corporate governance

Corporate Governance concept:- Framework and mechanism, scope & future

Author: Manish Kumar, AMIMA
Sr. Lecturer, Deptt of Mgt Studies, DBIT, Dehradun, UK
Email- manishkr_kush@yahoo.com

ABSTRACT
Keywords: Corporate Governance, Frame work, mechanism,


INTRODUCTION:-

After such a huge fraud revelations done in Satyam, the 4th big IT companies, a new question has been arisen among the all corporate i.e corporate governance. Satyam founder B Ramalinga Raju had, on January 7, confessed that he had cooked the company's books to the tune of over Rs 7,000 crore over several years, triggering India's biggest corporate governance scandal and throwing the future of the country's fourth largest computer services provider and its 53,000 employees into uncertainty.
What is corporate governance?
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 fulfill 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.
How?
Corporate governance mechanism is the toughest part of corporate handling. It requires an ideal control system which can regulate both motivation and ability. It also requires third party involvement for fair information provider regarding the working and management of the corporate.
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Corporate Governance concept:- Framework and mechanism, scope & future

An Introduction:-
After such a huge fraud revelations done in Satyam, the 4th big IT companies, a new question has been arisen among the all corporate i.e corporate governance. In September 2008 the World Council for Corporate Governance has honored the now-beleaguered Indian outsourcer Satyam with a "Golden Peacock Award" for global excellence in corporate governance. And now Council has rushed to keep distance from awarding to such organization and all over the world it is matter of great debating on corporate governance.

Satyam founder B Ramalinga Raju had, on January 7, confessed that he had cooked the company's books to the tune of over Rs 7,000 crore over several years, triggering India's biggest corporate governance scandal and throwing the future of the country's fourth largest computer services provider and its 53,000 employees into uncertainty.

After such money plundering, Minister of State for Information Technology Jyotiraditya Scindia said a stronger corporate governance framework is needed to prevent Satyam- like financial frauds.

"...I think most important is to have the measures in place to ensure something like this does not happen in terms of corporate governance across the country,"

Now the main question arises what is Corporate Governance?
The corporate governance is made of two words i.e corporate and second governance. In Business world “corporate” signifies the big honchos doing any business activity like P&G, UL, Nestle, TATA, BIRLA, INFOSYS, TCS, Satyam and few others. Governance is linked with the rules and regulations required for governing the companies. But in economics, corporate is a legal entity separate from the persons that form it. In British tradition it is the term designating a body corporate, where it can be either a corporation sole (an office held by an individual natural person, which is a legal entity separate from that person) or a corporation aggregate (involving more persons). In American and, increasingly, international usage, the term denotes a body corporate formed to conduct business, and this meaning of corporation is discussed in the remaining part of this entry (the limited company in British usage). Corporations exist as a product of corporate law, and their rules balance the interests of the shareholders that invest their capital and the employees who contribute their labor. People work together in corporations to produce value and generate income. Despite not being natural persons, corporations are recognized by the law to have rights and responsibilities like actual people. Corporations can exercise human rights against real individuals and the state, and they may be responsible for human rights violations. Just as they are "born" into existence through its members obtaining a certificate of incorporation, they can "die" when they lose money into insolvency. But after such a tragedy happened in Indian scenario, where the corporate governance is very less implemented or have little presence, people mainly stock holders has raised his voice over corporate governance. But very few of us know about it or have very meager knowledge about the corporate governance.

What exactly the corporate governance is? A Frame work-
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 fulfill 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. The management of the company hence assumes the role of a trustee for all the others. The main theme of corporate governance is multi facet subject and one of the important theme is to ensure the accountability of certain individuals in an organization through the elimination of principal- agent problem. The other important theme is strong emphasis on shareholders welfare.

Definition:-
One of the leading business author Gabrielle O'Donovan defines corporate governance as 'an internal system encompassing policies, processes and people, which serves the needs of shareholders and other stakeholders, by directing and controlling management activities with good business savvy, objectivity and integrity. Sound corporate governance is reliant on external marketplace commitment and legislation, plus a healthy board culture which safeguards policies and processes'.

Corporate governance is the relationship between corporate managers, directors and the providers of equity, people and institutions who save and invest their capital to earn a return. It ensures that the board of directors is accountable for the pursuit of corporate objectives and that the corporation itself conforms to the law and regulations.
- By International Chamber of Commerce

Corporate governance describes all the influences affecting the institutional processes, including those for appointing the controllers and/or regulators, involved in organizing the production and sale of goods and services. Described in this way, corporate governance includes all types of firms whether or not they are incorporated under civil law. - Shann Turnbull

“Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment”,
The Journal of Finance, Shleifer and Vishny

"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", OECD April 1999. OECD's definition is consistent with the one presented by Cadbury [1992, page 15].

"Corporate governance - which can be defined narrowly as the relationship of a company to its shareholders or, more broadly, as its relationship to society -….",
From an article in Financial Times [1997].

Even SEBI, India has defined corporate governance as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company.” The definition is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution. Corporate Governance is viewed as more ethics and a moral duty.

According to Gandhian principle of trusteeship , Trusteeship is combination of principle and philosophy both. We can develop trusteeship only when we follow the following principles-
• To promote relationship
• Neighborliness in all walks of life
• A means of radical social change
• Change of heart
• Human dignity and charity
• Mutuality and well-being
• Promote relationship
So, corporate is also a kind of trusteeship between promotor and stockholder. Even JRD Tata has imbibe the Gandhian thought’s of trusteeship and built such a big empire of Tata Groups.

Directive principles of the Indian Constitution puts stress on the overall governance of the country. the principles laid down therein are considered fundamental in the governance of the country, making it the duty of the State to apply these principles in making laws to establish a just society in the country. The principles have been inspired by the Directive Principles given in the Constitution of Ireland and also by the principles of Gandhism; and relate to social justice, economic welfare, foreign policy, and legal and administrative matters.

Mechanism:-
Corporate governance mechanism is the toughest part of corporate handling. It requires an ideal control system which can regulate both motivation and ability. It also requires third party involvement for fair information provider regarding the working and management of the corporate.

At one end of the spectrum are the shareholders as owners of the business entity since they provide the ultimate risk capital. At the other end are the “managers” or the main “executive directors” of the company who are in control of its day-to-day affairs. As the elected representatives of the shareholders it is the responsibility of the entire board of directors to direct operations of the company. As the owners of business the shareholders are expected to monitor and evaluate operations of the company as well as the performance of the entire board of directors and in particular the effectiveness of the full time or executive directors.

Corporate governance mechanisms differ as between different countries. The governance mechanism in each country is shaped by its political, economic and social history as also by its legal framework. The governance practices adopted in any country reflect national ethos and value systems adopted in that country over a long period of time. For most of the countries the corporate form of organization did not evolve and emerge through a natural business process. Hence different countries have assimilated it their own way. But given the differing social and business value systems of individual countries, assimilation process of the philosophy of the corporate form of organization was not necessarily similar in different countries.

Globally, the process of convergence in corporate governance is gathering momentum due to growing international integration of financial and product markets. Foreign investors and creditors are more comfortable in dealing with economic entities that adopt transparent and globally acceptable accounting and governance standards. Companies that embrace high disclosure and governance standards invariably command better premium in the market and thus able to raise capital at lower costs.

The predominant form of corporate governance in India is much closer to the east asian “insider” model where the promoters dominate governance in every possible way. A distinguishing feature of the Indian Diaspora is the implicit acceptance that corporate entities belong to the “founding families” though they are necessarily considered to be their private properties.

Despite all the differences among shareholders philosophy across different countries in regard to corporate governance mechanisms there is no denying of the fact that good governance is the time need of changing world. While multilateral organizations like world bank and ADB have shown keen interest in the subject of corporate governance, the intellectual lead has been given by the OECD (Organization for Economic Cooperation and Development) in evolving a set of cogent principles of corporate governance. OECD has come out with a set of clearly defined principles, which it hopes, will be useful to all countries irrespective of their stages of development, legal systems, institutional frameworks and traditions. But roughly there is the requirement of some corporate governance control.

It requires two types of corporate governance ie. internal corporate governance and external corporate governance.
























Internal corporate governance- controls monitor activities and take corrective actions for organizational growth and development using following parameters-
• Monitoring by the Board of Directors
• Balance of Power
• Remuneration

External Corporate governance- controls includes the controls external stakeholders exercise over the organization using following parameters-
• Competition
• Debt covenants
• Demand for and assessment of performance information specially financial information
• Government regulations
• Managerial labor market
• Media pressure
• Takeovers and mergers

Today there is need of strengthening the companies act, stringent role of independent directors and rights of shareholders of banks/public sector undertakings.

1. Strengthening companies’ act-India also has its own company act. Most of the important requirements set out by the OECD principles in regard to good corporate governance are very well defined in the companies act in India. These provisions have been further supplemented by SEBI recently which has directed all the stock exchanges to amend their listing agreement to incorporate new clauses to make it binding on the listed companies to improve their governance practices. However, the main instrumentality, viz the listing agreement, through which SEBI seeks to ensure implementation of its measures is a weak instrument, as its penal provisions are not hurting enough. Secondly, several regional stock exchanges where a large no. of companies are listed lack effective organizations and skills to monitor effective compliance with corporate governance requirements as stipulated by SEBI. It is therefore desirable that the companies act needs to be amended suitably for enforcing good governance.

2. Role of Independent directors- India has adopted a unitary board structure. For unitary board structure to function efficiently there should be a strong representation of non-executive independent directors who are capable of taking independent stand and are not suppressed by the full time directors or the promoters of the company. The board should be able to perform its task of monitoring performance of the full time directors satisfactorily. It should ensure that returns to the shareholders on their investments are maximized while not making any compromises with the provisions of law and the rightful interests of all the stakeholders.

3. Right of the shareholders of banks/ public sectors- Most of the important rights of shareholders like right to ownership and conveyance of transfer, obtaining relevant information regularly, elect members of the board, etc are reasonably well covered by the companies Act. However, the rights of shareholders of banks and public sector undertakings stand considerably abridged. The quality of disclosure by most of the Indian companies in regard to several key areas is rather poor There is scanty disclosure regarding organization structures and arrangements that enable certain shareholders to obtain a degree of control disproportionate to their known equity ownership.

Scope:-
According to KPMG’s Fraud survey 2002, the fraud areas where majority of cash losses occur are expense accounts, secret commission and kickbacks, forged documents, misappropriation or diversion of funds and false or misleading information. It must be emphasized that mere drafting of governance codes can’t restore ethical standards. An honest corporate culture and an internal ethical environment in an organization are pre-conditions for a successful governance code.

Corporate governance emerged as an issue following a series of frauds which were damaging confidence in the city in the late 1980s. Its initial focus was on financial reporting but it developed a detailed set of standards (the ‘cadbury code’) for the board to meet in order to rebuild confidence among the investment community. Sir Adrian Cadbury always intended the scope of corporate governance to cover all aspects of company direction, both internal and external, and the wider spectrum was addressed through the ‘Tomorrow’s Company’ Report of 1995 and the subsequent movement it engendered.

Progress in widening the scope of corporate governance leaves much to be done in deeping it. To many companies’ boards treat corporate governance as an imposition, like regulation, rather than a way of managing to be used to strengthen their business. Few companies have succeeded in taking corporate governance, and the shared values which animate it, right down through their organization.

Corporate governance refers to the system by which a corporation is governed and administered. It relates both to the roles of different actors in the system, and to its internal and external checks and balances. There are two broad views of corporate governance. The first focuses on the relationship between company owners and managers; the second on the wider set of relationships between owners and company stakeholders, including shareholders, employees, local communities and NGOs.

The need for corporate governance systems arises in relation to the separation of ownership and management of corporations. Public companies are characterized by a separation of roles between those who own the company (i.e. shareholders or investors) and those who direct its economic fortunes (i.e. managers). The main aim of corporate governance systems in public companies is to create a balance of power between owners and managers. Corporate governance standards can and should also apply to private small- and medium-sized companies, not least in order to increase their ability to attract external capital.

In the corporate governance debate, increasing attention is paid to the relationship between managers and stakeholders, the protection of minority shareholder rights and the independent supervision of business activities.

Good corporate governance is of crucial importance to countering corruption in both developed and developing countries. Where levels of corruption in the public sector are high, it is not the most competitive companies that succeed but, rather, those that can afford to bend the market and regulatory system in their favour. Without fair competition, international investors prefer to direct their investment elsewhere or to demand higher returns to mitigate the increased risk of doing business.

Fundamentally, there is a level of confidence that is associated with a company that is known to have good corporate governance. The presence of an active group of independent directors on the board contributes a great deal towards ensuring confidence in the market. Corporate governance is known to be one of the criteria that foreign institutional investors are increasingly depending on when deciding on which companies to invest in. It is also known to have a positive influence on the share price of the company. Having a clean image on the corporate governance front could also make it easier for companies to source capital at more reasonable costs. Unfortunately, corporate governance often becomes the centre of discussion only after the exposure of a large scam.

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 interest of individuals, corporations and society

“The foundation of any structure of corporate governance is disclosure. Openness is the basis of public confidence in the corporate system and funds will flow to centers of economic activity that inspire trust.”
-Sir Adrian Cadbury

“Shareholders role in governance is to appoint the directors and the auditors. Poor corporate governance has ruined companies, sent directors to jail, and destroyed a global accounting firm and threatened economies and governments.”
• e.g., Taj Company
• Cooperatives scandal
• Mohib Textile Mills Ltd

Today we have to follow more ethics and morals for corporate governance. Even Cudbury report produced in 1992 has raised the following points-

• Wider use of INDEPENDENT DIRECTOR
• Introduction of AUDIT COMMITTEE
• Separation between CHAIRMAN and CEO
• Adherence to detailed code of BEST PRACTICES.

Again OECD has defined some basic principles regarding corporate governance. It includes –

• Protect rights of SHAREHOLDERS
• Recognize the rights of STAKEHOLDERS
• Timely and accurate DISCLOSURE
• Responsibility of the BOARD

Again in 2002, a generic code of corporate governance has been promulgated on the pattern of earlier two principles.

• Non Executive Director
• Qualification of a Director
• Tenure of Director
• Governance Policies of the Directors
• Information to Directors
• Orientation Courses
• CFO/ Company Secretary
• Corporate and Financial Reporting
• Audit Committees

Today there is a need of corporate governance in every field such as-

• Training of the IAS officers and PSU official on board governance matters.
• Exclusive in house training program for central PSUs on board governance inclusive of ethics and corporate social responsibilities
• Short seminars with global Conference Center New York and The British Council.
• Teaching on corporate Governance in the business schools and universities in the European countries as France and Germany

Future:-
Inadequacies and failures of an existing system often bring to the fore the need for norms and codes to remedy them. This is also true for corporate governance. Even in the earlier phase in U.K., deficiencies in the accounting standards became more evident after many companies, in their eagerness to increase earnings and accelerate growth, exploited the weaknesses in the accounting standards to show the inflated profits and understate liabilities. Similarly, failures of several companies raised concern regarding corporate governance. In India also, the CII has published a code of Corporate Governance.

Corporate governance is considered an important instrument of investor protection. To further improve the level of corporate governance, need was felt for a comprehensive approach at this stage of development of the capital market, to accelerate the adoption of globally acceptable practices of corporate governance. This would ensure that the Indian investors are in no way less informed and protected as compared to their counterparts in the best-developed capital markets and economies of the world. The Financial crisis in the Asian markets in the recent past has highlighted the need of firm corporate governance.

Globally, stockholders are finally demanding that they must be heard and they are also calling for reforms in how companies are being run. Big investors are demanding international standards of corporate behaviour, accounting clarity, and disclosure. Boards of directors have been sued and found liable for their actions.

Significant changes are taking place in corporate regulation around the world. Some countries have written their business and company law, others are in the same line. Securities regulators have also become more demanding. The move towards the adoption of international accounting standards in many countries is also changing the corporate governance scene. Increasing recognition is beginning to dawn that the crucial issues are not really about board structures, company regulation or even shareholder power, they are about the processes, perceptions and powers of directors.

Corporate governance in the future will, according to Devdip Ganguli, reflect an increasing emphasis on customer satisfaction as a way of measuring the adaptability of the organization over time. As he put it, "By focusing too strongly on financial records (and audit committee work), we lose sight of the fact that departments like operations and human resources are very important components (in forecasting future success).

Shann Turnbull suggests that the world of corporate governance will benefit from the establishment of "a new type of corporate information and control architecture." In fact, he goes beyond this to propose that a network of more specialized board groups and "advisory stakeholder councils" comprising employees, lead customers, suppliers, and others offers a useful solution to the governance vacuum that exists in many large corporations today.

So, when there is requirement of corporate governance, then that time we have to take care of four things-

1. Responsibility
2. Measures
3. Rewards &
4. Goal

All should be interlinked and interrelated creating a diamond structure similar to porter model.

Responsibility


Measures Rewards

Goal

Finally, there is a need of balance among objectives, risks and controls, when we want smooth corporate governance.

Objectives Risks



Controls

In a world where principles have to be relearned, corporate governance will continue to rely on alert regulation. The history of regulation in the UK and elsewhere is full of examples of belated ‘stable door shutting’, most recently in insurance misleading. A new threat is emerging in the areas of life assurance consolidation where closed funds are run off to extinction.

There is no doubt that interest in corporate governance has substantially increased in recent years. Not only have separate states adopted their own corporate codes but also changes in corporate governance are directed at a global level. For developing economies, corporate governance helps to achieve stable economic growth by means of effective management of corporations and, to some extent, governments (Bushman and Smith 2001). Countries which already possess advanced corporate governance standards strive to strengthen adherence to them. It goes without saying that the catalyst of the process was the corporate and financial collapse of Enron. The crash of this company illustrated that even a company with good financial results might go bankrupt if it lacked solid corporate governance mechanisms guaranteeing trustworthy work of non-executive directors, auditors and the board of directors. Following the scandal, the regulators all over the world developed a number of policies to prevent further failures.

It seems unlikely that corporate governance will ever change human nature. Greed and fear are the basic motivators of humankind since the time of Adam and civilization is only skin deep. Corporate governance is part of a process of building a better world, based on shared values, which can produce growing wealth and new opportunity for sharing it more widely. At present corporate governance has not even won full acceptance in the boardroom and has touched few of the employees and other stakeholders who are needed to help to embed it in the daily routine of business.
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References:-
International Business- by VK Bhalla & S shivaramu
Around the corporate campfire by E Clark.
Business Environment by Francis Cherunilam
Business Environment by suresh bedi
HBS articles
www.corpgov.net
www.wikipedia.com