, well-defined
and suitable public policies, proactive governments, well-informed stakeholders
and the presence of corruption, bribery, discrimination and a culture of accepting
misgovernance, fraud and corporate misdemenour as part of human frailities.This
has been amply demonstrated in the manner in which corporates have been run
in developing countries by all-pervasive family-owned concerns. Shareholders,
on the other hand, have remained scattered, mute and often oblige managements
and pass resolutions without a murmur for the meagre dividends and petty gifts.
In such a scenario, development of strong and powerful regulatory institutions,
legal structures and evolving healthy precedence is of great importance.
Corporate governance systems depend upon a set of institutions (laws,
regulations, contracts, and norms) that create self-governing firms as the central
element of a competitive market economy.These institutions ensure that the
internal corporate governance procedures adopted by firms ate enforced and that
management is responsible to owners (shareholders) and other stakeholders: As
John D. Sullivan asserts : "In developing economics one must look to supporting Definition; point to
institutions—for example, shoring up weak judicial and legal systems in order that corporate governance
systems depend upon
to enforce contracts and protect property rights in a better svayē sThis need for set of institutions such
an institutional arrangement being the sinc qua for adopting better corporate regulations, Contracts
governance practices is underlined in the following definition: eCorporate and norms that cte•te
governance is not just corporate management; it is something much broader to setf•governingfirms
the central element of
include a fair, efficient and transparent administration to meet certain well-defined competitive market
objectives. It is a system of structuring, operating and controlling a company with economy These institutions
a view to achieving long-term strategic goals to satisfy shareholders. creditors, ensure that the internal
corporate governance
employees, customers and suppliers and to comply with the legal and regulatory procedures adopted b'/
requirements, apart from meeting environmental and local community needs. firms are enforced and that
When it is practised under a well-laid out system. it leads to the building of a managementsare
legal, commercial and institutional framework and demarcate the boundaries responsible to owners and
other stakeholders
within which these functions are performed."'
A critical factor in the corporate governance is the inherent need to accept it,
and to get acclimatised to, change veith its fast phase and unpredictability in a
market-driven global economy, even while getting even with cut-throat competition
at all levels. Every country wants its corporates to flourish and grow, provide
wealth and welfare to its people, enhance standards of living and ensure social
cohesion to the extent feasible.
But these concerns are not limited to the developing countries and the transition
governance.
societies alone. There isa global trend towards strengthening corporate
the
For example, in recent years, the Cadbury Committee in the United Kingdom,
the Organisation for Economic Co-operation and
Vienot Commission in France, and
is
Development (OECD)have all issued new guidelines- In the United States, there
 Corporate Governance

mounting concern over the "independence" of independent audits as witnessed in

the recent publicity surrounding violations of rules prohibiting auditors to invest
in companies that they audit. In all of these cases, the underlying concerns centre
around ways to accomplish the core values of corporate governance including
transparency, accountability and building values. 10
In this context, it is refreshing as well as interesting to note another definition
of corporate governance: "Some commentators take too narrow a view, and say it
(corporate governance) is a fancy term for the way in which directors and
handle their responsibilities towards shareholders. Others use the expression as
if it is synonymous with shareholders' democracy. Corporate governance is a
topic recently conceived, as yet ill-defined, consequently blurred at the edges...
Corporate governance is a subject, has an objective, or has a regime to be followed
for the good of shareholders, employees, customers, bankers, and indeed for the
economy. "
reputation and standing of our nation and its

Narrow Versus Broad Perceptions

of Corporate Governance
Corporate governance can also be defined from a very narrow perception to a
According to an article that
appeared in Financial Times broad manner. According to an article that appeared in Financial Times in 1997:
in 1997, "Corporate "Corporate governance..: is defined narrowly as the relationship ofa company
governance is defined to its shareholders or, more broadly, as its relationship to society."
narrowly as the relationship
of a company with its
The earliest definition of corporate governance in its narrow sense is
shareholders or, more from the Economist and Nobel Laureate, Milton Friedman. According to him,
broadly. as its relationship "corporate governance is to conduct the business in accordance with the owner's
with society."Thus, the or shareholders' desires, which, generally, will be to make as much money as
concept covers a vast canvas
and cannot be put into one
possible, while conformingto the basic rules of the society embodied in law
straitjacket. and local customs." This definition is based on the economic concept of market
value maximisation that underpins shareholder capitalism. In the present day
context, Friedman's definition appears narrow in scope. In this narrow sense,
corporate governance can be viewed as a set of arrangements internal to the
corporation that define the relationship between the owners and the managers of
the corporation. For instance, Monks and Minowll define corporate governance
as "the relationship among various participants in determining the direction and
performance of corporations. The primary participants are: (1) the shareholders,
(2) the management, and (3) the board of directors.
The World Bank defines corporate governance from two different perspectives.
From the standpoint of a corporation, the emphasis is placed on the relations
between the owners, the management, the board and other stakeholders '(the
employees, the customers, the suppliers, the investors and the communities).
Major significance in corporate governance in this narrow perspective is given
to the board of directors and its ability to attain long-term, sustained value by
balancing these interests. From a public policy perspective, corporate governance
refers to providing for the survival, growth and development of the company,
and at the same time, its accountability in the exercise of power and control over
companies, The role of public policy is to discipline companies and, at the same time,
to stimulate them to minimise differences between private and social interests.13
The OECD also offers a broader definition: "...Corporate governance refers to the
private and public institutions, including laws, regulations and accepted business
practices, which together govern the relationship in a market economy, between
the corporate managers and the entrepreneurs (corporate insiders) on one hand,
and those who invest resources in corporations, on the other.
From all the above definitions, any discerning reader can understand that
good corporate governanceis a desicleratumto the growth and development of
 CHAPTER2 Corporate Governance: An Overview
enterprises worldwide. To attain sustainable economic growth, the economy should
boast of a growing enterprise sector which is, inter alia responsible, accountable,
transparent and fair not only to its shareholders, but also to the entire groups
of stakeholders. These characteristics of good corporate governance;are now
recognised as a sine qua non for access to, and development of, financial markets,
and are being increasingly demanded by both international and domestic investors.
In the case of transition economies which are eager to convert their command
economies to market-driven economies, it is improved corporate performance
that will justify and accelerate their efforts to reach their goal. In the case of
India too, the government found implementation of delicensing, deregulation
and liberalisation relatively "easy going" because of the improved performance
of the corporate sector in the wake of the new economic policy initiated in and
after 1991,which in turn, boosted the growth of the country's national income,
in the aftermath of the changed strategies in economicpolicy.
Ensuring better corporate governance practices in the country's mega
corporations will result in boosting investors' confidence so that they can
confidently commit their funds to them. Having a transparent and fair system to
govern markets, equitable treatment of all stakeholders and an opportunity to
enterprises to prove their worth in competitive markets are all very important
to the successful development of an economy. And in this scenario, corporate
democracy should go hand-in-hand with political democracy.

Perceptional Differences in Definitions

Wehave seen several definitions of corporate governance and any intelligent reader
would not have failed to note the fact that even while all of them emphasise the
importance of ensuring good corporate governance practices for the good of the
economy and the nation, there is a perceptible difference in the emphasis they lay in In the several definitions of
terms of objectives, goals and the means and tools to achieve and realise it. In this corporate governance that
context, it will be appropriate to recall the contention of many writers of the history are available any intelligent
reader would not have failed
of economic thought. Having gone through the chequered history and development to note the fact that even
of economic thought with their profound impact on the policy formulations and white all of them emphasise
functioning of economies world-wide, they come to the inevitable conclusion that the importance of ensuring
economic doctrines—though they appear to be permanent and inexorable—reflect good corporate governance
practices for the good of the
the conditions of the times in which they are enunciated; so also the contexts and economy and the nation,
the situations in which they are to be tested or to be put into practice. Lest one is there is a perceptible
tempted to jump to the conclusion that such economic doctrines have no scientific difference in the emphasis
they lay in terms of objec-
relevance, one should be clear in one's mind that economics being a social science tives, goals, means and tools
studying human behaviour that can not be put into one strait-jacket, can hardly to achieve and realise it.
have inflexible and exact doctrines like physics or mathematics.
Therefore, corporate governance which reflects a practical field of economics
too has definitions that lay varying degree of emphasis on time, context and
the dimensions of corporate governance issues. According to some economists:
"Corporate governance is a field in economics that investigates how to secure/
incentive mechanisms,
motivate efficient management of corporations by the use of
limited to
such as contracts, organisational designs and legislation.)This is often corporate
how the
the question of improving finance performance, for example, a competitive
that the corporate managers will deliver
owners can secure/ motivate
rate of return."15
in different markets
Thus, in today's world different governance practices exist
is a common viewLthat the "natural goal"
reflecting the business reality. But there the same.
should be essentially
for all markets, be they developed or developing, come the
on the topic also
But even though there is common goal, writers is of the view that
conclusion that "One Size Does Not Fit All," For example, Mayer
Corporate Governance

"governance is more than shareholder/ management alignment; it is about who

is in control, for how long and over what critical important corporate activities„t
Other commentators argue that new economy companies' governance Structures
should adopt themselves rapidly to the fast-moving changes in control, while
this adoption may be slow in old economy companies. It is,therefore, important
that governance structures and practices should be tailored to meet aPPr0Priate
requirements and needs.
There are many Writers who hold the view, as Mayer does, that governance
is moving in a direction that encompasses corporatestrategyas a key element.
To Mayer, "corporate governance is not... solely concerned with the efficiency
with which companies are operated in the interests of shareholders.It is also
intimately related to company strategy and life cycledevelopment."
There are writers who would want corporate governance to include management
social responsibility,
discipline (including financial discipline), business ethics, corporate
also being presumed
and stakeholder participation in the decision-pnakingprocesses.•Itis development
economic
that corporates have a responsibility to promote sustainable
globalisation, it sisbeing
of the countries in which they operate. In this era of
corporate governance is not only a means
increasingly realised that instituting strategyto prosper.
competitive world, but a good
to survive in today's
 Chapter 2
Government and Management
Governance
The word governance is derived from the Greek verb kubemaein
[kubernaol(meaning to steer, the metaphorical sense first being attested in Plato).
Governance encompasses the system by which an organisation is
controlled and operates, and the mechanisms by which it, and its people, are
held to account. Ethics, risk management, compliance and administration are all
elements of governance.
Governance is establishment of policies, and continuous monitoring of
their proper implementation,by the members of the governing body of an
organization.It includes the mechanismsrequired to balance the powers of the
members (with the associated accountability),and their primary duty of
enhancing the prosperity and viability of the organization. Governance is the
way rules, norms and actions are structured, sustained, regulated and held
accountable.
Governancehas been defined to refer to structures and processes that are
designed to ensure accountability, transparency, responsiveness, rule of law,
stability, equity and inclusiveness, empowerment, and broad based
participation.Governancealso represents the norms, values and rules of the
game through which public affairs are managed in a manner that is transparent,
participatory, inclusive and responsive. Governance therefore can be subtle and
may not be easily observable. In a broad sense, governance is about the culture
and institutional environment in which citizens and stakeholders interact among
themselves and participate in public affairs. It is more than the organs of the
government.
In its most abstract sense, governance is a theoretical concept referring to
the actions and processes by which stable practices and organizations arise and
persist. These actions and processes may operate in formal and informal
organizations of any size; and they may function for any purpose, good or evil,
for profit or not. Conceiving of governance in this way, one can apply the
concept to states, to corporations,to non-profits, to NGOs, to partnerships and
other associations, to business relationship (especially complex outsourcing
relationships), to projectteams,and to any number of humans engaged in some
purposeful activity.
Governance can also define normative or practical agendas. Normative
conceptsof fair governance or good governanceare common among political,
public sector, voluntary, and private sector organizations.
(5)
6 LAW OF CORPORATE GOVERNANCE

Governance refers to a process whereby elements in society wield Power

authority and influence and enact policies and decisions concerning public life
and social upliftment,
"Governance", therefore, not only encompasses but transcends the
collective meaning of related concepts like the state, government, regime and
good government. Many of the elements and principles underling "good
government" have become an integral part of the meaning of "governance".John
Healey and Mark Robinson define "good government" as follows :
It implies a high level of organisational effectiveness in relation to
policy-formulation and the policies actually pursued, especially in the
conduct of economicpolicy and its contributionto growth, stability and
popular welfare. Good government also implies accountability,
transparency, participation, openness and the rule of -law. It does not
necessarily presuppose a value judgment, for example, a healthy respect
for civil and political liberties, although good government tends to be a
prerequisite for political legitimacy.
We can apply our minds to the definitionof governanceprovided by the
World Bank in Governance :
The World Banks Experience, as it has special relevance for the developing
world
Good governanceis epitomizedby predictable,open and enlightened
policy-making, a bureaucracy imbued with a professional ethos acting in
furtherance of the public good, the rule of law, transparent processes, and
a strong civil society participating in public affairs. Poor governance (on
the other hand) is characterizedby arbitrary policy making, unaccountable
bureaucracies, unenforced or unjust legal systems, the abuse of executive
power, a civil society unengaged in public life, and widespread corruption.
The World Bank's focus on governance reflects the worldwide thrust
toward political and economic liberalisation. Such a governance approach
highlights issues of greater state responsiveness and accountability, and the
impact of these factors on political stability and economic development. In its
1989 report, From Crisis to SustainableGrowth, the World Bank expressed this
notion as follows :
Efforts to create an enabling environment and to build capacities will
be wasted if the political context is not favourable. Ultimately, better
governance requires political renewal. This means a concerted attack on
corruption from the highest to lowest level. This can be done by setting a
good example, by strengthening accountability, by encouraging public
debate, and by nurturing a free press. It also means.... fostering grassroots
and non-governmental organisations such as farmers' associations,
co-operatives, and women's groups.
Apart from the World Bank's emphasis on governance, it is also necessary
to refer to academic literature on governance, which mostly originates from
scholars working with international development and donor agencies. The
majority of these scholars has concentratedalmost exclusively on the issue of
political legitimacy, which is the dependent variable produced by effective
 NATURE AND SCOPE OF CORPORATE GOVERNMENT 7

governance. Governance, as defined here, is "the conscious management of

regime structures, with a view to enhancing the public realm".
The contribution of Goran Hyden to bring greater clarity to the concept of
governance needs special attention. He elevates governance to an "umbrella
concept to define an approach to comparative politics", an approach that fills
analytical gaps left by others. Using a governance approach, he emphasises "the
creative potential of politics, especiallywith the ability of leaders to rise above
the existing structure of the ordinary, to change the rules of the game and to
inspire others to partake in efforts to move society forward in new and
productive directions".
His views boil down to the following :
• Governance is a conceptual approach that, when fully elaborated, can
frame a comparative analysis of macro-politics.
• Governance concerns "big" questions of a "constitutional"nature that
establish the rules of political conduct.
• Governance involves creative intervention by political actors to change
structures that inhibit the expression of human potential.
• Governance is a rational concept, emphasising the nature of interactions
between state and social actors, and among social actors themselves.
• Governance refers to particular types of relationships among political
actors : that is, those which are socially sanctioned rather than arbitrary.
To conclude, it is clear that the concept of governancehas over the years
gained momentum and a wider meaning. Apart from being an instrurnent of
public affairs management, or a gauge of political development, governance has
become a useful mechanism to enhance the legitimacy of the public realm. It has
also become an analytical framework or approach to comparative politics.
Management
The definition and scope of management include :
• Henri Favol (1841-1925)stated : "to manage is to forecast and to plan, to
organise, to command, to co-ordinate and to control."
• Fredmund Malik (1944-)defines management as "the transformation of
resources into utility".
• Management is included as one of the factorsof production—along with
machines, materials and money.
• Ghislain Deslandesdefines management as "a vulnerable force, under
pressure to achieve results and endowed with the triple power of
constraint, imitation and imagination, operating on subjective,
interpersonal, institutional and environmental levels".
Peter Drucker (1909-2005)saw the basic task of management as twofold :
marketing and innovation.Nevertheless, innovation is also linked to
marketing (product innovation is a central strategic marketing issue).
Peter Drucker identifies marketing as a key essence for business success,
but management and marketing are generally understood as two
different branches of business administration knowledge.
 8 LAW OF CORPORATE GOVERNANCE

Management is a process of planning, decision making, organizing,

leading, motivation and controlling the human resources, financial, physical,
and information resources of an organization to reach its goals efficiently and
effectively.
Managementis essential for an organized life and necessary to run all types
of management. Good management is the backbone of successful organizations.
Managing life means getting things done to achieve life's objectives and
managing an organizationmeans getting things done with and through other
people to achieve its objectives.
Whether managementis an art or science,will continue to be a subjectof
debate. However, most management thinkers agree that some form of formal
academic management background helps in managing successfully. Practically,
all CEO's are university graduates. Hence, the reason for including bUSiness
degree programs in all academic institutions.
Features of Management
Management is the process of setting and reaching goals effectively and
efficiently. Management process has some qualities or features;
1. Management is Associated with Group Efforts
2. Management is Purposeful
3. Management is Accomplished Through the Efforts of Others
4. Management is Goal-oriented
5. Management is Indispensable
6. Management is Intangible
7. Management can Ensure Better Life
Often there is a tendency to equate governance with management, the
latter primarily referring to the planning, implementation and monitoring
functions in order to achieve pre-defined results. Management encompasses
processes, structures and arrangements that are designed to mobilize and
transform the available physical, human and financial resources to achieve
concrete outcomes. Management refers to individuals or groups of people who
are given the authority to achieve the desired results. Governance systems set
the parameters under which management and administrative systems will
operate. Governance is about how power is distributed and shared, how policies
are formulated, priorities set and stakeholdersmade accountable.
Difference between Governanceand Management
Table below summarizes the difference between governance and
management :

Governance Management
Set and norms, strategic vision Run the organization in line with
and direction and formulate high-level the broad goals and direction set by
goals and policies. the governing body.
 9
NATURE AND SCOPE OF CORPORATE GOVERNMENT

Oversee management and Implement the decisions within

organizational performance to ensure the context of the mission and
that the organization is working in the strategic vision.
best interests of the public, and more
specifically the stakeholders who are
served by the organization's mission.
Direct and oversee the and
decisions
Make operational
management to ensure that the policies, keep the governance bodies
organization is achieving the desired informed and educated.
outcomes and to ensure that the Be responsive to requests for
organization is acting prudently, additional information.
ethically and legally.
In the development literature, the term 'good governance' is frequently
used. In particular, the donors promote the notion of 'good governance' as a
necessary pre-condition for creating an enabling environment for poverty
reduction and sustainable human development. Good governance has also been
acceptedas one of the targets of the Millennium Development Goals [MDGsl.
The good governance agenda stems from the donor concern with the
effectivenessof the development efforts. Good governance is expected to be
participatory, transparent, accountable, effective and equitable and promotes
rule of law.
Types of Governance
Governance often refers to a particular level of governance associated with
a type of organization (including public governance, global governance,
non-profit governance, corporate governance, and project governance), a
particular'field' of governanceassociatedwith a type of activity or outcome
(including environmental governance, internet governance, and information
technology governance), or a particular 'model' of governance, often derived as
an empirical or normative theory (including regulatory governance,
participatory governance, multilevel governance, meta governance, and
collaborative governance).
PuQic governance
Governance, conveys the administrativeand process-oriented elements of
governing rather than its antagonistic ones. Such an argument continues to
assume the possibility of the traditional separation between "politics" and
"administration". Contemporary governance practice and theory sometimes
questions this distinction, premising that both "governance" and "politics"
involve aspects of power and accountability.
In general terms, public governance occurs in three broad ways :
Through networks involving public-privatepartnerships (PPP) or with the
collaboration of community organisations;
Through the use of marketmechanisms whereby market principles of
competition serve to allocate resources while operating under
government regulation;
Through top-down methods that primarily involve governments and
 10 LAW OF CORPORATE GOVERNANCE

the state bureaucracy.

Private governance
Private governance occurs when non-governmental entities, including
private organizations, dispute resolution organizations, or other third party
groups, make rules and/or standards which have a binding effect on 'the
'quality of life and opportunities of the larger public." Simply put, private—not
public—-entities are making public policy. For example, insurance companies
exert a great societal impact, largely invisible and freely accepted, that is a
private form of governancein society,in turn, reinsurers, as private companies,
may exert similar private governance over their underlying carriers. The term
"public policy" should not be exclusively associated with policy that is made by
government.Public policy may be created by either the private sector or the
public sector. If one wishes to refer only to public policy that is made by
government, the best term to use is "governmental policy," which eliminates the
ambiguity regarding the agent of the policy making.
Global governance
Global governance is defined as "the complex of formal and informal
institutions, mechanisms, relationships, and processes between and among
states, markets, citizens and organizations,both inter-and non-governmental;
through which collective interests on the global plane are articulated, right and
obligations are established, and differences are mediated". In contrast to the
traditional meaning of "governance",some authors like JamesRosenauhave used
the term '"global governance" to denote the regulation of interdependent
relations in the absence of an overarchingpolitical authority. The best example
of this is the international system or relationships between independent states.
The term, however, can apply wherever a group of free equals needs to form a
regular relationship.

Corporate governance
Organizationsoften used the word governance to describe both :
I. The manner in which boardsor their like direct a corporation;
2. The laws and customs (rules) applying to that direction.
Corporate governance consists of the set of processes, customs, policies,
laws and institutions affecting the way people direct, administer
or control a
corporation. Corporate governance also includes the relationships among
many players involved (the stakeholders)and the corporate the
goals. The principal
players include 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.
The first documented use of the word "corporate
Richard Eells (1960,p. 108) to denote "the structure and governance" is by
functioning of the
corporate polity". The "corporate government"concept
itself is older and was
already used in finance textbooks at the beginning of the 20th
century,
Project governance
Project governance is the management framework within which
project
 NATURE AND SCOPE OF CORPORATE GOVERNMENT 11

decisionsare made. Its role is to provide a repeatable and robust system

through which an organization can manage its capital investments—project
governance handles tasks such as outlining the relationships between all groups
involved and describing the flow of information to all stakeholders.
Fair governance
When discussing governance in particular organizations, the quality .of
governance within the organization is often compared to a standard of good
govenmnce.In the case of a businessor of a non-profitorganization,for example,
good governance relates to consistent management, cohesive policies, guidance,
processes and decision-rights for a given area of responsibility, and proper
oversight and accountability. "Good governance" implies that mechanisms
functionin a way that allows the executives (the "agents") to respect the rights
and interests of the stakeholders(the "principals"),in a spirit of democracy.
Good governance
Good governance is an indeterminate term used in international
development literature to describe various normative accounts of how public
institutions ought to conduct public affairs and manage public resources.These
normative accounts are often justified on the grounds -that they are thought to
be conducive to economic ends, such as the eradication of poverty and
successful economic development. Unsurprisingly different organizations have
defined governance and good governance differently to promote different
normativeends.
The WorldBank defines governance as :
• the manner in which power is exercised in the management of a
country's economic and social resources for development.
• The WorldwideGovernanceIndicatorsproject of the World Bank defines
governance as :
the traditions and institutions by which authority in a country is
exercised.
This considers the process by which governments are selected, monitored
and replaced; the capacity of the government •to effectively formulate and
implementsound policies and the respect of citizens and the state of the
institutions that govern economic and social interactions among them.
According to the United Nations DevelopmentProgramme's Regional Project
on Local Governance for Latin America :
Governance has been defined as "the rules of the political system to
solve conflicts between actors and adopt decision (legality). It has also
been used to describe the "proper functioning of institutions and their
acceptance by the public" (legitimacy). And it has been used to invoke the
efficacyof governmentand the achievementof consensusby democratic
means (participation),

Effective governance
The effectivenessof governments is not a straightforward and consentient
type of governance, Measurement and conceptualization of effectiveness is
 12 LAW OF CORPORATE GOVERNANCE

controversial and often used interchangeably with good governance. However

during the period of 1996-2018,an effort was made by the World Bank to create
a comparable measure of the performance of governments; the Worldwide
Govemance Indicators (WGI). The WGIlis constituted by over 30 databases
which are rescaled and categorized into six categories, among one of these is
government effectiveness. According to this category, effective governance is
composed by five aspects the quality of public services, the quality of the civil
service, the degree of the government's independence from political pressures
the quality of policy formulation and implementation, and the credibility of the
government's commitment to such policies. In short, effective governance is
about quality of service, the independence of government and the quality of
policies and implementation.
Adding to these components, one might argue that responsiveness to
citizen's needs is high in an effective government. Acting according to these
needs, effectiveness is achieved by transparent, decentralized and neutral
structures, that are consistent and disciplined. Therefore, efficient financial
management, high-quality and committed personnel and formalized and
standardized ways of processes is needed. For the latter, governments became
much more efficient with the rise of bureaucracies. Nevertheless, governments
in a rapidly changing environment need to be able to adapt quickly, so being
bounded by rigid structures of functioning could work as a detriment.
Since the conceptualization of effective governance is not one fold, some
more components that might constitute it are suggested : "it should be small in
extent with limited intervention in the economy; a clear vision and processes;
committed quality personnel that can formulate and implement policies and
projects; comprehensive participation with the public; efficient financial
management; responsive, transparent and decentralized structures and political
stability".
Internal and external effective governance
The components of effective governance described above all have a
domestic character, within the boundaries of the national territory, national
policies and about the inhabitants of a country. This •is the internal aspect of
effective governance, which mainly focuses on national services and policies.
The external aspect of effective governance on the other hand, exclusively
focuses on the international domain of politics. It entails the state's capacityto
exerciseits rights and fulfil its duties in alignment with international law, the
representation of its people in the international political landscape and its
participation in international relations.
The purpose of effective governance in the internal aspect is to be the
sovereign within its national territory; in the external aspect to wield
sovereignty over international relations. For this reason, it is a necessary
characteristic of the state to have unrestricted capacity to act, without any form
of dependence in both state and international law. This independency is the
core of statehood.
 Chapter 3
Corporate Governance
Definition of Corporate Governance according to Various Writers
"Corporate Governance is the system by which companies are directed and
controlled."Cadbury Report (1992).
Good governance is not a new concept. It has existed since the early days
civilisation.Both eastern and western civilisation recognized and preached the
principles of good governance. The philosophy of good governance can be
related also to various religious studies like the Hinduism, Islamism,
Christianism,Judaism, Buddhism and others. In the modern business world, the
conceptof governance has been put in the context of business management,
thus corporate management and control and to end up with nowadays highly
used business word "Corporate Governance".
Corporate Governance is not a new issue. It has an ancient touch, since the
formation of companies. The need for corporate governance arises because of
the separation of management and ownership in modern corporation. In
practice,the interest of those who have effective control over a firm can differ
from those interests of the suppliers of external finance. The 'principal agent'
problem is reflected in management pursuing activities which may be
detrimental to the interest of the shareholders and this problem can be
mitigated through the protections derived from good corporate governance.
O'Donovan (2003)defines corporate governance as an internal mechanism
encompassing processes, policies and people who work for the benefit of
stakeholders and shareholders by coordinating sound management practices
with integrity and business knowledge which will ultimately lead to a healthy
board structure and hence creating a sound corporate structure within the
organisation.
CYDonovan(2003)put forward that a firm implementing good corporate
governance practices can influence its share price as well as the amount of cost
required in raising capital, determined various external market- forces, the
financial markets, legislations and global environment. External forces are
beyond the control of the board and the board find its difficult to handle
external pressures and forces. Corporate governance is now being enthralled in
various legislations for the sake of transparency from the part of corporate in
order to avoid corporate malpractices.
Taking a finance point of view, Shleifer and Vishny (1997)define corporate
governance as dealing with the various ways in which finance providers assure
themselves of getting an appropriate rate of return on their respective amount
(13)
 14 LAW OF CORPORATE GOVERNANCE

of investment.
Kakabadse, Kakabadse and Kouzmin (2001)put forward that following on
a survey which reads "Board Governance and Company Performance : Any
Correlations?", carried out by McKinsey and Company who referred to Agrawal
et al., (1996),it was clearly noticed that investors willing to pursue a growth
strategy and subsequently invested in low valued or table companies were
willing to pay for good governance. These investors-assumed that a company
performance over a
with good corporate governance will have a better financial the risks
time lag and/or that good corporate governance can ultimately reduce
associated and attract further investments.
Adrian Cadbury defines the term corporate governance thus : "Corporate
governance is concerned with holding the balance between economic and social
goals and between individual and communal goals. The governance framework
is there to encourage the efficient'use of resources and equally to require
accountability for the stewardship of those resources. The aim is to align as
nearly as possible the interests of individuals, corporations and society".
The OECD provides a functional definition of 'corporate governance' by
stating that "Corporate Governance is the system by which business
corporations are directed and controlled. The corporate governance structure
specifies the distribution of rights and responsibilities among different
participants in the corporation, such as the board, managers, shareholders, and
other stakeholders, and spells out the rules and procedures for making decisions
on corporate affairs. By doing this, it also provides the structure through which
the company objectives are set, and the means of attaining those objectives and
monitoring performance."
Corporate governance has also been more narrowly 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 and thereby, mitigating
agency risks which may stem from the misdeeds of corporate officers".
Corporate governance has also been defined as "the act of externally
directing, controlling and evaluating a corporation" and related to the definition
of governance as 'The act of externally directing, controlling and evaluating an
entity, process or resource". In this sense, governance and corporate governance
are different from management because governance must be external to the
object being governed.. Governing agents do not have personal control over, and
are not part of the object that they govern. For example, it is not possible for a
CIO to govern the IT function. They are personally accountable for the strategy
and management of the function. As such, they "manage" the IT function; they
do not "govern" it. At the same time, there may be a number of policies,
authorized by the board, that the CIO follows. When the CIO is following these
policies, they are performing "governance" activities because the primary
intention of the policy is to serve a governance purpose. The board is ultimately
"governing" the IT function because they stand outside of the function and are
only able to externally direct, control and evaluate the IT function by virtue Of
established policies, procedures and indicators. Without these policies/
procedures and indicators, the board has no way of governing, let alone
 NATURE AND SCOPE OF CORPORATE GOVERNMENT 15

affectingthe IT function in any way.

One source defines corporate
governance as "the set of conditions that
shapes the ex post bargaining over the
itself is modelled as a governance quasi-rentsgenerated by a firm". The firm
structure acting through the mechanisms of
contract. Herecorporate governance may include its relation to
corporatefinance.
Corporate governance is the collection of
relations by which corporationsare controlledmechanisms, processes and
structures and principles identify the and operated. Governance
distribution
among different participants in the corporation of rights and responsibilities
(such as the board of directors,
managers, shareholders, creditors, auditors,
regulators, and other stakeholders)
and include the rules and procedures for making
decisions in corporate affairs.
Corporate governance is necessary because of
the
interests between stakeholders, primarily between possibility of conflicts of
shareholders and upper
management or among shareholders.
Corporate governance is the system of rules practices,
and
a firm is directed and controlled. Corporate governance processesby which
essentially involves
balancing the interests of a company's many stakeholders,
such as shareholders,
seniormanagement executives, customers, suppliers, financiers, the government,
and the community. Since corporate governance also provides the
framework
for attaining a company's objectives, it encompasses practically every
sphere of
management, from action plans and internal controls to performance
measurement and corporate disclosure.
• Corporate governance is the structure of rules, practices, and processes
used to direct and manage a company.
• A company's board of directors is the primary force influencing
corporate governance.
• Bad corporate governance can cast doubt on a company's reliability,
integrity, and transparency, which can impact its financial health.
Corporate governance is the combination of rules, processes or laws by
which businesses are operated, regulated or controlled. The term encompasses
the internal and external factors that affect the interests of a company's
stakeholders,including shareholders, customers, suppliers, government regulators
and management.
Governance refers specifically to the set of rules, controls, policies, and
resolutions put in place to dictate corporate behavior. Proxy advisors and
shareholders are important stakeholders who indirectly affect governance, but
these are not examples of governance itself. The board of directors is pivotal in
governance, and it can have major ramifications for equity valuation.
A company's corporate governance is important to investors since it shows
a company's direction and business integrity. Good corporate governance helps
companies build trust with investors and the community. As a result, corporate
governance helps promote financial viability by creating a long-term investment
opportunity for market participants.
Communicating a firm's corporate governance is a key component of
community and investor relations.On Apple Inc's investor relations site, for
example, the firm outlines its corporate leadership—its executive team, its board
 16 LAW OF CORPORATE GOVERNANCE

of directors—and its corporate governance, including its committee charters

governance documents, such as by laws, stockownership guidelines and articles ,
of incorporation.
Most companies strive to have a high level of corporate governance.For
many shareholders, it is not enough for a company to merely be profitable}
it ,

also needs to demonstrate good corporate citizenship through environmental

awareness, ethical behavior, and sound corporate governance practices. Good
corporate governance creates a transparentset of rules and controls in which
shareholders, directors, and officers have aligned incentives.
Corporate governance refers to the set of systems, principles and processes'
by which a company is governed. They provide the guidelines as to how the
company can be directed or controlled such that it can fulfil its goals and
objectives in a manner that adds to the value of the company and is also
beneficial for all stakeholders in the long term. Stakeholders in this case would
include everyone ranging from the • board of directors, management
shareholders to customers, employees and society.
Corporate governance has a broad scope: It includes both social and
institutional aspects. Corporate governanceis the system by which companies
are directed and managed. It influences how the objectives of the company are
set and achieved, how risk is monitored and assessed,and how performanceis
optimized.
Corporate governance is the system of principles, policies, procedures, and
clearly defined responsibilities and accountabilities used by stakeholders to
overcome the conflicts of interest inherent in the corporate form.
Corporate governance -is the interaction between various participants
(shareholder, board of directors and company management) in shaping
corporation's performance and the way lit is proceeding towards. Corporate
governance deals with determining ways to take effective strategic decisions
and developed added value to the stakeholder.
Corporate govemance ensures transparency which ensures strong and
balance economic development. This also ensures that the interest of all
shareholders (majority as well as minority shareholder) are safeguard.
Corporate governance affects the operational risk and, hence, sustainability
of a corporation.
The quality of a corporation's corporate governance affects the risks and
value of the corporation.
Effective, strong corporate governance is essential for the efficient
functioning of markets,
 NATURE AND SCOPE OF CORPORATE GOVERNMENT 17

CorporateGovernance Defined
Corporate Governance Defined
f}OJRE Marøpts

SHAREOWNERS

MANAGERS DIRECTORS

Corporate governance is the structure and the associationswhich govern

corporate direction and performance. The board of directors have dominant role
in corporate governance. Its relationship to the other primary participants,
typically shareholders and management, is critical. Other members include
employees, customers, suppliers, and creditors. The corporate governance
framework also depends on the legal, regulatory, institutional and ethical
environment of the community. Usually, corporate governance is described as
the host of legal and non-legal principles and practices affecting control of
publicly held business firms. Broadly speaking, corporate governance affects not
only who controls publicly traded corporationsbut also the allocation of risks
and returns from the firm's activities among the various contributors in the
firm, including stockholders and managers as well as creditors, employees,
customers,and even societies.
Concept of governance
Many management scholars have recognized that strong corporate
governanceis vital to resilient and vibrant capital markets and is an important
tool of investor protection. According to the institute of Company Secretariesof
India, "Corporate Governanceis the applicationof best management practices,
compliance of law in true letter and spirit and adherence to ethical standards for
effective management and distribution of wealth and discharge of social
responsibility for sustainable development of all stakeholders". Cadbury
Committee (U.K.), 1992 has defined corporate governance as "Corporate
governanceis the system by which companiesare directed and controlled.It
encompasses the entire mechanics of the functioning of a company and attempts
to put in place a system of checks and balances between the shareholders,
directors,' employees, auditor and the management." Other group of scholars
explained the term corporate governance as "process and structure by which the
business and affairs of the company are directed and managed in order to
 18 LAW OF CORPORATE GOVERNANCE

enhance long term shareholder value through enhancing corporate performance

and accountability, whilst taking into account the interests of other
stakeholders".
Firms at global level are recognising that better corporate governance adds
substantial value to their operational performancein the following ways :
1. It improves strategic thinking at the top by inducting independent
directors who bring a wealth of experience, and a host of new ideas.
2: It justifies the management and monitoring of risk that a firm faces
globally.
3. It limits the responsibilityof senior management and directors,by
carefully articulating the decision making process.
4. It assures the integrity of financial reports.
5. It has long term reputational effects among main stakeholders, both
internally and externally.
Objective of corporategovernance
The fundamental objective of corporate governance is to boost and
maximize shareholder value and protect the interest of other stakeholders.
World Bank described corporate governance as a blend of •law, regulation and
appropriate voluntary private sector practiceswhich enables the firm to attract
financial and human capital to perform efficiently, prepare itself by generating
long term economic value for its shareholders, while respecting the interests of
stakeholders and society as a whole. Corporate governance has various
objectivesto strengthen investor's confidenceand in turn leads to fast growth
and profits of companies. These are mentioned below :
1. A properly structured Board proficient of taking independent and
objective decisions is in place at the helm of affairs.
2. The Board is balanced as regards the representation of suitable
number of non-executiveand independent directors who will take
care of the interests and well-being of all the stakeholders.
3. The Board accepts transparent procedures and practices and arrives
at decisions on the strength of adequate information.
4. The Board has an effective mechanism to understand the concerns of
stakeholders.
5, The Board keeps the shareholders informed of relevant developments
impacting the company.
6. The Board effectivelyand regularly monitors the functioning of the
management team.
7. The Board remains in the effective control of the affairs of the
company at all times.