Today adoption of good Corporate Governance practices has emerged as an integral element for doing business. It is not only a pre-requisite for facing intense competition for sustainable growth in the emerging global market scenario but is also an embodiment of the parameters of fairness, accountability, disclosures and transparency to maximize value for the stakeholders.
Corporate governance is beyond the realm of law. It cannot be regulated by legislation alone. Legislation can only 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 the mindset and ethical standards of management.
Studies of corporate governance practices across several countries conducted by the Asian Development Bank, International Monetary Fund, Organization for Economic Cooperation and Development and the World Bank reveal that there is no single model of good corporate governance.
The OECD Code also recognizes that different legal systems, institutional frameworks and traditions across countries have led to the development of a range of different approaches to corporate governance. However, a high degree of priority has been placed on the interests of shareholders, who place their trust in corporations to use their investment funds wisely and effectively is common to all good corporate governance regimes.
Also, irrespective of the model, there are three different forms of corporate responsibilities which all models do respect:
- Political Responsibilities: the basic political obligations are abiding by legitimate law; respect for the system of rights and the principles of constitutional state.
- Social Responsibilities: the corporate ethical responsibilities, which the company understands and promotes either as a community with shared values or as a part of larger community with shared values.
- Economic Responsibilities: acting in accordance with the logic of competitive markets to earn profits on the basis of innovation and respect for the rights/democracy of the shareholders which can be expressed in terms of managements' obligation as 'maximizing shareholders value'.
In addition, business ethics and corporate awareness of the environmental and societal interest of the communities, within which they operate, can have an impact on the reputation and long-term performance of corporations.
The three key constituents of corporate governance are the Board of Directors, the Shareholders and the Management.
- 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 all 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.
The underlying principles of corporate governance revolve
around three basic inter-related segments. These are:
- Integrity and Fairness
- Transparency and Disclosures
- Accountability and Responsibility
The Main Constituents of Good Corporate
- Role and powers of Board: the foremost requirement of good corporate governance is the clear identification of powers, roles, responsibilities and accountability of the Board, CEO and the Chairman of the board.
- Legislation: a clear and unambiguous
legislative and regulatory framework is fundamental to effective corporate
- Code of Conduct: it is essential that
an organization's explicitly prescribed code of conduct are communicated
to all stakeholders and are clearly understood by them. There should
be some system in place to periodically measure and evaluate the adherence
to such code of conduct by each member of the organization.
- Board Independence: an independent
board is essential for sound corporate governance. It means that the
board is capable of assessing the performance of managers with an objective
perspective. Hence, the majority of board members should be independent
of both the management team and any commercial dealings with the company.
Such independence ensures the effectiveness of the board in supervising
the activities of management as well as make sure that there are no
actual or perceived conflicts of interests.
- Board Skills: in order to be able to
undertake its functions effectively, the board must possess the necessary
blend of qualities, skills, knowledge and experience so as to make quality
contribution. It includes operational or technical expertise, financial
skills, legal skills as well as knowledge of government and regulatory
- Management Environment: includes setting
up of clear objectives and appropriate ethical framework, establishing
due processes, providing for transparency and clear enunciation of responsibility
and accountability, implementing sound business planning, encouraging
business risk assessment, having right people and right skill for jobs,
establishing clear boundaries for acceptable behaviour, establishing
performance evaluation measures and evaluating performance and sufficiently
recognizing individual and group contribution.
- Board Appointments: to ensure that
the most competent people are appointed in the board, the board positions
must be filled through the process of extensive search. A well defined
and open procedure must be in place for reappointments as well as for
appointment of new directors.
- Board Induction and Training: is essential
to ensure that directors remain abreast of all development, which are
or may impact corporate governance and other related issues.
- Board Meetings: are the forums for
board decision making. These meetings enable directors to discharge
their responsibilities. The effectiveness of board meetings is dependent
on carefully planned agendas and providing relevant papers and materials
to directors sufficiently prior to board meetings.
- Strategy Setting: the objective of
the company must be clearly documented in a long term corporate strategy
including an annual business plan together with achievable and measurable
performance targets and milestones.
- Business and Community Obligations: though
the basic activity of a business entity is inherently commercial yet
it must also take care of community's obligations. The stakeholders
must be informed about the approval by the proposed and on going initiatives
taken to meet the community obligations.
- Financial and Operational Reporting: the
board requires comprehensive, regular, reliable, timely, correct and
relevant information in a form and of a quality that is appropriate
to discharge its function of monitoring corporate performance.
- Monitoring the Board Performance: the
board must monitor and evaluate its combined performance and also that
of individual directors at periodic intervals, using key performance
indicators besides peer review.
- Audit Committee: is inter alia responsible
for liaison with management, internal and statutory auditors, reviewing
the adequacy of internal control and compliance with significant policies
and procedures, reporting to the board on the key issues.
- Risk Management: risk is an important
element of corporate functioning and governance. There should be a clearly
established process of identifying, analysing and treating risks, which
could prevent the company from effectively achieving its objectives.
The board has the ultimate responsibility for identifying major risks
to the organization, setting acceptable levels of risks and ensuring
that senior management takes steps to detect, monitor and control these
A good corporate governance recognizes the diverse interests
of shareholders, lenders, employees, government, etc. The new
concept of governance to bring about quality corporate governance is not
only a necessity to serve the divergent corporate interests, but also
is a key requirement in the best interests of the corporates themselves
and the economy.