CORPORATE GOVERNANCE
Corporate governance is the system of rules, practices, and processes by which a company is
directed and controlled. Corporate governance essentially involves balancing the interests of a
company's many stakeholders, which can include shareholders, senior management,
customers, suppliers, lenders, the government, and the community. As such, corporate
governance encompasses practically every sphere of management, from action plans
and internal controls to performance measurement and corporate disclosure.
Benefits of Corporate Governance
• Good corporate governance creates transparent rules and controls, guides leadership,
and aligns the interests of shareholders, directors, management, and employees.
• It helps build trust with investors, the community, and public officials.
• Corporate governance can give investors and stakeholders a clear idea of a company's
direction and business integrity.
• It promotes long-term financial viability, opportunity, and returns.
• It can facilitate the raising of capital.
• Good corporate governance can translate to rising share prices.
• It can reduce the potential for financial loss, waste, risks, and corruption.
• It is a game plan for resilience and long-term success.
Significance of Corporate governance
1. It shapes growth and future of capital markets of the economy.
2. It helps in raising adequate funds from capital markets.
3. It links company’s management system with its financial reporting system.
4. It enables management to take innovative decisions for effective functioning of an enterprise
within the legal framework of accountability.
5. It supports investors by making corporate accounting practices transparent. Corporate
enterprises have to disclose financial reporting structures.
6. It provides adequate and timely disclosure, reporting requirements, code of conduct etc.
Companies present material price sensitive information to outsiders and ensure that till the time
this information is made public, insiders abstain from dealing in corporate securities. It, thus,
avoids insider trading.
7. It improves efficiency and effectiveness of an enterprise and adds to material wealth of the
economy.
8. It improves international image of the corporate sector and enables home companies to raise
global capital.
Principles of Corporate Governance
While there can be as many principles as a company believes make sense, some of the most
common ones are:
Fairness: The board of directors must treat shareholders, employees, vendors, and
communities fairly and with equal consideration. Fairness gives shareholders an opportunity
to voice their grievances and address any issues relating to the violation of shareholder’s rights.
This principle deals with the protection of shareholders’ rights, treating all shareholders equally
without any personal favouritism, and granting redressal for any violations of rights.
Transparency: The board should provide timely, accurate, and clear information about such
things as financial performance, conflicts of interest, and risks to shareholders and other
stakeholders. Providing clear information about a company’s policies and practices and the
decisions that affect the rights of the shareholders represents transparency. This helps to build
trust and a sense of togetherness between the top management and the stakeholders. It ensures
accurate and full disclosure timely on material matters like financial condition, performance,
ownership.
Risk Management: The board and management must determine risks of all kinds and how
best to control them. They must act on those recommendations to manage risks and inform all
relevant parties about the existence and status of risks.
Corporate Responsibility: The board is responsible for the oversight of corporate matters and
management activities. It must be aware of and support the successful, ongoing performance
of the company. Part of its responsibility is to recruit and hire a chief executive officer (CEO).
It must act in the best interests of a company and its investors.
Accountability: The board must explain the purpose of a company's activities and the results
of its conduct. It and company leadership are accountable for the assessment of a company's
capacity, potential, and performance. It must communicate issues of importance to
shareholders.
Accountability means to be answerable and be obligated to take responsibility for one’s actions.
By doing so, two things can be ensured-
1. That the management is accountable to the Board of Directors.
2. That the Board of Directors is accountable to the shareholders of the company.
This principle gives confidence to shareholders in the business of the company that in case of
any unfavourable situation, the persons responsible will be held in charge.
Independence: Independence means the ability to make decisions freely without being unduly
influenced. Decisions should be made freely without having any personal interest in the
company. It ensures the reduction in conflict of interest. Corporate governance suggests the
appointment of independent directors and advisors so that decisions are taken responsibly
without influence.
Social Responsibility: Company social responsibility obligates the company to be aware of
social issues and take action to address them. In this way, the company creates a positive image
in the industry. The first step towards Corporate Social Responsibility is to practice good
Corporate Governance.
Advantages of Corporate Governance
Good corporate governance can turn a good company into a great one. The leaders in any
industry are at the helm of their respective industries, mainly because of outstanding corporate
governance practices.
• Compliance with laws: With corporate governance in place, compliance with various
laws is taken care of easily, as corporate governance includes the rules, regulations and
policies that enable a business to stay compliant throughout and function without any
hassle or legal inconveniences whatsoever.
• Lesser fines and penalties: Since the legal compliance aspect is taken care of credit to
the corporate governance practices, companies are able to save a fortune on unnecessary
fines and compliances and possibly redirect those funds towards business objectives to
achieve greater heights.
• Better management: Since there is a structure in place with regard to how the entity
operates, its day-to-day functioning, managing the activities and achieving targets
becomes a whole lot easier. The work atmosphere also takes care of itself under good
principles of corporate governance fostering teamwork, unity, efficiency and a drive for
success.
• Reputation and relationships: Companies with good corporate governance are able
to attract investors and external financiers with relative ease, going by their sterling
reputation and brand image. One of the pillars of corporate governance is transparency,
which is the practice of sharing key internal information with the stakeholders. This
improves the relationship of the entity with its stakeholders and sows the seeds of trust
between the company and society at large.
• Lesser conflicts and frauds: The rules instilled in the workplace encourage the
employees to be morally conscious in every situation that they encounter, thus
eliminating the possibility of fraud and conflict between employees.
Disadvantages of Corporate Governance
When it comes to the matter of smaller corporations, there might be a bit of hassle where the
shareholders may serve as the directors and managers, having no segregation as such. Bearing
this in mind, it gives rise to: -
• The burden of staying legally compliant: Corporates generally have loads of
compliance that have to be followed, attracting different laws based on their industry.
Corporate governance ensures legal compliance, but it does come at a very hefty price.
• Increased costs: Administrative costs for companies with corporate governance are
pretty exorbitant, considering all the requirements to be met. Here are a few
documents to be maintained: -
– Stock sales and purchases. – Legal compliance records. – Annual registration.
• Maintenance of segregation: Irrespective of the size of the corporation, the adherence
to all formalities and requirements must be met without any exceptions. Failure to
comply with these rules leaves the company with huge exposure such as “piercing of
the corporate veil”, where the separate legal entity status of the corporation is ignored
in order to understand the goings-on behind the closed doors.
• The conflict between the principal and the agent: Large corporations have made it a
common practice to appoint a well-known manager, one with a good track record to
manage the day-to-day operations of the business. Unfortunately, this gives rises to a
conflict between the shareholders and the managers as they both may have very
different objectives and perspectives. This often leads to a clash between the two, thus
affecting the overall ability of the business to run its operations in a smooth and efficient
manner.
