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Unit 1

Corporate Governance – Concepts and Issues

Corporate governance refers to the set of regulations, customs, and procedures that govern
how an organization is run. Balancing the interests of a company’s numerous stakeholders is the
fundamental task of corporate governance. Therefore, action plans, internal controls,
performance evaluation and corporate disclosure are all in the broad corporate governance
category.

The laws, regulations, guidelines, and decisions implemented to guide business conduct are
collectively called governance. The Board of Directors have a fiduciary duty to the shareholders
and thereby are responsible for overseeing the operations and activities of the company.

According to Milton Friedman, corporate governance is "to conduct the business in accordance
with the shareholders' desires, which generally will be to make as much money as possible, while
conforming to the basic rules of the society embodied in law and local customs"

Adrian Cadbury – ““CG is a system by which companies are directed and controlled.”

Objectives of Corporate Governance

To create social responsibility

To create a transparent working System

To develop an efficient organization culture

To protect and promote the interest of shareholders.

To minimize wastages, corruption etc.

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 Features of Corporate Governance
1. A proper tool for transparency: Disclosing the status of the affairs of company at every step to
every stakeholders i.e. required to maintain transparency. The concept goes against the theory of
suppression of material facts by the company to its stakeholders.

2. Prudent and participative management: The management should use its full intelligence and
knowledge for the benefit of the stakeholders. Hence, it may be taken that management is prudent
and wise in its decision making.

3. Enhancing value of the enterprise: Any company should grow from year to year, if it wants to
satisfy it stakeholders. Better governing companies will have better reputation, trust of the
stakeholders and leading to more profit and better enterprise valuation.

4. Accountability: Success and accountability has to go together. Successful companies will make
themselves accountable to the stakeholders. There are many combination of relationships, i.e. with
the customer, creditors, shareholders, employees. etc.

5. Innovation: Doing something new or doing the same thing in a novel manner is the essence of
growth and sustainability of an enterprise. The governance structure should encourage new things
in the company for enhancing value of the company.

Difference between Ethics and Corporate Governance

Ethics Corporate Governance

Ethics are the moral values that guide how a Corporate governance is the framework that
company's employees and organization governs how a company is owned and
conduct business. managed.
Applies at all levels of the business. Applies at top level because corporate
policies and procedures are made at higher
level only.
There are no guidelines on how to deal with There are established guidelines on how to
issue of ethics. deal with issue of corporate governance.
No regulations are there. Regulations are important as it needs strict
compliance.

Emergence (Need) and Evolution of Corporate Governance

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1. Instances of corporate failures: Last two decades have witnessed various corporate failures of
some of the reputed and large companies which has loosed the trust of stakeholders on companies.
Such as - Harshad Mehta case, Satyam , Sahara case etc.

2. Increased number of retail investor who want various information;

3. Disclosing of company information in public domain;

4. Regulatory requirements: many regulations apply on ethical and governance issues.

5. Non compliance of regulations are increasing.

6. Disconnect with stakeholders is considered to be a bad practice.

7. Abnormal volatility in share prices gives rise to speculation and outsiders are interested to know
about the happenings of company.

Benefits of Corporate Governance

1. Better governed company is essential for growth and stabilization.

2. Reputation of the company will enhance, people to know that you are a honest or good governed
company.

3. Better use of funds of the company.

4. Better management of resources which are available to the company.

5. Better governance ensures long term and steady growth.

6. Establishing stakeholders’ confidence

7. Leverage of competitive advantages

8. Alliances with other companies are easy as others are interested to be associated with your
company.

Theories Corporate Governance through Board Management

Stewardship theory: Stewards are company executives and managers working for the shareholders
and they protects and make profits for the shareholders. The stewards are satisfied and motivated
when organizational success is attained.

Agency theory: Directors are considered to be agents of the shareholders and are supposed to run
the company for best interest of the shareholders. The shareholders expect the directors to act and

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make decisions in the best interest of company. The theory prescribes that people or employees are
held accountable in their tasks and responsibilities. Rewards and Punishments can be used.

Stakeholder theory - This theory considers wide inclusion of stakeholders, other than shareholders.
Hence, the directors need to keep a balance between the interests of various stakeholders. It
suggests that businesses should create value for all stakeholders, including customers, employees,
investors, suppliers, communities etc.

Trusteeship theory: The directors are the persons who are given the authority to run the business by
the shareholders which may be a huge amount of money. The relationship of trust is very important
for performance by directors who take major decisions of the company.