What is Corporate Governance? Corporate Governance is a generic concept, and in most cases it is defined by its objectives. Corporate Governance can be defined and analyzed by two terms. The first was introduced by the Organization of economic Corporation and Development (OECD 1999). OECD defined “Corporate Governance as a system in which business corporations are directed and controlled.
The Corporate Governance structure specifies the distribution of rights and responsibilities among the different participation of the corporation such as the Board of Directors, Managers, Shareholders, and other Stakeholders and spells out the rules and procedures for making decisions on corporate affairs. By doing this it also, provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring the performance.
According to the OECD definition Corporate Governance mainly focuses on corporate control, identification of authorities and responsibilities; identifying corporate goals and the proper procedures of attaining such goals and the share of power by all stakeholders and other means necessary”. The second definition was introduced by the World Bank (WB 2000). World Bank defines Corporate Governance as “being concerned with holding the balance between the economic and social goals and between individual and communal goals.
It further states that corporate governance is there to encourage the efficient use of the resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interest of individuals, corporations and society. ” The World Bank primarily focuses on attaining the goals of the corporation. That is expected from them since it has a global development objective and the alignment of the diverse interests of the corporation, community, shareholders and management.
In 1999, the OECD published it Principles of Corporate Governance, and were the first international code of good Corporate Governance approved by government. Given both definitions the principles of Corporate Governance demonstrates the same relationships. * shareholders should fully participate in the management of the Company through shareholder meetings; * shareholders should share in the Company’s profits; * shareholders should benefit from high liquidity levels for stock transactions; * corporate conduct shall provide timely disclosure of ull and true information about the Company, including its financial status, economic indicators, and the ownership and management structure, in order to provide shareholders and investors with the ability to make well-founded decisions in a timely manner; * the Board of Directors, who is accountable to shareholders, is responsible for the strategic management of the Company and exercises effective control over the activities of the executive bodies of the Company; * the Board of Directors shall decide the strategic decisions of the Company and exercise effective control over the financial and economic activities of the Company; * the Board of Directors shall meet regularly in accordance with an agreed timetable; * committees of the Board of Directors shall review all significant issues; * all executive bodies shall act in accordance with the financial and economic goals of the Company; * remuneration of the General Director and corporate executives shall be made according to their qualifications and taking into account their actual contribution to the Company’s results; * tight control shall be exercised over the confidentiality of information; * in order to ensure effective operations, the management bodies shall always consider the interests of third parties, including the Company’s creditors, government, and municipal institutions on whose territory the Company or its subsidiaries are located; * the management bodies of the Company shall promote the interests of its employees to ensure effective operation of the Company; * cooperation between the Company and third parties shall be sought and encouraged in order to increase the value of the Company’s assets, the price of its stock as well as to create new jobs The internal corporate governance mechanism for control of a company is divided between two bodies: the board of directors and the shareholders. Corporation's growth to a great extent depends on the sense of direction and purpose of the board.
The basic structure is this: shareholders vote for and then appoint a board of directors who then have the power to look out for shareholders’ interests. The board hires a CEO, who is accountable to the board. The CEO, (sometimes with input from the board) hires a management team. At each step there is a flow of power down the chain (from shareholder through to frontline-employees), and a flow of accountability back up the chain. There are all sorts of rules – including various policies and principles of good governance that established how that power and accountability is put in place. There will also be internal rules (partly determined by pertinent corporate law); about how board elections are carried out.
Flow chart shows the flow of power down the chain (from shareholders through to frontline employees) Corporate governance mechanism s and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse selection. The shareholders hold the board of directors responsible for the efficient use of the entrusted resources. The Board of Directors delegates authority to operating managers. That includes (strategies, daily decision making and controls). To protect self interest in the company, management tries to dominate Board of Directors through the composition of the board of directors who sometimes plays dual role as chairman of the board.
The board of directors has as many seats as possible. It comprises of both internal and external directors. The internal directors know more of the company’s operation; whereas the external directors increase the board ability to control management and serve shareholders’ interest. Having the CEO undertake (dual role) gives the CEO more power in running the operations and oversees the future of the company as chairman of the board and the CEO. Having an individual serve both as CEO and chairman of the board creates conflict of interest, and throws doubt that the CEO can objectively evaluate management‘s performance since he/she is part of the managing term.
It is often thought that corporate managers as being focused on just one thing “shareholder wealth maximization”. However, in truth managers are people, and many of them no more concentrate single-mindedly on wealth maximization than all do on grade maximization. And, if a manager does not inherently focus on wealth maximization, then he or she will not necessarily make decisions based on the corporate valuation model. So, the field of corporate governance has been developed to help us understand how managers are likely to behave, and actions that stockholders can take to insure that managers-who are really employees of the stockholders-behave in a manner that is consistent with wealth maximization. Why is Corporate Governance 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 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 often becomes the centre of discussion only after the exposure of a large scam”. (Economic Times 2009) To an investor, governance might look first and foremost like a matter of economics.
Harrington (1997) states, “Corporate Governance is a field of economics which investigates how to secure and motivate efficient management of corporations by the use of incentives mechanism such as contracts, organizational design, and legislation”. It further states that “Organizations who practices corporate governance desire to profit in a manner as well as maintain stability”. No individual particularly wants to invest in a poorly –governed company. Governance is also a legal matter because shareholders needs protection from unscrupulous or don’t care attitude boards of directors and executives, and because the public interest is at stake when large companies are miss-governed. Corporate Governance is out-and out- a matter of ethics.
It is about who is responsible to whom, and for what and under what conditions. “Ethics refers to the branch of philosophy dealing with issues such as morality, justice, virtue and responsibility. With regard to corporate ethics, the two most commonly applied divisions of moral philosophy are normative ethics and descriptive ethics. Normative ethics comments on what is right or wrong and how people and organizations should act. Descriptive ethics, comments on how people actually behave and how that affects organizations”. (Leburn- e-how 2010). Corporate Governance supports the principles of equality and ethical behavior within the organization.
The organization is believed to operate better under concept of equal opportunity and positive communication. Visionary goals are instilled in the organization which allow the organization to t generate team consistency and commitment. Ethical-based leadership models are pleasantly displayed within the working environment through the obedience and respect for the well being of the entire organization. Corporate Governance strives to be a role model for at risk organizations. Ethical based- leadership models reinforce the concept of corporate governance through the mental process transformation. Organizations which govern under fraudulent behavior are challenged to endure a process of re-engineering.
The structure of at-risk organizations must be designed to produce positive outcomes versus negative consequences. Misleading practices with at-risks organizations only results in failure. In 2001-2002 it clearly demonstrates how unethical and misleading practices can cause failure for an organization. Enron and WorldCom are prime examples of high profile collapses of large corporation mostly involving accounting fraud and accountability opened the way for renewed interest in corporate governance practices of modern corporations. Corporate scandals of various forms have maintained public political interest in the regulation of Corporate Governance. Their demise has led the US federal government passing the Sarbanes –Oxley Act in 2002.
The Sarbanes-Oxley Act (SOX) was enacted in 2002. In an effort to enhance Corporate Governance in general it was prepared and developed by congressional Committee chaired by both Mr. Sarbanes and Mr. Oxley in response to the corporate scandals of 2000/2001. Sox provided improvements in the following dimensions: The responsibilities of corporate directors and officers and it raised the penalties of officers in cases of fraud and illegal acts under both the civil and criminal laws. The violation of ethical practices that led to the demise of Enron, WorldCom, and Tyco within Corporate Governance also called for tighter regulations of accounting firms.
The Public Company Accounting Oversight Board (PCAOB) was established. This is an independent, non-governmental board that oversees the audits of public companies to protect the interests of investors and to promote public confidence in independent audit reports. The SEC oversees and finances the board. The primary duties are to register and discipline accounting firms that audit public firms, established audit and accounting standard and to investigate financial irregularities. With these regulations in place the underlying role Corporate Governance plays organizations will be able to operate better. Organizations will continue to maintain stability, produce productivity and positive power.
Managers, employees, shareholders, stakeholders and all participants and all other participants have a knowledgeable vision of what is clearly required of them to meet performance standard. Harrington, J. (1987). The improvement Process: The new era of reengineering. New York, NY: McGraw-Hill www. oecd. org/daf/corporaateaffairs/corporategovernanceprinciples en. wikipedia. org/wiki/Corporate governance http://businessethicsblog. com/2010/10/20/corporate-governance-and-ethics http://articles. economicstimes. indiatimes. com/2009-01-18/news/corporate-governance http://www. forbes. com/sites/rajeevpeshawaria. com/2012/12/01/the- other- duty-of corporate governance http://www. ehow. com/corporate-ethics-corporate-governance. html