1. Corporate Governance
Definition of 'Corporate Governance'
The system of rules, practices and processes by which a company is directed and
controlled. Corporate governance essentially involves balancing the interests of the many
stakeholders in a company - these include its shareholders, management, customers,
suppliers, financiers, government and the community. Since corporate governance also
provides the framework for attaining a company's objectives, it encompasses practically
every sphere of management, from action plans and internal controls to performance
measurement and corporate disclosure.
Most companies strive to have a high level of corporate governance. These days, it is not
enough for a company to merely be profitable; it also needs to demonstrate good
corporate citizenship through environmental awareness, ethical behavior and sound
corporate governance practices.
What is corporate governance?
Corporate governance refers to the set of systems, principles and processes by which a
company is governed. They provide the guidelines as to how the company can be
directed or controlled such that it can fulfil its goals and objectives in a manner that adds
to the value of the company and is also beneficial for all stakeholders in the long term.
Stakeholders in this case would include everyone ranging from the board of directors,
management, shareholders to customers, employees and society. The management of the
company hence assumes the role of a trustee for all the others.
What are the principles underlying corporate governance?
orporate governance is based on principles such as conducting the business with all
integrity and fairness, being transparent with regard to all transactions, making all the
necessary disclosures and decisions, complying with all the laws of the land,
accountability and responsibility towards the stakeholders and commitment to conducting
business in an ethical manner. Another point which is highlighted in the SEBI report on
corporate governance is the need for those in control to be able to distinguish between
what are personal and corporate funds while managing a company.
Why is it important?
Fundamentally, there is a level of confidence that is associated with a company that is
known to have good corporate governance. The presence of an active group of
independent directors on the board contributes a great deal towards ensuring confidence
2. in the market. Corporate governance is known to be one of the criteria that foreign
institutional investors are increasingly depending on when deciding on which companies
to invest in. It is also known to have a positive influence on the share price of the
company. Having a clean image on the corporate governance front could also make it
easier for companies to source capital at more reasonable costs. Unfortunately, corporate
governance often becomes the centre of discussion only after the exposure of a large
scam.
Principles of Corporate Governance
• Shareholder recognition is key to maintaining a company’s stock price. More
often than not, however, small shareholders with little impact on the stock price
are brushed aside to make way for the interests of majority shareholders and the
executive board. Good corporate governance seeks to make sure that all
shareholders get a voice at general meetings and are allowed to participate.
• Stakeholder interests should also be recognized by corporate governance. In
particular, taking the time to address non-shareholder stakeholders can help your
company establish a positive relationship with the community and the press.
• Board responsibilities must be clearly outlined to majority shareholders. All
board members must be on the same page and share a similar vision for the future
of the company.
• Ethical behavior violations in favor of higher profits can cause massive civil and
legal problems down the road. Underpaying and abusing outsourced employees or
skirting around lax environmental regulations can come back and bite the
company hard if ignored. A code of conduct regarding ethical decisions should be
established for all members of the board.
• Business transparency is the key to promoting shareholder trust. Financial
records, earnings reports and forward guidance should all be clearly stated
without exaggeration or “creative” accounting. Falsified financial records can
cause your company to become a Ponzi scheme, and will be dealt with
accordingly.
Importance of Corporate Governance
The need, significance or importance of corporate governance is listed below.
3. 1. Changing Ownership Structure : In recent years, the ownership structure of
companies has changed a lot. Public financial institutions, mutual funds, etc. are
the single largest shareholder in most of the large companies. So, they have
effective control on the management of the companies. They force the
management to use corporate governance. That is, they put pressure on the
management to become more efficient, transparent, accountable, etc. The also ask
the management to make consumer-friendly policies, to protect all social groups
and to protect the environment. So, the changing ownership structure has resulted
in corporate governance.
2. Importance of Social Responsibility : Today, social responsibility is given a lot
of importance. The Board of Directors have to protect the rights of the customers,
employees, shareholders, suppliers, local communities, etc. This is possible only
if they use corporate governance.
3. Growing Number of Scams : In recent years, many scams, frauds and corrupt
practices have taken place. Misuse and misappropriation of public money are
happening everyday in India and worldwide. It is happening in the stock market,
banks, financial institutions, companies and government offices. In order to avoid
these scams and financial irregularities, many companies have started corporate
governance.
4. Indifference on the part of Shareholders : In general, shareholders are inactive
in the management of their companies. They only attend the Annual general
meeting. Postal ballot is still absent in India. Proxies are not allowed to speak in
the meetings. Shareholders associations are not strong. Therefore, directors
4. misuse their power for their own benefits. So, there is a need for corporate
governance to protect all the stakeholders of the company.
5. Globalisation : Today most big companies are selling their goods in the global
market. So, they have to attract foreign investor and foreign customers. They also
have to follow foreign rules and regulations. All this requires corporate
governance. Without Corporate governance, it is impossible to enter, survive and
succeed the global market.
6. Takeovers and Mergers : Today, there are many takeovers and mergers in the
business world. Corporate governance is required to protect the interest of all the
parties during takeovers and mergers.
7. SEBI : SEBI has made corporate governance compulsory for certain companies.
This is done to protect the interest of the investors and other stakeholders.
Corporate Governance in India: Aims and Objectives
Corporate governance, in plain terms, refers to the rules, processes, or laws by which
businesses are operated, regulated, and controlled. The term can refer to internal factors
defined by the officers, stockholders or constitution of a corporation, as well as to
external forces such as consumer groups, clients, and government regulations.
However, an enforced corporate governance provides a structure that, at least in theory,
works for the benefit of everyone concerned by ensuring that the enterprise adheres to
accepted ethical standards and best practices as well as to formal laws. To that end,
organizations have been formed at the regional, national, and global levels.
In recent times, corporate governance has received increased attention because of high-
profile scandals involving abuse of corporate power and, in some cases, alleged criminal
activity by corporate officers. An integral part of an effective corporate governance
regime includes provisions for civil or criminal prosecution of individuals who conduct
unethical or illegal acts in the name of the enterprise.
Aims and Objectives
It is said that good corporate governance helps an organization achieve several objectives
and some of the more important ones include:
• Developing appropriate strategies that result in the achievement of stakeholder
objectives
• Attracting, motivating and retaining talent
• Creating a secure and prosperous operating environment and improving operational
performance
• Managing and mitigating risk and protecting and enhancing the company’s reputation.
Some aspects covered in the poll include:
• Corporate governance regulations in India
• Corporate governance concerns in India and role of independent directors and audit
committees in
addressing these concerns
• Board practices, board oversight of risk management and the importance given to
integrity and ethical
values
• Practices that are fundamental to improved corporate governance.
In comparison with developed countries that impose stringent penal and criminal
5. consequences for poor corporate governance, penalty levels in India are considered to be
inadequate to enforce good governance. 71 percent of the respondents considered penalty
levels to discipline poor and unethical governance to be low. 22 percent of the
respondents were either undecided or did not know if the penalty levels are low.
Definition of 'Whistleblower'
Anyone who has and reports insider knowledge of illegal activities occurring in an
organization. Whistleblowers can be employees, suppliers, contractors, clients or any
individual who somehow becomes aware of illegal activities taking place in a business
either through witnessing the behavior or being told about it. Whistleblowers are
protected from retaliation under various programs created by the Occupational Safety and
Health Administration (OSHA) and the Securities and Exchange Commission (SEC).
A whistleblower (whistle-blower or whistle blower)[2]
is a person who tells the public
or someone in authority about alleged dishonest or illegal activities (misconduct)
occurring in a government department or private company or organization. The alleged
misconduct may be classified in many ways; for example, a violation of a law, rule,
regulation and/or a direct threat to public interest, such as fraud, health/safety violations,
and corruption. Whistleblowers may make their allegations internally (for example, to
other people within the accused organization) or externally (to regulators, law
enforcement agencies, to the media or to groups concerned with the issues).
One of the first laws that protected whistleblowers was the 1863 United States False
Claims Act (revised in 1986), which tried to combat fraud by suppliers of the United
States government during the Civil War. The act encourages whistleblowers by
promising them a percentage of the money recovered or damages won by the government
and protects them from wrongful dismissal.[3]
Whistleblowers frequently face reprisal, sometimes at the hands of the organization or
group which they have accused, sometimes from related organizations, and sometimes
under law.
Questions about the legitimacy of whistle blowing, the moral responsibility of whistle
blowing, and the appraisal of the institutions of whistle blowing are part of the field of
political ethics.
6. consequences for poor corporate governance, penalty levels in India are considered to be
inadequate to enforce good governance. 71 percent of the respondents considered penalty
levels to discipline poor and unethical governance to be low. 22 percent of the
respondents were either undecided or did not know if the penalty levels are low.
Definition of 'Whistleblower'
Anyone who has and reports insider knowledge of illegal activities occurring in an
organization. Whistleblowers can be employees, suppliers, contractors, clients or any
individual who somehow becomes aware of illegal activities taking place in a business
either through witnessing the behavior or being told about it. Whistleblowers are
protected from retaliation under various programs created by the Occupational Safety and
Health Administration (OSHA) and the Securities and Exchange Commission (SEC).
A whistleblower (whistle-blower or whistle blower)[2]
is a person who tells the public
or someone in authority about alleged dishonest or illegal activities (misconduct)
occurring in a government department or private company or organization. The alleged
misconduct may be classified in many ways; for example, a violation of a law, rule,
regulation and/or a direct threat to public interest, such as fraud, health/safety violations,
and corruption. Whistleblowers may make their allegations internally (for example, to
other people within the accused organization) or externally (to regulators, law
enforcement agencies, to the media or to groups concerned with the issues).
One of the first laws that protected whistleblowers was the 1863 United States False
Claims Act (revised in 1986), which tried to combat fraud by suppliers of the United
States government during the Civil War. The act encourages whistleblowers by
promising them a percentage of the money recovered or damages won by the government
and protects them from wrongful dismissal.[3]
Whistleblowers frequently face reprisal, sometimes at the hands of the organization or
group which they have accused, sometimes from related organizations, and sometimes
under law.
Questions about the legitimacy of whistle blowing, the moral responsibility of whistle
blowing, and the appraisal of the institutions of whistle blowing are part of the field of
political ethics.
