Unit 02 Business Ethics

Unit- II Corporate Governance

Introduction, Concept And Definitions Of Corporate Governance, Scope And
Importance Of Corporate Governance, Ethical Issues In Corporate Governance
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2.1 Introduction Concept And Definitions Of Corporate Governance: -
Introduction

Corporate governance is the system that controls and directs a company's

operations. It involves the policies, processes, and people that ensure a company's
conduct and decision-making are in line with its goals.

Corporate governance is the system by which companies are directed and controlled.
Boards of directors are responsible for the governance of their companies. The
shareholders' role in governance is to appoint the directors and the auditors and to
satisfy themselves that an appropriate governance structure is in place.

Corporate governance is the system of rules, practices, and processes by which a

company is directed and controlled. Establishing and implementing these practices
involves balancing the interests of a company's many stakeholders, including:

• Employees

• Shareholders

• Senior management

• Customers

• Suppliers

• Lenders

• Local, state, and federal governments

• Community members and groups

Prof. Kalyani Sunil Chandore CMCS, Yavatmal 1

Unit 02 Business Ethics

Corporate governance encompasses practically every sphere of management, from

action plans and internal controls to performance measurement and
corporate disclosure.

Concept

Corporate governance is the set of practices that guide a company's management and
decision-making. It ensures that a company is run ethically, legally, and effectively. It
is essentially the system by which companies are directed and controlled. It involves
a set of relationships between a company's management, its board of directors, its
shareholders, and other stakeholders.

Corporate governance refers to the system of rules, practices, and processes by which
a company is directed and controlled. It involves balancing the interests of a
company’s stakeholders, including shareholders, management, customers, suppliers,
financiers, government, and the community.

Corporate governance is all about management practices that ensure a company is

managed effectively, ethically, and in compliance with laws and regulations. It
involves implementing best practices, upholding legal requirements, and adhering to
ethical standards.

Key principles of corporate governance:

• Accountability: Being answerable for one's actions and performance

• Transparency: Being open and honest, and disclosing relevant information

• Fairness: Treating all people and groups fairly
• Responsibility: Taking responsibility for one's actions and performance

Elements of corporate governance: Culture, Leadership, Alignment, Systems, and

Structure.

Prof. Kalyani Sunil Chandore CMCS, Yavatmal 2

Unit 02 Business Ethics

Definitions

The Corporate Governance was defined by Sir Adrian Cadbury, head of the
Committee on the Financial Aspects of Corporate Governance in the United Kingdom:
“Corporate governance is the system by which companies are directed and
controlled” (Cadbury Committee, 1992).

Corporate governance refers to the systems, processes, and principles that guide how
a corporation is directed, controlled, and held accountable. It involves a set of rules,
practices, and processes used to make decisions in the company, ensuring that
stakeholders’ interests (including shareholders, employees, customers, and society)
are considered. Here are some common definitions:

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.
Organization For Economic Co-operation
And Development (OECD)
Corporate governance is the structure of rules, practices, and processes used to direct
and manage a company. It essentially involves balancing the interests of the various
stakeholders in a company, including shareholders, management, customers,
suppliers, financiers, government, and the community.
World Bank Definition
Corporate governance is the framework of rules and practices by which boards of
directors ensure accountability, fairness, and transparency in a company’s
relationship with all its stakeholders. This encompasses how corporate objectives are
set and achieved, how risk is monitored and assessed, and how performance is
optimized.
Institute of Directors (IoD)

Prof. Kalyani Sunil Chandore CMCS, Yavatmal 3

Unit 02 Business Ethics

2.2 Scope And Importance Of Corporate Governance:

Corporate governance refers to the system of rules, policies, and practices that guide
a company's management, ensuring accountability to stakeholders by establishing a
framework for ethical decision-making, risk mitigation, and long-term sustainability,
ultimately aiming to protect shareholder interests and build trust with investors
through transparency and responsible conduct.

Its scope encompasses aspects like board composition, executive compensation,

financial reporting, and compliance with legal regulations, making it crucial for a
company's reputation, access to capital, and overall performance.

Scope
Corporate governance refers to the system of rules, practices, and processes by which
a company is directed and controlled. Corporate governance is a crucial framework
that dictates how a company is directed and controlled. Here's a breakdown of its
scope and importance:

Fig No. 1 Scope Of Corporate Governance

Prof. Kalyani Sunil Chandore CMCS, Yavatmal 4

Unit 02 Business Ethics

Structure and Processes:

This includes the establishment of boards of directors, their roles and responsibilities,
and the creation of internal controls and procedures.

It covers the definition of the rights and responsibilities of various stakeholders,

including shareholders, management, and employees.

Transparency and Disclosure:

Corporate governance mandates clear and accurate financial reporting, as well as the
timely disclosure of relevant information to stakeholders.

This ensures that stakeholders have access to the information they need to make
informed decisions.

Ethical Behaviour:
It promotes a culture of ethical conduct within the organization, emphasizing
integrity, fairness, and accountability.

This involves establishing codes of conduct and mechanisms for addressing ethical
dilemmas.

Risk Management:
Corporate governance plays a vital role in identifying, assessing, and managing risks
that could impact the company's performance and reputation.
This includes financial, operational, legal, and reputational risks.

Stakeholder Interests:
It aims to balance the interests of all stakeholders, recognizing that the company's
success depends on their support.

This includes considering the impact of the company's actions on employees,

customers, suppliers, and the community.

Prof. Kalyani Sunil Chandore CMCS, Yavatmal 5

Unit 02 Business Ethics

Importance
Corporate governance is important because it helps a company run ethically and
responsibly, while also protecting the interests of its stakeholders. It also helps a
company avoid mistakes and build trust with investors and the public.

Corporate governance is essential for the stability, transparency, and long-term

success of organizations. It establishes a framework for ethical decision-making,
accountability, and sustainable business growth.

Corporate governance is fundamentally important for the health and sustainability of

any organization. Here's a breakdown of its key importance:

Fig No. 2 Importance Of Corporate Governance

Building Trust And Confidence

Good corporate governance fosters trust among investors, stakeholders, and the
public. Transparency and accountability are crucial for building this trust.

This increased confidence can lead to greater investment, better access to capital, and
a stronger reputation.

Prof. Kalyani Sunil Chandore CMCS, Yavatmal 6

Unit 02 Business Ethics

Protecting Stakeholder Interests

It ensures that the interests of all stakeholders, including shareholders, employees,
customers, and the community, are considered.

This helps to prevent abuse of power and ensures that the company is managed in a
fair and ethical manner.

Enhancing Financial Performance

Strong governance practices can lead to improved decision-making, better risk
management, and increased efficiency.
This can result in higher profitability and long-term sustainable growth.

Mitigating Risks
Effective corporate governance helps to identify and manage potential risks, reducing
the likelihood of financial losses, legal problems, and reputational damage.

Ensuring Compliance
It ensures that the company complies with all applicable laws and regulations,
reducing the risk of penalties and legal action.

Promoting Ethical Behaviour

Corporate governance establishes a culture of ethical conduct, promoting integrity
and accountability throughout the organization.

Long Term Sustainability

By focusing on ethical practices, and the needs of all stakeholders, companies are more
likely to have a business model that is sustainable in the long term.

In essence, corporate governance provides the framework for responsible and ethical
business practices, which are essential for long-term success.

Prof. Kalyani Sunil Chandore CMCS, Yavatmal 7

Unit 02 Business Ethics

2.3 Ethical Issues In Corporate Governance:

Ethical issues in corporate governance include bribery, corruption, and a lack of
transparency. These issues can harm a company's reputation and lead to financial
losses. Ethical issues in corporate governance are a critical concern for businesses
worldwide.

Ethical issues in corporate governance arise when companies fail to uphold principles
of fairness, transparency, accountability, and responsibility in their decision-making
and business practices. They touch upon the fundamental principles of fairness,
transparency, and accountability. Here's a breakdown of key ethical challenges:

Fig No. 3 Ethical Issues In Corporate Governance

Conflict Of Interest:
This occurs when personal interests interfere with the duty to act in the best interests
of the company and its stakeholders. Examples include board members making
decisions that benefit themselves or related parties.

Lack Of Transparency And Disclosure:

Failure to provide accurate and timely information to stakeholders, including
shareholders, employees, and the public, undermines trust and can lead to unethical
behaviour.

Prof. Kalyani Sunil Chandore CMCS, Yavatmal 8

Unit 02 Business Ethics

Financial Fraud:
This encompasses a range of deceptive practices, such as manipulating financial
statements, insider trading, and bribery, which harm investors and damage the
company's reputation.

Insider Trading:
Trading stocks or securities based on non-public, material information gives an
unfair advantage and erodes market integrity.

Bribery And Corruption:

Offering or accepting bribes to gain an unfair advantage is unethical and often illegal,
creating an uneven playing field and undermining fair competition.

Failure To Protect Stakeholder Interests:

Corporate governance should ensure that the interests of all stakeholders, not just
shareholders, are considered. This includes employees, customers, suppliers, and the
community.

Weak Board Independence:

If board members are not truly independent, they may be unable to provide effective
oversight and hold management accountable. This can lead to decisions that prioritize
personal interests over the company's best interests.

Separation Of Ownership And Management:

Especially in family run businesses, the lines between ownership and management
can become blurred, leading to conflicts of interest, and lack of proper oversight.

Prof. Kalyani Sunil Chandore CMCS, Yavatmal 9

Unit 02 Business Ethics

Factors Contributing to Ethical Lapses:

Pressure to Perform:
Excessive pressure to meet financial targets can lead to unethical behaviour, such as
manipulating financial results.

Lack of Ethical Culture:

A weak ethical culture within the organization can create an environment where
unethical behaviour is tolerated or even encouraged.

Inadequate Internal Controls:

Weak internal controls can make it easier for unethical behaviours to occur and go
undetected

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Prof. Kalyani Sunil Chandore CMCS, Yavatmal 10