Corporate Governance and its Possibility for Business Practices


By

Dr. Vijay Pithadia
PhD, Electronics Technocrat
Assistant Professor [Reader] & Chair: Kidevices AG
R.K. College of Business Management
Kasturbadham, Bhavnagar Road, Rajkot-360020 GJ
 


Prologue:

Corporate Governance (CG) has emerged as one of the key elements of public policy reforms individuals. It is still in its infancy; it has been around only for the last three to four years. It is however not a foolproof concept as it relies heavily on data available from insiders. But it has specific and special role to play to enhance the strength of a particular unit and of the entire corporate sector. Corporate Governance is to be maintained or observed as effective tool to assure the stakeholders of their long-term interests without prejudice to public interest.

Corporate Governance is the term given to the management practices followed by the business organization. At flour, we believe that good business practices, transparency in corporate financial reporting and the highest levels of corporate governance must be maintained. This section includes documents regarding flour's corporate governance practices that keep flour accountable to its shareholders. These channels in turn are activated through several structural and institutional factors pertaining to the corporation. They are as follows:

[1] The ownership structure of the organization.
[2] The financial structure of the corporation.
[3] The structure and functioning of the company boards and the associated internal control systems
[4] The legal, political and regulatory environment within which the Corporate functions

Thus Corporate Governance (CG) is the way the firm ought to be run, managed and controlled. It is related with supervision and holding the responsibility of those who direct and control the management. It also includes framing rules and procedures to run the unit. It directly refers to the induction of checks and balances in the system to prevent abuse of authority. Corporate Governance also hints at ethical and integrated behavior to maintain the financial results.

Corporate Governance at Universal Level:

Traditionally the matters with corporate sector were involved with esoteric branch of commercial law. Limited generally to a narrow view of how to ensure the managers follow the interests of shareholders. Basic standards of Corporate Governance structure and processes have been slowly evolving over last two decades. Traditionally it was observed only in respect of the operation of market pressure.

Looking beyond India the scenario in general is different. In the country like U.S. and U.K. there is an active market for corporate control to discipline managers, if they fail to maximize shareholders wealth. They largely adopted three main instruments they are- "Proxy Contests". Friendly mergers and Hostile take over. The first among the above said there is considered more effective Friendly mergers have hardly succeeded to solve the "agency problem". While take over is not appealing strongly on the ground of heavy cost incurred in it and also for want of political will conducive to the policy. In Germany and Japan the system that prevails in U.K. and U.S. is absent. Unlike that system there is "Banking Supervision". The main bank financing the corporate unit acts as an external control mechanism. In such case very least intervention is found and that only when financial problem arises. It is in light of these experiences that innovative approach to the concept is formed. Several credit rating agencies have stepped in the market and they are offering services of the kind, which meets with the Quality of Governance in corporate entities.

Indispensable Principles of CG:

There are certain indispensable Principles envisaged in the concept. These mainly include the following;

(a) Discipline in operations:

Operational discipline refers to healthy manufacturing practices; Full utilization of installed capacity in accordance with financial viability and demand pressures must be practiced. Operational discipline asks for quality approval at every stage of predictor services. It refers to the effective and optimum application of the technology available at times. Integration and coordination in the entire system is but the prime requirement for the operational efficiency.

(b) Transparency in dealings and disclosures:

Transparency here means "perfection" with "holistic approach". It means that dealings with clients, customers, suppliers, distributors to whomsoever, must be fair and healthy. Legitimate grounds for differentiation should be can be maintained in consideration of the relationship. Transparency includes fairness with purchasers and sellers. Disclosure pertaining to the balance sheet must be perfect in tune with the standardized accounting practices. Besides observance of legal norms, commitment to the moral standards must be reflected in accounting procedures. "Hidden charging ", "Secrecy" which violate the fundamentals of accounting in theory and practice be not allowed. Disclosures through the balance sheet must be in tune with prevailing taxation norms.

(c) Accountability to shareholders:

Let the company perform in a manner through which shareholders long term economic interest may remain intact. Accountability includes taking shareholders into confidence. This is legal binding also. Let there be healthy democratic practices to be followed by the company, convening anneal general meeting, minimum time in advance notice to be saved comprising all technical adequacies, free and fair election of board of directors. Chartered Accountant, these are the prime requirements. Dividend, bonus all other legitimate interests to be performed in adequate manner. Shareholders are virtual partners; hence their trust in the company and their goodwill for the company does work as an asset. This must be considered as part of accountability.

(d) Responsibility of company's action:

Company's all actions must be well planned and thoughtful. Any action of haste may prove boomerang. In event of any failure or poor performance company must done to share the responsibilities. Strategic actions may some time not sound well. Human resource practices adopted may at times affect to the growth of the company. All such results must be treated positively and corrections over period of time be made without any kind of bias or prejudices. What may apparently seem too little as action or result may sometimes turn into too big impacts.

(e) Social Responsibility:

To think strictly in respect of shareholders' interest is considered too narrow view. There are many stakeholders beyond the shareholders. The society in general is the largest stakeholders. There fore observance of social responsibility must be reflected in Toro, prudence in environmental norms, adding to the societal value, sharing with Government or other agencies in social uplift men's tasks these are to be considered as "Investments" rather than more "cost", social health if cared for a long period may enhance "wealth" of the company over a period of time.

Ranking the Corporate Governance:

It is expected that Corporate Governance aim to ensure that investors should get an appropriate return on their money. The modern approach of Corporate Governance includes stakeholders namely employees, customers, suppliers, community and Government. In the early1990's recommendations on institutional codes of Cadbury committee were published in UK. Stock exchanges and regulators around the world have already begun to set standards or codes of best practices for Corporate Governance. Elite group of investors irrespective of nation or occupation have also begun to review more systematically company's Corporate Governance practices as part of their investment and under writing decision-making process.

There are different perspectives applied in rating Corporate Governance. Leading global agencies, standard and poor, and moody has adopted "Financial Perspective" to rate Corporate Governance. They mainly stick to the interests of "Financial stakeholders". This particular term includes both shareholders and creditors. Their interests are closely interred linked. It depends on company's ability to honor contractual financial obligations to creditors and to   maximize the value of its equity and distribution for its shareholders. In consideration of these criterions rating agencies tend to review the process of interaction among managers, directors and shareholders to direct and control the affairs of the company and to ensure that all financial stakeholders receive their fair share of earnings and assets.

Inter related apprehensions:

Some important issues carry interrelation significance in the whole task of Corporate Governance. It is important to understand the relationship and mark of difference that is found existing between Corporate Governance and credit rating. There is no positive correlation always found between the two.

Second very important component is to understand and examine the relationship between Corporate Governance assessments and share holder value creation. Here most notes worthy illustrations are available from ICRA and CRISIL. These two Indian agencies involved in credit rating have tried to factor in value creation in their assessment. There are legitimate doubts being raised regarding applicability of any realistic model in which entrepreneurial ability and value creation can be covered to gather. It is because that the factors, which determine and measure entrepreneurial ability and that influences value creation, are basically different. These two-intact demand extensive empirical researches, over a period of time to developed and validate any model.

Third critical issue is related with share price performance. Through in some cases it is observed that operating and share price performance is having positive relationship with governance measures, there are no fact-finding studies deriving conclusion where in strong causality is found.

Necessities for Influential Corporate Governance:

A climate of Trust, a culture of open dissent, a fluid portfolio of roles that ensures individual accountability and self-evaluation by the board engenders the foundation of good Corporate Governance. Second important requirement for sound Corporate Governance is to understand the precise pattern of ownership.

Affiliation amongst shareholders or the type of collusion may prove sometimes more effective. It is equally important to know the adverse impact of expropriation on efficiency through effects on the incentives of managers and employees. Some important board decisions are equally important. Incentive contracts decision is recently found more effective as far as the opportunities are concerned. Managers are found more comfortable and in more commanding positions to successfully negotiate such contracts when they enjoy the autonomy for such contracts.

Another important area is of ethical practices. It depends on company's ability to promote corporate fairness and transparency. It demands company's commitment to maintain the highest standard of ethical practices in all its transactions. Financial transparency is a must in the form of "Disclosures". All information's must adequately disclose regarding modes operandi of company, Prospects of the company and risk factor involved in the same. Transparency primarily must focus on "Access", "Comprehensiveness", "Relevance, Quality and Reliability". These must be followed appropriately.

Reimbursement of Unassailable Governance:

There are certain reimbursement of Corporate Governance. These can be outlined as under;

(a) It strengthens operational efficiency and financial performance of the firm.
(b) It improves customer satisfaction and results into an excellent internal environment.
(c) It adds to the integrity of the business and there by becomes helpful in extending the market base and share.
(d) It works as most effective tool to diversify and or to acquire the new company or other company.

Tribulations:

The entire task of Corporate Governance is having a mechanism where in some inbuilt problems are found. These problems can be summed up as under;

(a) Effectiveness of the board:

The board may not in all cases may all-time be having an entity independent of management. No outsider can inquire into this from inside. Some external procedures followed as part of the rules can well be checked but that alone does not suffice the purpose to justify independent entity, Appointment of committees and sub committees may in many cases be preplanned with certain determined goals.

(b) Balanced board:

Board of directors of the company may not be found appropriately balanced. Many a times it is found in many cases the board is not having an appropriate mix of business experience and functional discipline.

(c) Directors Turnover:

It is well known fact that in some companies Directors turnover is not supported with strong director evaluation procedure. Director's appointed may not be having strategic planning or risk management experience. And or sometimes against expectations traditional director may tend to stick with the company by certain practices not prescribed in the norms.

(d) Cultural Behavioral Element:

In any company, irrespective of size or nature of product or services, it is clearly found that ultimately it is the behavioral culture inbuilt in the members which play major role i governing the unit. This behavioral part plays more important role when CEOs in the respective companies perform better and enjoy commanding height as functionaries. Behavioral segment is important in context of conflict resolution, reengineering the growth, reinvesting the assets etc. In such case problem is to anticipate and identify behavioral norms in respect of the cultural lag that precisely exists within the board between the boards of directors.

Epilogue:

Corporate Governance is wrongly interpreted to nurture the interest of the shareholders only. It is beyond that which promotes the integrity in business. Besides it is also equally important that effective Corporate Governance is not suited only to large-scale players, on the contrary it creates better image, more market potentials for small-scale sector too. Good Governance is a key to successful business. Today's small units can well begin their journey towards large scale through achieving the norms of Corporate Governance.

Bibliography:

(1) D. N. Ghosh [2005], "Corporate Governance Rating: Objective, Scope and Limitations", Economic & Political Weekly, Vol. 40 No.42 P No. 4539 to 4544

(2) Sanjay Chaugale [2006], "Corporate Governance and SMES", Economic Times, P No. 4, 24th January
 


Dr. Vijay Pithadia
PhD, Electronics Technocrat
Assistant Professor [Reader] & Chair: Kidevices AG
R.K. College of Business Management
Kasturbadham, Bhavnagar Road, Rajkot-360020 GJ
 

Source: E-mail July 14, 2006

     

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