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Introduction

The root of the word ‘Governance’ is from ‘GUBERNATE’ which means to steer i.e. to direct the course & the word Corporate Governance would literally means – to direct the course of the corporate.

Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, management, and the board of directors. Other stakeholders include employees, customers, creditors, suppliers, regulators, and the community at large.

Corporate governance is a multi-faceted subject. An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. A related but separate thread of discussions focuses on the impact of a corporate governance system in economic efficiency, with a strong emphasis on shareholders' welfare. There are yet other aspects to the corporate governance subject, such as the stakeholder view and the corporate governance models around the world.

History

People are generally having a misconception that the concept of Corporate Governance has evolved with the negative happenings in the corporate world, but the fact is this that the concept of Corporate Governance is as old as the society. Kautilya’s Artashastra has mentioned the same and stated that all administrators including the King were to be considered as servants of people to maintain good governance.

Kautilya elaborates on four fold duty of a King as:-

i. raksha

ii. vridhi

iii. palana

iv. yogakshema –Social Security System (in modern times Corporate Social Responsibility)

In the modern times its history can be traced way back from mid 1970’s and the USA enacted an act on the review of system of Internal Control viz. The Foreign Corrupt Practices Act, 1977. Also in 1979 US Securities Exchange Commission prescribed the mandatory reporting.

There has been renewed interest in the corporate governance practices of modern corporations since 2001, particularly due to the high-profile collapses of a number of large U.S. firms such as Enron Corporation and MCI Inc. (formerly WorldCom). In 2002, the U.S. federal government passed the Sarbanes-Oxley Act, intending to restore public confidence in corporate governance.

VARIOUS COMMITTEES

Many committees have been inter alia formed to help out regulatory authorities in raising standards of Corporate Governance. Some of the popular Committees were:-

At International Level:-

1. The Cadbury Report – 1992

2. The Greenbury Report - 1995

3. The Hampel Report  - 1998

4. The Turnbull Report

5. Higgs Report

6. Smith Report

7. Tyson Report

8. Combined Code on Corporate Governance (2008)

In India:-

 

1. CII’s Desirable Corporate Governance Code

2. Kumara Mangalam Birla Committee

3. Task Force on Corporate Excellence Through Governance – by MCA

4. Naresh Chandra Committee

5. N.R. Narayana Murthy Committee

6. Dr. JJ Irani Expert Committee

DEFINITION OF CORPORATE GOVERNANCE

So many committees (Both at National and International Level) have been formed and all gave their opinion and defined it in best suited way like –

According to Cadbury Committee – “It is the system by which companies are directed and controlled”.

According to James D. Wolfesohn, President of World Bank – “It is about prompting fairness, transparency and accountability”.

So it can be summed up that it is the code of business in accordance with the stakeholders desires to achieve the desired goals while confirming to the basic rules of the society embodied in law and local customs.

ELEMENTS OF GOOD CORPORATE GOVERNANCE

1. Role and Powers of Board

2. Legislation

3. Board Environment

4. Board Appointment

5. Board Meetings

6. Code of Conduct

7. Financial and Operational Reporting

8. Monitoring the Board Performance

9. Risk Management

10. Active Participation of Stakeholders

MODELS OF CORPORATE GOVERNANCE

There are many different models of Corporate Governance around the world. These differ according to the variety of capitalism in which they are embedded. . The liberal model that is common in Anglo-American countries tends to give priority to the interests of shareholders. The coordinated model that one finds in Continental Europe and Japan also recognizes the interests of workers, managers, suppliers, customers, and the community. Each model has its own distinct competitive advantage.

Anglo-American Model

The Novo Nordisk Model

CORPORATE GOVERNANCE MODELS AROUND THE WORLD

Continental Europe

Some continental European countries, including Germany and the Netherlands, require a two-tiered Board of Directors as a means of improving corporate governance. In the two-tiered board, the Executive Board, made up of company executives, generally runs day-to-day operations while the supervisory board, made up entirely of non-executive directors who represent shareholders and employees, hires and fires the members of the executive board, determines their compensation, and reviews major business decisions.

India

India's SEBI Committee on Corporate Governance defines 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." It has been suggested that the Indian approach is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution, but this conceptualization of corporate objectives is also prevalent in Anglo-American and most other jurisdictions.

United States, United Kingdom

The so-called "Anglo-American model" of corporate governance emphasizes the interests of shareholders. It relies on a single-tiered Board of Directors that is normally dominated by non-executive directors elected by shareholders. Because of this, it is also known as "the unitary system" Within this system, many boards include some executives from the company (who are ex officio members of the board). Non-executive directors are expected to outnumber executive directors and hold key posts, including audit and compensation committees. The United States and the United Kingdom differ in one critical respect with regard to corporate governance: In the United Kingdom, the CEO generally does not also serve as Chairman of the Board, whereas in the US having the dual role is the norm, despite major misgivings regarding the impact on corporate governance.

In the United States, corporations are directly governed by state laws, while the exchange (offering and trading) of securities in corporations (including shares) is governed by federal legislation. Many US states have adopted the Model Business Corporation Act, but the dominant state law for publicly-traded corporations is Delaware, which continues to be the place of incorporation for the majority of publicly-traded corporations. Individual rules for corporations are based upon the corporate charter and, less authoritatively, the corporate by laws. Shareholders cannot initiate changes in the corporate charter although they can initiate changes to the corporate bylaws.

LEGISLATIVE FRAMEWORK OF CORPORATE GOVERNANCE IN INDIA

The heart of good Corporate Governance is transparency, disclosure, accountability, and integrity. For achieving the better and best result the things need to come in from within not by the force or pressure. Good Governance flows from the ethical business practices even when there is no legislation. It is not just the legal concept, however one cannot rely that all will be enlightened at large in corporate and so there lies the need of the legislative framework. In Indian context there are many regulatory forces which look and take care that Governance is achieved upto a minimum level.

Some of the major regulatory forces that foster the same are:-

SEBI Guidelines

Companies Act

Listing Agreement




Category Corporate Law, Other Articles by - Vivek Mehta (CA, DISA,CS, MBA) 



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