Corporate Governance

Why Corporate Governance?

• Past and recent business scams, resultant down slides/closures of the companies, falsification of company’s financial records and their public disclosures, auditors’ collusion with the company’s bigwig(s) in doing so and ultimately, hoodwinking the stakeholders and general public has necessitated questioning the veracity of the corporate governance into the limelight.
• These issues are construed as misconduct and unlawful acts of those who are involved in them.
• Due to such unlawful practices by the individuals and companies in their high offices, public and investors’ confidence in them gets shaken up badly.
• Therefore, the need to define corporate governance and tightening up the legal side of it has become imperative.
• Corporate governance, therefore, specifies certain foolproof mechanisms (consisting of external and internal laws, bylaws and systems encompassing policies, processes and people) to ensure that the interests of the company’s shares holders and other stake holders are safeguarded all the times. These mechanisms control and guide the activities of the people at the helm of the corporations. They determine to what end a company should be run.
• Corporate governance, then, in essence, by way of systematic processes must direct and control the company to enhance its wealth generating capabilities and ensuring the utilization of vast quantum of resources in a manner that meets the expectations of shareholders, other stake holders and the society at large.

What Is Corporate Governance?

• It is well known that the corporate governance lies in the hands of the board of directors of a company (even if its day-to-day running is delegated to the CEO who may or may not be head of the board and the other members of its management). It is the directors who have the responsibility and accountability to govern the corporation in the best interests of the company’s shareholders and all the other stake holders (and some people include even the general public, since the public also gets affected by the presence and working of a company).
• In terms of corporate governance, the directors of the board of a company have to act as trustees to the shareholders and stake holders.
• Traditionally, as per the law, the directors on the board of a company were thought to be primarily responsible to the company and their responsibility to company’s share holders was thought to be secondary.
• However, with the modifications in the provisions of the law, the law regarding the corporate governance has become more stringent on the board of directors. Now, the directors’ responsibility to their shareholders is primary.
• Directors on the boards of the companies must not have any financial, family, employee or business relationships with the companies on whose boards they serve. There should not exist any conflict of interest.
• There are many restrictions on the auditors also like necessity to rotate the auditors at a fixed periodicity for a particular client company and the employees of the audit firm should not have any financial dealings in the companies where they audit.
• Therefore, while on one hand, policies on corporate governance must empower the board of directors and the executive management of the company, it must create a foolproof mechanism of checks and balances to ensure that the various powers vested in the board and management are used with lots of responsibility to meet all the stakeholders’ and societal expectations.

Corporate Governance Philosophies

By and large, the companies can be guided by the following major philosophies of corporate governance:

• Transparency
• Truthful disclosures on financial and other related matters
• Trusteeship
• Supervision
• Controls
• Ethical practices
• Legal practices
• Empowerment with accountability
• Prevention of conflict of interest
• Commitments to shareholders and other stakeholders
• Societal commitments
• Environmental commitment
• Resource utilization commitments
• Wealth generation

Tasks of Corporate Governance

• Hiring of CEO and his direct reports
• Supervision over CEO and his management team
• Firing of CEO when necessary
• Board composition
• Periodic conduct of board meetings
• Taking all the strategic decisions
• Internal controls, checks and balances
• Mergers
• Takeovers
• Remuneration management
• Sustainability practices
• Disclosures and communication
• Prevent inside trading
• Prevent any kind of frauds
• Audit of the company by auditors as per laws
• Adherence to the laws
• Adherence to ethics and ethical practices
• Ultimately, ensuring all stakeholders’ and societal interests

For More Guidance, Assistance, Training and Consultation

Contact: prodcons@prodcons.com

Originally posted at http://corporate-governance-policy.blogspot.com/ Monday, July 20, 2009