Corporate Governance
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This document discusses the concepts and principles of corporate governance. Corporate governance is concerned with balancing economic and social goals, and individual and corporate goals. It establishes a system for companies to be directed and controlled by boards of directors, while also being responsive to shareholders and society. The key pillars of corporate governance are accountability, fairness, transparency, and responsibility. Various committees like the Treadway Commission, Cadbury Committee, and King Committee have made recommendations to strengthen corporate governance practices.
Corporate Governance
- 2. Concept • Corporate governance is concerned with holding the balance between economic and social goals and between individual and corporate goals.The corporate governance framework is there to encourage the efficient use of resources equally for accountability and for the stewardship of those resources. • This is a system by which companies are run and the means by which they are responsive to the shareholders, employees and the society. • The system by which companies are directed and controlled, board of directors are responsible for the governance of the company. • Corporate governance is also concerned with the ethics, values and morals of a company and its directors. • The role of corporate governance is to ensure that the directors of company are subject to their duties, obligations and responsibilities to act in the best interest of their company, to give direction, and to remain accountable to their shareholders and other beneficiaries for their actions.
- 3. Need of Corporate Governance • Liberalisation and deregulation all over the world have given greater freedom in management. This would imply greater responsibilities. • Players in the field are many. Competition brings in its weakness in standards of reporting and accountability. • The market conditions are increasingly becoming complex in the light of global developments like World Trade organisation and removal of barriers, reduction in duties. • The failure of corporates due to lack of transparency, disclosures, falsification of accounts and the effect of such undesirable practices and other companies.
- 4. Importance • It lays down the framework for creating a long-term trust between companies and external providers of capital. • It rationalises the management and monitoring of risk that a firm faces globally. • It limits the liability of top management and directors by carefully articulating the decision making process. • It has long-term reputation effects among key stakeholders both internally and externally.
- 5. Pillars of Corporate Governance • Accountability • Fairness • Transparency • Responsibility
- 6. 1. ACCOUNTABILITY: - Corporate accountability refers to the obligation and responsibility to give an explanation or reason for the company’s actions and conducts. - Ensure that management is accountable to the Board. - Ensure that the board is accountable to Shareholders. 2. FAIRNESS: - Fairness refers to equal treatment. For example, all Shareholders should receive equal consideration for whatever shareholdings they hold. - Protect Shareholders rights. - Treat all Shareholders including minorities, equitably.
- 7. 3. TRANSPARENCY: - Transparency means openness, a willingness by the company to provide clear information to Shareholders and stakeholders. - Ensure timely, accurate disclosure on all material matters, including the financial situation, performance, ownership and corporate governance. 4. RESPONSIBILITY: - Boards of directors are given authority to act on behalf of the company. - They should therefore accept full responsibility for the power that it is given and the authority that it exercises.
- 8. Committees on Corporate Governance • Treadway Commission • Cadbury Committee • King Committee • National Task force
- 9. 1. TREADWAY COMMISSION (US) - This commission placed a greater emphasis on the composition and functioning of board of directors. - All public companies to form audit committee, composed exclusively of independent directors. 2. CADBURY COMMITTEE (England, UK) - This committee works primarily from the point of view of shareholders of the company. - It published a report on December 1992, emphasised good practice concerning the responsibilities of executive and non-executive directors, the role of auditors and link among shareholders, board and auditors. - It also pays emphasis on institutional investors to play a more active role in ensuring good corporate governance.
- 10. 3. KING COMMITTEE (South Africa) - The King committee was set up to develop code of ethics for business enterprises. - The report of the committee published in November 1994, highlighting the role of boards, auditors, ensuring an effective worker participation in decision-making, adopting affirmative action programmes. - This committee also requires a company to recognise its accountability and responsibility towards environmental matters. 4. NATIONAL TASK FORCE (India) - National task force was set up by the Confederation of Indian Industries (CII) under the chairmanship of Rahul Bajaj to evolve a code for desirable corporate governance in India. - It published its report in April 1997, emphasising on the long-term shareholders value as the objective of good corporate governance, facilitating the corporate takeover by allowing the capital market to play its due role in improving the corporate governance and the role of creditors and finances.