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Introduction to Corporate Governance

Over the past two decades, the investment world has seen a large numbers of scandals relating to companies which are attributed to failure of governance. This has been caused due to a combination of factors which can be principally classified into three corporate sins.

·The executive directors of the company lost the sense of business ethics and earnings became the only motive. Directors were not prepared to show losses which led to the use of unethical practices like forging books of accounts to show higher earnings.

·Other directors acted as a puppet in the hands of executive directors, approving improper financial statements and condoning unfair practice. Managers awarded themselves huge bonuses and stock options, often at the expense of other shareholders.

·Auditors colluded or failed to stop executive directors from using improper accounting policies. In the process they lost their independence which they surrendered it in return for high audit fees.

The area of corporate governance has acquired heightened attention in the last decade because of various notable scandals and collapses cited from the USA (Enron, World com, Tyco), the UK (the collapse of Maxwell publishing group), Germany (the cases of Holtzman, Berliner Bank, and HIH), Korea (the widespread banking distress in 1997), Australia (Ansett Airlines and One Tel), France (Credit Lyonnais and Vivendi), and Switzerland (Swissair), India (Satyam and Reebok). The world reaction to these corporate wrongs was massive which led to the development of law and codes for better corporate governance. Cadbury Committee report 1992 (UK), Greenbury report 1995 (UK), The Combined code 1998 (UK), Turnbull report 1999 (UK), OCED principles of corporate governance 1999 etc were some of the international initiatives to regulate corporate affairs.

Especially the collapse of Enron in the USA in 2001 increased the importance of corporate governance both in the USA and in other parts of the world.

II. Corporate Governance-The concept
Corporate refers to the most common form of business organisation, one which is chartered by a state and given legal rights as an entity separate from its owners. This form of business is characterised by the limited liability of its owners. The process of becoming a corporation, called incorporation gives the company separate legal standing from its owners and protects those owners from being personally liable in the event that the company is sued.

The concept of corporate governance is gaining momentum because of various factors as well as the dynamic business environment. The principles of good governance are as old as good behaviour, which needs no formal definition. However, in reference to the corporate world, it has been defined by various persons, some of whom is described below just in order to satisfy that the vital details and spirit of the term are not missed out. Sir Adrian Cadbury Committee, which looked into corporate governance issues in U.K., defines Corporate Governance "as the system by which the companies are directed and controlled. The basic objective of corporate governance is to enhance and maximize shareholder value and protect the interest of other stake holders".[1]Further the Kumar Mangalam Birla committee constituted by SEBI has observed that, "Strong corporate governance is indispensable financial reporting structure."[2]According to ICSI, "We may define 'corporate governance as a blend of rules, regulations, laws and voluntary practices that enable companies to attract financial and human capital, perform efficiently and thereby maximise long term value for the shareholders besides respecting the aspirations of multiple stakeholders including that of the society."[3]

Corporate governance is a multidisciplinary field of study it covers a wide range of disciplines – accounting, consulting, economics, ethics, finance, law, and management[4]. The main function of corporate governance is to make agreements that describe the privileges and tasks of shareholders and the organization. In case of disagreements because of conflict of interest, it is the responsibility of corporate governance to bring everyone together. It also has the function of setting standards against which corporations work can be managed and administered[5]

Good governance is integral to the very existence of a company. It inspires and strengthens investor's confidence by ensuring company's commitment to higher growth and profits. It seeks to achieve following objectives:
(i) That a properly structured Board capable of taking independent and objective decisions is in place at the helm of affairs;
(ii) That the Board is balanced as regards the representation of adequate number of non-executive and independent directors who will take care of the interests and well being of all the stakeholders;
(iii) That the Board adopts transparent procedures and practices and arrives at decisions on the strength of adequate information.
(iv) That the Board has an effective machinery to sub serve the concerns of stakeholders;
(v) That the Board keeps the shareholders informed of relevant developments impacting the company;
(vi) That the Board effectively and regularly monitors the functioning of the management team; and
(vii) That the Board remains in effective control of the affairs of the company at all times. The overall endeavour of the Board should be to take the organisation forward, to maximise long-term gains and stakeholders' wealth.[6]

III. Need for and Importance of Corporate Governance
The need for corporate governance has arisen because of the increasing concern about the non-compliance of standards of financial reporting and accountability by boards of directors and management of corporate inflicting heavy losses on investors. Many large corporations are transnational in nature. This means that these corporations have impact on citizens of several countries across the globe. If things go wrong, they will affect many counties, some more severely than others. It is, therefore, also necessary to look at the international scene and examine possible international solutions to corporate governance difficulties. Corporate governance is needed to create a corporate culture of consciousness, transparency and openness. It refers to a combination of laws, rules, regulations, procedures and voluntary practices to enable companies to maximise shareholder's long-term value. It should lead to increasing customer satisfaction, shareholder value and wealth. With increasing government awareness, the focus is shifted from economic to the social sphere and an environment is being created to ensure greater transparency and accountability.

It is integral to the very existence of a company and can be summarised in the following points:
a) Corporate scams: Scandals in the corporate world, whether centred around corruption, bribery, fraud, or greed tend to have a significant impact on the economy as a whole. The need for corporate governance is, then, imperative for reviving investors' confidence in the corporate sector towards the economic development of society.

b) Wide Spread Shareholders: In today's era, a company has a very large number of shareholders spread all over the world. The idea of shareholders' democracy remains confined only to the law and the Articles of Association which requires a practical implementation through a code of conduct of corporate governance.

c) Changing Ownership Structure: The pattern of corporate ownership has changed considerably, in the present-day-times with institutional investors and mutual funds becoming largest shareholders in large corporate private sector. These investors have become the greatest challenge to corporate managements, forcing the latter to abide by some established code of corporate governance to build up its image in society.

d) Globalisation: Desire of more and more companies to get listed on international stock exchanges also focuses on a need for corporate governance. There is no doubt that international capital market recognises only companies well- managed according to standard code of corporate governance.

IV. Issues in Corporate Governance
Corporate governance has been defined in different ways by different writers and organisations. Some define it in a narrow perspective to include in it only the shareholders, while others want it to address the concerns of all stakeholders. Some talk about corporate governance being an important instrument for a country to achieve sustainable economic development, while others consider it as a corporate strategy to achieve a long tenure and a healthy imagine. But to all, corporate governance is a means to an end, the end being long term shareholder, and more importantly, stakeholder value. Thus, all authorities on the subject are one in recognising the need for good governance practices to achieve the end for which corporate are formed. Some governance issues are identified as being crucial and critical to achieve these objectives.

These are:
·Distinguishing the roles of board and management: Constitutions of more and more companies stress and underline that the business is to be managed "by or under the direction of" the board. In such a practice, the responsibility for managing the business is delegated by the board to the CEO, who in turn delegates the responsibility to other senior executives. Thus, the board occupies the key position between the shareholders (owners) and the company's management (day-to-day managers of the company).

·Separation of the roles of the CEO and chairperson: The composition of the board is a major issue in corporate governance as the board acts as a link between the shareholders and the management and its decisions affect the performance of the company. All committees that studied corporate governance practices all over the world, starting with the Cadbury committee, have suggested various improvements in the composition of boards of companies. It is now increasingly being realised that the practice of combining the role of the chairperson with that of the CEO as is done in countries like the US and India leads to conflicts in decision making and too much concentration of power in one person resulting in unsavoury consequences. Combining the role of both the CEO and chairperson removes an important check on senior management's activities. This is the reason why many authorities on corporate governance recommend strongly that the chairman of the Board should be an independent director in order to "provide the appropriate counterbalance and check to the power of the CEO" (IFSA).[7]

·Directors and executive's remuneration: This is one of the mixed and vexed issues of corporate governance that came into the limelight during the massive corporate failures in the US between 2000 and 2002. Executive compensation has also in recent time become the most viable and politically sensitive issue relating to corporate governance. According to the Cadbury report: "The over- riding principle in respect of Board remuneration is that shareholders are entitled to full and clear statement of directors present and future benefits, and how they have been determined." Other committees on corporate governance have also laid emphasis on other related issues such as " pay-for performance", heavy severance payments, pension for non- executive directors, appointment of remuneration committee and so on.

·Disclosure and audit: The OECD lays down a number of provisions for the disclosure and communication of "key facts" about the company to its shareholders. The Cadbury Report termed the annual audit as "one of the cornerstones of corporate governance". Audit also provides a basis for reassurance for everyone who has a financial stake in the company. There are several issues and questions relating to auditing which have an impact on corporate governance. There are, for instance, questions such as: (i) How to ensure independence of the auditor? (ii) Should individual directors have access to independent resource? Etc.

·Composition of the board and related issues: A board of directors is a "committee elected by the shareholders of a limited company to be responsible for the policy of the company. Sometimes, full time functional directors are appointed, each being responsible for some particular branch of the firm's work".[8]The composition of board of directors refers to the number of directors of different kinds that participate in the work of the board. Over a period of time there has been a change as to the number and proportion of different types of directors in the board of a limited company. The SEBI appointed Kumar Mangalam Birla Committee's Report defined the composition of the Board thus:
"The Board of directors of a company shall have an optimum combination of executive and non- executive directors with not less than 50 percent of the board of directors to be non- executive directors. The number of independent directors would depend upon whether the chairman is executive or non- executive. In case of a non-executive chairman, at least one-third of the board should comprise independent directors and in case of executive chairman, at least half of the board should be independent directors.[9]

V. India and corporate governance
Corporate governance has played a very important role in the present economic condition of India. India successfully started its move towards open and welcoming economy in 1991 by following the LPG policy. From then onwards it has seen an amazing upward trend in the size of its stock market, that is, number of listed firms was increasing proportionately[10]If India wants to attract more countries for foreign direct investments, Indian companies have to be more focused on transparency and 'Shareholders value maximization'[11]

Kumarmangalam Birla Committee described the concept of corporate governance instead of defining or giving a meaning of it. Three key constituents of corporate governance as the shareholders, the Board of Directors and the Management and has attempted to identify in respect of each of these constituents, their roles and responsibilities as also their rights in the context of good governance. Fundamental to this examination and permeating throughout this exercise is the recognition of the three key aspects of corporate governance; namely, accountability, transparency and equality of treatment for all stakeholders.

The pivotal role in any system of corporate governance is performed by the board of directors. It is accountable to the stakeholders and directs and controls the management. It stewards the company, sets its strategic aim and financial goals and oversees their implementation, puts in place adequate internal controls and periodically reports the activities and progress of the company in the company in a transparent manner to the stakeholders. The shareholders role in corporate governance is to appoint the directors and the auditors and to hold the board accountable for the proper governance of the company by requiring the board to provide them periodically with the requisite information, in a transparent fashion, of the activities and progress of the company. The responsibility of the management is to undertake the management of the company in terms of the direction provided by the board, to put in place adequate control systems and to ensure their operation and to provide information to the board on a timely basis and in a transparent manner to enable the board to monitor the accountability of management to it.[12]

Naresh Chandra Committee 'Report of the Committee on Corporate Audit and Governance' describe: The fundamental theoretical basis of corporate governance is agency costs. Shareholders are the owners of any joint-stock, limited liability Company, and are the principals. By virtue of their ownership, the principals define the objectives of a company. The management, directly or indirectly selected by shareholders to pursue such objectives, are the agents. While the principals might wishfully assume that the agents will invariably do their bidding, it is often not so. In many instances, the objectives of managers are quite different from those of the shareholders. Such misalignment of objectives is called the agency problem, and the cost inflicted by such dissonance is the agency cost. The core of corporate governance is designing and putting in place disclosures, monitoring, oversight and corrective systems that can align the objectives of the two sets of players as closely as possible and, hence, minimise agency costs.

Narayan murthy Committee on 'Report of the SEBI Committee on Corporate Governance' commented on Corporate Governance in the following manner:[13]
·A corporation is a congregation of various stakeholders, namely, customers, employees, investors, vendor partners, government and society. A corporation should be fair and transparent to its stakeholders in all its transactions. This has become imperative in today's globalised business world where corporations need to access global pools of capital, need to attract and retain the best human capital from various parts of the world, need to partner with vendors on mega collaborations and need to live in harmony with the community. Unless a corporation embraces and demonstrates ethical conduct, it will not be able to succeed.
·Corporate governance is about ethical conduct in business. Ethics is concerned with the code of values and principles that enables a person to choose between right and wrong, and therefore, select from alternative courses of action. Further, ethical dilemmas arise from conflicting interests of the parties involved. In this regard, managers make decisions based on a set of principles influenced by the values, context and culture of the organisation. Ethical leadership is good for business as the organisation is seen to conduct its business in line with the expectations of all stakeholders.

·Corporate governance is beyond the realm of law. It seems from the culture and mindset of management, and cannot be regulated by legislation alone. Corporate governance deals with conducting the affairs of a company such that there is fairness to all stakeholders and that its actions benefit the greatest number of stakeholders. It is about openness, integrity and accountability. What legislation can and should do is to lay down a common framework- the "form" to ensure standards. The "substance" will ultimately determine the credibility and integrity of the process. Substance is inexorably linked to mindset and ethical standards of management.

VI. Conclusion
In this paper, we saw how important it is for a company to follow good corporate governance practices. The paper started going deep into the root cause of factors that affect corporate governance such as distinguishing the roles of board and management, composition of the board and related issues, choice of auditors and audit committee, directors and executives' remuneration etc. Then we looked at the brief history of corporate governance in India. India being an emerging economy needs to work more on regulating the corporate governance policies. The future of corporate governance is becoming a little clear now; the investors are promoted to behave more like owners rather than just traders. Independent directors have more defined roles and responsibilities.

End-Notes
[1]TheCadbury Committee report, 1992( March 25th, 2018, 10:00 pm)
[2]Kumar Mangalam committee report(March 25th2018, 11:00 pm)
[3]ICSI,Corporate Governance Reporting( March 25th, 2018, 10:00 pm)
[4]S. Li and A. Nair, "Asian corporate governance or corporate governance in Asia?" Corporate Governance: An International Review, vol. 17, no. 4, pp. 407-410, 2009.
[5]C. S. V. Murthy,Business Ethics and Corporate Governance, 2009
[6]Ruchi Kulkani and Balasundram Maniam,Corporate Governance- Indian Perspective( March 25th, 2018, 10:00 pm)
[7]IFSA Guideline- Investment and Financial Services Association (1999). Corporate Governance: A Guide for Investment Management and Corporations.
[8]Hanson, J.L.,A Dictionary of Economics and Commerce, 3rd Ed. London: The ELBS and MC Donald and Evans Ltd.
[9][9]Rajagopalan, R.,Directors and Corporate Governance, 1stEd, Company Law. Institute of India Pvt. Ltd. P. 136.
[10]L. Som, "Corporate Governance Codes in India," Economic and Political Weekly, vol. 41, no. 39, pp. 4153-4160, 2006.
[11]R. Ramakrishnan,Inter-relationship between business ethics and corporate governance among Indian companies(2007).
[12]'Draft Report of the kumar Mangalam Committee on Corporate Governance', September 1999, Securities and Exchange Board of India (SEBI), February 2000, para 2.7 and 2.8
[13]Report of SEBI committee on Corporate Governance, 8 February, 2003.

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