Some Views on Corporate Governance


By

Prof. Jayashree Sadri
Senior Visiting Faculty
Indira School of Management Studies
Tathawade, Pune
 


Corporate Governance when used in the context of business organisations is a system of making directors accountable to share holders for effective management of the companies, in the best interest of the company and shareholders along with concern for ethics and values.  It is a management of companies by the board of directors. It hinges on complete transparency, integrity and accountability of management that includes executive and non-executive directors. Its genesis can be traced to the internal audit function and its importance was enhanced after the Stock Market Crash of 1987. With the CG reports of Adrian Cadbury in the United Kingdom, Mervyn King in South Africa and Kumarmangallam Birla in India the subject was reduced to controlling shareholder operations and ensure ethical practices in the financial sector. From thence, it has moved into other areas of the organisation but unfortunately restricts itself to the management and control of funds. The ambit of significance of CG lies far beyond this as has been explained at length in Business Ethics and Corporate Governance: Towards Organisational Excellence (2005).

Is corporate governance just another fashionable word or is it a more important concept of lasting value? There is no gainsaying the fact that CG is an important concept and a means to an end that of achieving corporate excellence. Corporate excellence and corporate governance are positively correlated.  In the end, it is difficult to achieve excellence without good governance. Many experts prefer to define corporate governance in the narrow sense, i.e. making the management accountable to the owner (the shareholders) through the board of directors.

Some experts like J J Irani, Narayana Murthy and Naushir Mirza adopt a broader definition of CG to include the interests of all the stakeholders like employees, customers and the society at large. Sustaining the balance between different and often conflicting interest groups is however an extremely difficult task, which is in fact, the real challenge of good governance.

Essential ingredients of excellence in this author's opinion are: attitude, management structure and governance.  Management structure is the key to the goal of success.  Any corporate worth its name should not bask in past success, as past success is no guarantee for continued and future success.  Past success only increases expectations and therefore any management has necessarily to strive harder and harder to meet challenges and to emerge continually successful.   Past success is static success and managements should pursue the path of dynamic success.   Ethics of success is important for dynamic success.  Ethics of success is entwined in corporate governance. 

If ethics of success is ignored or sidelined, failure inevitably results. And failure increases costs considerably and erodes profitability.  Dynamic success keeps on raising the expectations of everyone and managements will face on-going challenges.  As success depends on CG, managements must believe in and practise good governance principles.  He opined that CG is only a means, the end being corporate excellence. 

CG is not just only for the shareholders, but it is as much important for the corporations themselves.  To experience the goodness of CG and to realize its immense benefits, corporate should have staunch belief in the concept and its practice.

The illiterates of the 21st century will not be those who cannot read and write, but those who cannot learn, unlearn and relearn.  The dawn of the new millennium has ushered in an era of liberalization, privatisation, and globalisation, digital technology and information super highways. 

A desirable paradigm on CG must, therefore, in my opinion, address and accommodate myriad compulsions and convulsions due to discontinuous, non-linear technological upheavals, fast integrating world economy and a fast shrinking world characterizing the new millennium.

Corporate governance is a necessary condition and not a sufficient condition for succeeding in the global market place. Friedman's formulation that the business of any business is business has outlived its relevance and the social responsibility of business has become the buzzword in the international corporate arena and has assumed importance in ensuring long term success of companies.

What constitutes CG in transparency, accountability, investor protection, better compliance with statutory laws and regulations, social value is good CG practices. However, mere understanding and appreciation of the principles of corporate governance just would not do. 

The principles must be implemented with religious sincerely and rigidity. Implementation is the litmus test.  This is particularly so because the road ahead is bumpy and rocky and we are habitually obsessed with complacency.  Only when failure hurts, do people become serious enough.

One can ignore corporate governance only to loose out to competition globally.  This view has been amply argued by the authors in the forthcoming tome Business Ethics and Corporate Governance: Towards Organisational Excellence (2006) where the paradigm of the Strategic Triad has been elaborated upon. The need of the hour is to initiate firm action for implementation of CG practices.  Awareness is a prelude to action.  Corporate houses should identify reform processes voluntarily and not just wait for the laws and regulations to be promulgated.

Corporate governance per se might not lead to corporate excellence as it deals with the form and not the substance, which is the key to corporate excellence.  In order to create this substance, corporate houses should continually strike alignment between their business environment and business strategy, between their strategy and organizational structure and between their structure and corporate culture and philosophy.  Customers should be valued the most. The effort should be to get the best out of the people by focussing on employee contribution and developing a culture of continual learning.  Knowledge management is another vital ingredient necessary for corporate excellence.

During the 1990's a large number of companies have failed and the economy has witnessed a number of rating downgrades, both in the manufacturing sector and the financial sector.  It was discovered that a plethora of companies that collected funds from the public through public issues during the stock market euphoria have just vanished from the scene and investors were left in the lurch.  Names of individuals like Harshad Mehta and Ketan Parekh in India are known to all, as are the names of organisations like the Unit Trust of India and Larsen and Toubro that fell foul of proper CG practices months after they were anachronistically given the award for good governance practices. The question arises then whether these people could have done all the scamming alone or were there accomplices who because of muscle or money or political power escaped the net.

This has raised an important question why were the board of directors, auditors and the regulating authorities not able to detect and pre-empt these irregular practices. The role of the State Bank of India, the Vijaya Bank and the Madhavpura bank readily come to mind for their failure to contain the siphoning of public funds for private benefit.

On corporate governance, the role of financial institutions and the role of board of directors has been a major focus.  While these two bodies no doubt have a major role to play in ensuring good cg the concept has to include the very fundamentals on how the company function in its day-to-day dealings with customers, with the trade, with suppliers, with the suppliers, with the shareholders, with the government and with the public.  By its very definition, CG requires more internal discipline over external accountability.  This internal discipline implies that the quality of its management has to be of a high order to be able to exercise that discipline in the organisation.  By this one would expect that a good management would lead a company to being a good corporate citizen.  It may be soon be that in the open market economy survival itself may be stake in the even issues of corporate governance are not given due importance.

Corporate governance is a process or a set of systems and processes to ensure that a company is managed to suit the best interests of all.  The systems that can ensure this may include structural and organisational matters.  The stake holders may be internal stake holders (promoters, members, workmen and executives) and external stake-holders (promoters, members, customers, lenders, vendors, bankers, community, government and regulators).

Corporate governance is concerned with the establishing of a system whereby the directors are entrusted with responsibilities and duties in relation to the direction of corporate affairs.  It is concerned with accountability of persons who are managing it towards stakeholders.  It is concerned with the morals, ethics, values, parameters of conduct and behaviour of the company and its management. Corporate governance is nothing but a voluntary ethical code of business of companies. This is based on the core values of the top management and the guiding principles that emanate from it.

According to the Cadbury committee on financial aspects of CG, corporate governance is the system by which companies are directed and controlled.  The board of directors is responsible for the governance of the company.  The directors and the auditors are to satisfy themselves that an appropriate governance structure is in place.

The concept of corporate governance hinges on total transparency, integrity and accountability of the management. This includes non-executive directors. it is a system of making management accountable to the shareholders for effective management of the companies, with adequate concern for ethics and values.  Corporate governance recognizes issues like maintaining continuity by succession planning, identifying opportunities, facing challenges and managing changes within the business and allocation of resources towards the right priority.

Corporate governance mainly consists of two elements:

* A long-term relationship, which has to deal with checks and balances, incentive of managers and communications between managers and investors.
* A transactional relationship involving matters relating to disclosure and authority.

Corporate governance is basically a system of making directors accountable to share holders for effective management of the companies, in the best interest of the company and shareholders along with concern for ethics and values.  It is a management of companies by the board of directors.   It hinges on complete transparency, integrity and accountability of management, which includes executive and non-executive directors.

Corporate governance is a way of life and not a set of rules.  It is more of a way of life that necessitates taking interests in every business decision.  a key element of good corporate governance is transparency projects through a code of good governance which  incorporates a system of checks and balances between key players- board of management, auditors and shareholders.

Corporate governance is in essence determination of how companies are governed, how executive actions are supervised and how a company is accountable to regulations imposed on it by law or other commitments to shareholders.

It has been defined by the Cadbury committee report as:

The system by which companies are directed and controlled

EXCELLENCE THROUGH CORPORATE GOVERNANCE

Adherence to good governance practices enhances the efficiency of corporate sector in the following manner.

1. Good governance provides stability and growth to the companies.
2. Good governance system, demonstrated by adoption of good corporate practices, builds confidence.
3. Effective governance reduces perceived risks, consequently reducing cost of capital.
4. In the knowledge driven economy, excellence ion skills like management will be the ultimate tool for corporate houses to leverage competitive advantage in the financial market.
5. Adoption of good corporate practices promotes stability and long-term sustenance of stakeholders' relationship.
6. A good corporate citizen becomes an icon and enjoys a position of pride.
7. Potential stakeholders aspire to enter into a relationship with enterprises whose governance credentials are exemplary.

Corporate governance is basically a system of making directors accountable to shareholders for effective management of the company along with concern for ethics and values.  It is the management of companies by the board of directors.  it hinges on complete transparency, integrity and accountability of management that includes executive and non-executive directors.

Corporate governance is in essence determination of how companies are governed, how executive actions are supervised and how a company is accountable to regulations imposed on it by law or other commitments to shareholders.  It has been defined by the Cadbury committee report as:

The system by which companies are directed and controlled

The role of corporate governance is to ensure that the directors of a company are subject to their duties, obligations and responsibilities, to act in the best interest of their company, to give direction and to remain accountable to their shareholders and other beneficiaries for their actions.

Corporate governance is concerned with establishing a system whereby directors are entrusted with responsibilities and duties in relation to the direction of a company's affairs. An effective corporate governance system should provide mechanisms for regulating directors' duties in order to restrain them from abusing their powers and to ensure that they act in the best interests of the company in its broad sense.  Corporate governance is also concerned with the ethics, values and morals of a company and its directors.

BIBLIOGRAPHY

* Alison Maitland (1999): "The value of virtue in a transparent world," Business Standard, Mumbai
* Arun Jethmalani (1999): "Value for money," Business Standard, Mumbai
* Bhahu Pande (1999): "Wooing Mr. Moneybags," Business Standard (Strategist), Mumbai
* Debashis Basu (1999): "False Value," Economic Times, Mumbai
* Jayant Rama Verma  (1997) : Corporate Governance in India : Disciplining the dominant shareholder Management Review.    
* Jayashree S (2005): What Every MBA Should Know About HRM, Himalaya Publishing House, Mumbai.
* Nandini Sengupta (1999): "When disclosure is a capital idea", Economic Times" Mumbai
* Puneet Jain (1999): "The Real Bulwark," Economic Times, Mumbai
* Rajendra Singh: (1999) Boardroom in the 21st century: Issues & Challenges
* Vision - The Journal of Business Perspective.
* S. Sadri and S Jayashree (2006): Business Ethics and Corporate Governance [Towards Organisational Excellence] (forthcoming)
* S. D. Israni (1999): "Corporate Governance - The party is over! Its time for real performance "Paper Presented at a National Symposium in ICSI-CCRT, Navi Mumbai 2001.    
* The Economist (1999): "The Number Game", Economic Times, (reprint) Mumbai.
 


Prof. Jayashree Sadri
Senior Visiting Faculty
Indira School of Management Studies
Tathawade, Pune
 

Source: E-mail March 24, 2006

    

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