"Corporate Governance is base for the sound economy"

By

Dr. Mita B. Vora
Assistant Professor
R.K. College of MBA
Bhavnagar Road, Kasturbadham, Rajkot-360 020
 

"Success is not the art of making mistakes when nobody is looking at, true success is the truthful expression of the performance when it is measured"*

Who does not like the progress? Progress leads to success in terms of satisfaction of desires and expectations. When any individual compares his past performance with the present and when the graph is upward then individual appreciates himself or herself. The same is in the case of corporate or country or any country's economy, which want to be sound then they need success. But success is not simple to get. Now days there are many ways through which success can be achieved. The ways can be short cuts or may be long ways, where more sincerely and ethically one has to work. Corporate governance can be put in this 2^nd category.

Corporate governance has succeeded in attracting a good deal of public interest because if it's apparent importance for the economic health of corporations and society in general. We know each corporation obtains its funds from different class of investors. When they do so, it becomes their prime responsibility to see that the funds are used in proper direction. The investors are also even needed assurance for such matter.

"Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting return on their investment." *

The Cadbury committee, London, U.K. in the year 1992, is giving corporate Governance concept. But corporate governance is not new invention but was inherent characteristics of all healthy organizations.

"Corporate Governance practices and concept has been recently raised due to growing level if falls out in corporate sector leading to severe injury not only to the Stake holders but to the whole economy.

When company follows corporate governance in practice in a way it becomes transparent in every single matter related to co.'s transactions, it has to be very honest while publishing financial information, firm has to fellow guidelines specified by various institutions and bodies. Thus any matter, which involves affairs with of company, has to be clear so that it can be repressed with clarity. Actually company is accountable or answerable to its shareholders for any consequence and that is few when it has to adopt for transparent business.

There are many norms of the corporate governance, if practiced by the corporate people then it will lead to sound economy, as sound and progressing corporate units are the bases for the sound economy. At the same time corporate governance is not the luxury goods that only wealthier economy can afford but it is the base if followed by the corporate as well as by any developing country then it will contribute in the development of the economy. Different norms are related to the performance of the company as well as the directors who holds the position of the Board of the directors. Corporate governance practices are like guiding policies for corporate executives to run their business with accountability and transparency. The norm of corporate Governance practices includes various aspects, which are necessary to be followed by Board of Directors and emphasis on the Director who is holding the directorship position in the company, whether the Director is executive director, non-executive director or an independent director. It is one of the norms of the corporate governance that if the chairman of the Board is executive chairman there must be at least 50%of the Board should be of independent director, the director who is apart from receiving his remuneration does not have any materialistic relationship with the company or with director of the company and when the chairman of the board is non executive chairman then 1/3 ^rd of the Board should be consist of the independent director.

Corporate Governance also emphasis on the transparency aspect. "Transparency is the core aspect of corporate governance" Each and every stakeholder expects transparency from the management, because stakeholders cannot get total idea inside management practices, by just referring to the Balance sheet of the firm. They must be aware about essential aspects like how much remuneration is drawn by directors, what criteria are used by company for director's appointment and reappointment

Transparency in every single mater starting from the directors' pay scale to the number of AGM held and risk management policy followed by the company and many more… Recently the chairman of the SEBI, M. Damodaran had announced that all the listed company has to follow the norm that is required by the clause 49 of listing agreement of the Company's Act and has to follow it before December 2005. If company remains transparent in disclosure creditor's trust and corporation can be improved like.

* Investors evaluate the company as highly efficient company and market value of firm may go high.

* Loyalty of investors toward company increases and they provide their "NOD" for every aspect.

* It transparency is mandatory as per the corporate governance norms hence it is also advantageous for company if remain transparent.

* If firm remains transparent it becomes efficient in overall work and it leads to increase in overall increase in firm's value.

* Apart from increase in market value it can be imaged as ethical business and it can also attract maximum FDR and FII.

* The picture of overall economy also changes as efficiency of economy is directly related with efficiency of corporate sector.

In today's trend it becomes essential to survive in global trends by accepting norms accepted by global corporate would, corporate governance is one of the parameters that is expectancy of every global investor.

Hence Transparency has greater significance has greater significance in corporate governance, 

Apart from the transparency Corporate Governance norms emphasis on the major aspect of the company's front and that is financial management. Finance is the major aspect for any economy and for the corporate also. Thus there are certain mandatory norms as well as certain non-mandatory norms, which are expected to be followed by the corporate people. They are supposed to disclose in front of the investors, all the data like overall capital, net worth, EPS that is Earning Per Share, Dividend pay out ratio and profitability ratio along with EVA that is Economic Value addition." If a corporation is to be viable attraction for capital, its board must ensure disclosure and transparency concerning the companies' true financial performance as well as its governance practices". Accounting games may be short-term keys but they are not long-term bases for financial creditability.

Corporate Governance also points that to what extent the complaints of the stakeholders including shareholders are being resolved with in the specified time or not. Company has to disclose in front of the shareholders that how efficiently they have resolved the complaints.

Stakeholder's claims are bound to appear in the regular course of business. There are different stakeholders who are important to be taken care of by the company. They are shareholders, employees, customers, middlemen, society, financial, institutions, and government as well foreign direct investors.

Each of the stakeholders is directly or indirectly related with the company and it significantly affects to the decision of management. That is why the disclosures related to the stakeholders are important to be disclosed in front of stakeholder when the size and scope of any corporate expands, it affects to the value of stake holders, so while expanding and managing large corporate world, whether corporate executives are balancing the value of stakeholders or not are that is important aspect of corporate Governance

Corporate Governance also includes the aspect like Corporate Social responsibility.  In addition to economic performance, modern business must demonstrate social awareness or sensitivity and social performance. Dependence of business on its environment is so complete that the very existence and survival as any growth of any organization depend upon its acceptance by the society. If it outlives its utility to the society it has no place and reason to live.

With regards to the corporate governance, corporate social responsibility is one of the important disclosures that every business has to make in front of the stakeholder that it is fulfilling its social responsibility on efficient manner.

As per the norms of the corporate governance, about doing business of own, it's the responsibility of each corporate leader to focus on the social responsibility front.

Thus to conclude one can say that corporate governance is not the luxuries goods that only wealthier countries can afford but if the developing countries like India take one step to move toward mandatory implementation of the Corporate governance by the corporate sectors, whether public corporate or the private, then it will lead to the excellent growth of the nation as well as the economy.

References:

1. The journal of finance, shleifer & vishny

2. The chartered Account; "Corporate governance, November 1996

3   Corporate governance, Gopalsami, 1998
 

Dr. Mita B. Vora
Assistant Professor
R.K. College of MBA
Bhavnagar Road, Kasturbadham, Rajkot-360 020
 

Source: E-mail August 4, 2006

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