CORPORATE GOVERNANCE Introduction Corporate governance (CG) is one of the most talked about topics in business, indeed in society,today.

Good Corporate Governance practices are important to encourage investment in a country.Companies in global economy, where access to capital markets is in the interest of economy,assume greater significance. While the report of Kumar Mangalam Birla committee on CorporateGovernance opined that a strong Corporate Governance was a prerequisite for the growth of capital market and was an important instrumen t of investor protection, studies of variouscompan ies the world over revealed that markets and investors did take notice of well governedcompanies, responded positively to them and rewarded such companies with higher valuations asreflected in stock prices. Good Corporate Governance leads to the efficiency of a businessenterprise, to the creation of wealth of stakeholders and to the countrys economy. The need isfor the entire corporate world to follow the principles of Corporate Governance.There is to need to monitor the functioning of Corporate for guarding the interest of investorsand creditors. With increasing awareness and access to information, investors do not solelydepend upon regulators to protect them. They are conscious of their rights and strive to maximizetheir wealth, so does a company. The key differences, with everything else being common, will be the ability to create self driven, selfaccessed, self-regulated organization with a

conscience.This is ultimately all about Corporate Governance in India and elsewhere.Also the Satyam scandal has allowed us to look at the fundamental aspects of CorporateGovernanceon whose behalf the company is governed, and how we can distribute power toensure the longevity and effectiveness of the institution. Good corporate governance is key to theintegrity of corporations, financial institutions and markets, and central to the health of our economies and their stability. Corporate governance has become talk of the day in the corporateworld, especially when there is financial crisis originated in the U.S.A. and some other countriesdue to poor governance of financial institutions. Therefore, now days corporate governancewhich is a mechanism to lessen the clash of interests among the stakeholders of a corporation,has achieved further focus from regulatory groups.Corporate governance is concerned with the resolution of collective action problems among dispersed investors and the reconciliation of conflicts of interest between various corporate claimholders. Genesis of Governance One may govern life in accordance with the revealed truth as one sees it or natural law or as i m p l e p e r c e p t o f n o t t r e a t i n g o t h e r s a s j u s t e n d s , o r i n t h e p u r s u i t o f t h e g o o d l i f e o f cont emplation prized by Aristotle. One may believe that morality lies in doing the best one cando for oneself and ones children and giving something back to the society, when one can buymoney or time. One may also

think that morality is simply being responsible for ones actions,not harming others, and when one can compensate people for their pain and when one cannot.One may think that morality is simply doing whatever produces the greatest good for the greatestnumber; others may believe that morality is nothing more than maximizing ones wealth. Onemay believe any of these things has a moral compass to direct ones daily life. One should cometo the realization that sometimes the ends do not justify the means and sometimes the endsthemselves are not pursuing. But a company/corporation has one end in mind. Corporations havenothing called systems or beliefs. The result is that corporations are able to act without moralityor accountability, for they are formed for that one purpose: To maximize pecuniary shareholdersv a l u e . T h e r e f o r e , t o m a i n t a i n t h e s a nctity of a corporate self, the corporations sel f , t h e corporations are required to follow a moral and ethical suit that has become more pronounced inthe present scenario, and has indeed exceeded the axiom of wealth maximization. History: US growth was made because of the emergence of multinational corporations saw the building of the managerial class. FollowingHarvar d Busine ss S chool management professors releasedinfluential monographs studying their prominence: Jay Lorsch (organizational behavior)Myles Mace(entrepreneurship),and Elizabeth MacIver (organizational behavior). According to

Lorsch"many large corporations have dominant co ntrol over business affairs without sufficientaccou ntability or monitoring by their board of directors."In late 1970s, corporate governance has been the mater of criticism in the U.S. and around theglobe. Steps to reform corporate governance have been driven, in part, by the needs and desiresof shareowners to exercise their rights of corporate ownership and to increase the value of their shares and, therefore, wealth. Over the past t hree decades, corporate directors duties haveexpa nded greatly beyond their traditional legal responsibility of duty of loyalty to the corporationand its shareowners. In the first half of the 1990s, the issue of corporate governance in the U.S. received considerable press attention due to the wave of CEO dismissals (e.g.:IBM,Kodak,Honeywell) by their boards. TheCalifornia Publi c Employees' Retirement Syst em (CalPERS) l e d a w a v e o f institutional shareholder activism (something only very rarely seen before), as a way of ensuringthat corporate value would not be destroyed by the now traditionally cozy relationships betweenthe CEO and the board of directors (e.g., by the unrestrained issuance of stock options, notinfrequently back dated).In 1997, theEast Asian Financial Crisissaw the economies of Thailand,Indonesia,South Korea,MalaysiaandThe Philippinesseverely affected by the exit of foreign capital after property assetscollapsed. The lack of corporate governance mechanisms in these countries highlighted theweaknesses of the institutions in their economies.

What is corporate governance? The concept of corporate governance cannot b e c o m p l e t e d w i t h o u t a c k n o w l e d g i n g t h e contrib ution of the most celebrated scholar of ancient India, Kautilya. One of the worlds mostcompete manuscript on the science of governance was penned by Kautilya in the third centuryBC. Kautilyas discussions on administrati ons and management are strikingly modern andsci entific covering almost all aspects of governance. According to him, an ideal king is one for whom Praja sukhe, sukhamragyam, Prajanan c a hite hitam, Naatman priyam hitam ragyanPrajana n tu piyam hitam, i.e., in the happiness and well-being of the subjects lies the well-beingof the king, in the welfare of the subjects is the welfare of the king, what is desirable and beneficial to the subjects and not his personal desires and ambitions is desirable and beneficialfor the king. He further elaborates that a king has fourfold duty as Raksha or protection, vridhi or enhancement, palana or maintenance, yogakshema or safeguard. It is the duty of the king to protect the wealth of the state and its subjects. If we for a moment assume todays business CEOor corporate board as king and the shareholders as the subject, it brings out the essence of corporate governance as public good should be ahead of private good and companys resourcesshould not be used for personal gains .The four duties in corporate terminology would imply protection of shareholders wealth, enhance ment of wealth by proper utilization of assets,mai

ntaining the wealth (without appropriating it otherwise)and safeguarding the interests of allstakeholders.Basically, corporate governance concerns all the steps taken by the owners of a company toensure that it produces for them the best possible benefit. The corporate governance structurespecifies the distribution of rights and re sponsibilities among different participants in thec orporation, such as, the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides thestructure through which the company objectives are set, and means of attaining those objectivesand monitoring performance. Put simply, therefore, corporate governance concerns all thei nstitutional structures that help to maximize efficiency, i.e., legislation, company organizations,agreements, etc. Historically it is known as the ways in which a firm preserves theinterestsof itsfinanciers(investors,lenders, andcreditors). The modern definition calls it structure of rulesandexercise by which a board of directors ensures purity andtransparencyin thefirm'scombinationwith its allstakeholders. There are two contracts in the structure, such as- explicit andimplicit.A n i m p o r t a n t t h i n g o f c o r p o r a t e g o v e r n a n c e i s t o b r i n g o u t t h e accountabilityof certaini ndividuals through that tool that tries to lessen the principal-agent problem. Another relatedconsideration highlights on the impact of

a corporate governance system ineconomic solvency and efficiency, with a strong impact on shareholders' wellbeing. Corporate governance also dealwith thestakeholder viewand the corporate governance models. Corporate Governance is:System of laws, regulations and a practice, which promotes enterprise, accelerates performance and ensures accountability Principles of Corporate Governance: Commonly accepted principles of corporate governance include: Rights and equitable treatment of shareholders :Organizations should respect the rights of shareholders and help shareholders toexercise those rights. They can help shareholders exercise their rights by effectivelycommunicating information that is understandable and accessible and encouragingshareholders to participate in general meetings. Interests of other stakeholders :Organizations should recognize that they have legal and other obligations to alllegitimate stakeholders. Role and responsibilities of the board : The board needs a range of skills and understanding to be able to deal with various b u s i n e s s i s s u e s a n d h a v e t h e a b i l i t y t o r e v i e w a n d c h a l l e n g e m a n a g e m e n t perfor

mance. It needs to be of sufficient size and have an appr opriate level of commitment to fulfill its responsi bilities and duties. There are issues about theappr opriate mix of executive and non-executive directors. Integrity and ethical behavior :Ethical and responsible decision making is not only important for public relations, butit is also a necessary element in risk management and avoiding lawsuits. Because of this, many organizations establishCompliance and Ethics Programsto minimize therisk that the firm steps outside of ethical and legal boundarie Disclosure and transparency :Organizations should clarify and make publicly known the roles and responsibilitiesof board and management to provide shareholders with a level of accountability.Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.Issues involving corporate governance principles include: Internal controls and internal auditors The independence of the entity's external auditors and the quality of their audits Oversight and management of risk

 Oversight of the preparation of the entity's financial statements Review of the compensation arrangements for the chief executive officer and other senior executives The resources made available to directors in carrying out their duties The way in which individuals are nominated for positions on the board Dividendpolicy. Nevertheless "corporate governanc e," despite some feeble attempts from various qua rters,remains an ambiguous and often misunderstood phrase. For quite some time it was confined onlyto corporate management. That is not so. It is something much broader, for it must include a fair,efficient and transparent administration and st rive to meet certain well defined, written objectives. Corporate governance must go well beyond law. The quantity, quality and frequencyof financial and managerial disclosure, the degree and extent to which the board of Director (BOD) exercise their trustee responsibilities (largely an ethical commitment), and thecommitment to run a transparent organization- these should be constantly evolving due

tointerplay of many factors and the roles played by the more progressive/responsible elementswithin the corporate sector. John G. Smale, a former member of the General Motors board of directors, wrote: "The Board is responsible for the successful perpetuation of the corporation.That responsibility cannot be relegated to management. Aims of Corporate Governance Fulfilling long-term strategic goals of owners

Taking care of the interests oh employees A consideration of the environment and local community Maintaining excellent relations with customers and suppliers Proper compliance with all the applicable legal and regulatory requirements. Following extracts fro Kumar Mangalam Birlas report on corporate governance brings out thecardinal principle of corporate governance-Strong corporate governance is indispensable toresilient and vibrant capital markets and is an important instrument of investor protection .It isthe blood that flow within the veins of transpare nt corporate disclosure and high qualityaccounting

practices. It is the muscle that moves a viable and accessible financial reportingstructure Components of Corporate Governance The main constituents of Corporate Governance are the shareholders, the board of directors andthe management. The Board of Directors is responsible for the governance of the company. The board members set the strategic objectives, frame financial as well as other policies and overseethe implementation thereof, control the financial aspects and present the directors report on theactivities and the progress of the company to the shareholders to whom they are accountable. The boards actions are subject to applicable laws, rules and regulations. The shareholders role inenabling good governance is to identify and elect the directors as well as auditors of the companyand satisfy themselves as well as the auditors of the company and satisfy themselves that anappropriate governance structure is in place. The responsibilities of the senior managementinclude ensuring that control systems are in place to achieve the objectives laid down by theBoard and help the board to discharge its responsibilities to the shareholders effectively Indian Model It is a mix of the Anglo American and German models. Corporations in India can be groupedin to three categories : private company, Public co mpany, banks and other corporations. Thefounder, his fa mily, and associates closely hold the private com

panies and they exercisemaximum control over the activities of the company. The business of private companies like thatof the Tata group, the Reliance group, or the Birla group are financed by retained earnings or/anddebt. The role of external equity finance is minimal. In case of public companies, the Central andState Govt. choose the members of the board. Even after the disinvestment of some public sector companies, the Govt. continues to have a considerable hold over the activities of the company.Here the interests of the stakeholders are given low priority. Large public sector enterprises are

run to serve the interests of the Govt. rather than aiming for efficiency and maximizing long -term owner value Governance assumes an open system.Manage ment assumes a closed system.S t r a t e g y o r i e n t e d T a s k o r i e n t e d Concerned with where the company isgoing.Concerned with getting the companythere. Is Corporate Governance a Business Ethic? Yes, Corporate governance is about ethical conduct in business. Business ethics are concernedwith the core values

and principles that enable a person to choose between right and wrong and,therefore, select from alternative courses of action. However, ethical dilemmas may arise fromconflicting interests of the parties involved. Managers have to, thus, make decisions based on aset principles influenced by the values, context and culture of the organization. Ethical leadershipis desirable for business as the organization is seen to conduct its business in line with theexpectations of all concerned stakeholders.Independent directors of the company, i.e., board, are pivotal to the implementation of corporate governance code and achievement of its desired results. Independent directors are expected to take active interest in taking part in the companys boardfunctions including policy formulation and strategic business decisions.The board should function through committees, comprising of most of the directors, who areindependent.These committees could be: Audit committee Remuneration committee Nomination committee Shareholders committee Other committees specific to companys needs. Audit committees exercise responsibility in three important areas:1 . F i n a n c i a l r e p o r t i n g 2 . C o r p o r a t e G o v e r n a n c e 3 . C o r p o r a t e c o n t r o l In financial reporting ,the

responsibility of audit committee should be to provide assurance to the board about financial disclosures made by the management to reasonably portray the companysfinancial health, results of operations, true and fair view of state of affairs and profitability, andthe companys future plans and long-term commitments. The role of audit committees incor porate relevant laws and regulations, is conducting its affairs ethically, and is maintainingeffective control against any conflict of interest and malafide practices .In corporate control, theaudit committees responsibility should include an understanding of the companys key financialreporting, areas and the system of internal control and fiscal management. Conclusion While Corporate governance is a necessary tool for managerial performance, it also leads tocorporate growth and excellence. Corporate is a path on which one can drive to reach theheights of excellence and from there, proceed towards another milestone only through goodcorporate governance practices. Corporate governance is the path on which success can beexperienced and excellence reached. It is the vehicle that drives an institution to the stage of corporate excellence --a state of the highest satisfaction in terms of value creation not only for the owners or contributors of capital and labor but also for all the other stakeholders of anenterprise.Ideals of corporate governance primari ly need transparency, full disclosure, fairness to allstakeholders and effective monitoring of the state

of corporate affairs. The basic philosophy of corporate governance is to achieve business excellence and enhance stake holders value whilekeeping in view the need to balance the interests of all stakeholders Reasons for strengthening of Corporate Governance norms in recent yrs Environment Loss of moral fiber of corporationsBusiness environment characterized by need to compete with the new economy B o a r d s 14 | P a g e Fundamental weaknesses in business mod e l s s o u g h t t o b e c o m p e n s a t e d b y adoption of aggressive accounting practicesIgnored ethics and value systems when a much hyped business strategy failed todeliver as expected and articulated to Wall StreetIncompetence of board members and overriding of audit committees Managements Stock option heavy compensation structuresBonus linked to short-term revenue growth, EPS and stock price A n i n a b i l i t y t o a c c e p t f a i l u r e E x c e s s i v e focus on beating the street A u d i t o r s

Aggressive interpretation of accounting standardsIndependence compromised to obtain lucrative consulting assignments Employees Compensation linked to stockprice movementLarge disparity between the highest and lowest paid employeeCulture of greed promoted within the organization by management M a n i p u l a t i v e a c c o u n t i n g practices A n a l y s t s Ever-greening of reports with an eye on investment banking assignmentsPressurized managements to beat quarterly estimates Investors Short term focus of investors Results of Good Corporate Governance Enhancing the value for stakeholders. A well-understood corporate vision/mission statement. A broad-based board, comprising of directors with professional and expert acumen withindepend ent dispositions. Establishment of relevant committees of the board, with their roles clearly defined, to overseefunctions of the company in critical areas. Setting standards for good corporate practices to-1.Ensure a transparent and fair relationship between the stakeholders and the

company,2.Institute a comprehensive management evaluation system; 3. Proactively eliminate investor complaints and evolve for redressed of the grievances (of the customers, investors and borrowers),and,4 . I n s t i t u t e s y s t e m s a n d p r o c e s ses to ensure compliance with the statuses an d l a w s concerning the company. A clearly enunciated code of conduct for dealing with the stakeholders. Effective systems of internal control, monitoring and reporting mechanisms. Communication to the shareholder to ensure a high degree of transparency. The board to establish appropriate policies and monitor the performance at all levels organizationincluding selfevaluation