CORPORATE GOVERNANCE

CORPORATE GOVERNANCE

Definitions:

Corporate governance is to conduct business in accordance with shareholders desire while confirming to local laws and customs. - Milton Friedman

Corporate governance is all about promoting corporate fairness, transparency and accountability. – J.Wolfensohn.

Meaning

Corporate governance is the system by which the company is directed and controlled by the management in the best interest of the stakeholders (shareholders, investors, employees, customers, suppliers and others).

The board of directors of the company is responsible for the corporate governance by ensuring transparency in business operations and accountability on their part to protect the interests of the stakeholders.

Major players in area of Corporate governance:

1) Within the corporation:

a) The board of directors

b) The shareholders

c) The employees

2) Outside the corporation are:

a) Regulatory agencies such as SEBI, RBI

b) Lenders of finance such as banks.

c) Customers, suppliers and society.

Ø Corporate governance depends upon the 2 factors:

1) The first is the commitment of the board of director and management for the principle of integrity and transparency in business operation.

2) The second is the legal and administrative framework and the administrative framework created by the government. If public governance is weak, then we cannot have good Corporate Governance.

Ø Corporate governance objectives:

The main objectives of the Corporate governance is the “enhancement of shareholders value, keeping in view the interest of other stakeholders”. Therefore a company needs to strike a balance at all times between the needs to enhance shareholders wealth and the need to protect the interests of other stakeholders.

Ø The important aspects of Corporate governance are:

· There is no unique structure of Corporate governance in the developed world. The Corporate governance code of each country has to designed keeping in view the peculiarities of the country. Mr. Adrian Cadbury who had framed the Cadbury Committee Report on basis of this idea.

· Indian companies, Banks and Financial institution can no longer afford better corporate practices. With integration of India into the world market, companies will be required to give greater disclosure, more transparent explanation for major decisions and better corporate value.

FACTOR INFLUENCING CORPORATE GOVERNANCE

1) INTEGRITY OF MANAGEMENT: A board of director with a low level of integrity is tempted to misuse the trust reposed by shareholders and other stakeholders to take decision that benefit a few at the cost of other.

2) ABILITY OF THE BOARD: The collective ability, in term of knowledge and skill, determines the effectiveness of the board.

3) ADEQUACY OF THE PROCESS: Board of directors cannot effectively supervise the executive management if the process fails to provide sufficient and timely information to the board, necessary for reviewing plan and the performance of the enterprise.

4) COMMITMENT LEVEL OF INDIVIDUAL BOARD MEMBER: The quality of a board depends on the commitment of individual member to tasks, which they are expected to perform as board members.

5) FINANCIAL REPORTING: Accuracy and transparency in financial statement and disclosure, internal controls and independence of auditors.

6) PARTICIPATION OF STAKEHOLDER IN THE MANAGEMENT: The level of participation of stakeholders determines the number of new ideas being generated in optimum utilization of resources and for improving the administrative structure and the process.

7) QUALITY OF CORPORATE REPORTING: The quality of corporate reporting depends on the transparency and timeliness of corporate communication with shareholder.

IMPORTANCE OF THE CORPORATE GOVERANCE

1 TO PROTECT INTEREST:-

Corporate governance helps the company or business to protect the interest of the all stake holders such as shareholders, customers, employees and the governments, society and suppliers, competitors.

2 PROVIDED INFORMATION:-

it provided the information about the company financial position and also value of share in the market should be put on the company web site that help the company to make issues of their share i.e. collect the capital by public issues.

3. GOOD PUBLIC IMAGE:-

A business which responds favorably to social needs enjoys a good reputation and consequently good public’s supports. A company that cares and has a concern for its employees, shareholders, consumers, and society, will be respected by them and will enjoy a good public image.

4. OPTIMUM UTILISATION OF RESOURCES:-

It helps the company to make optimum utilization of the available resources. It means that at by putting minimum cost and gets the maximum output that will also give good quality product to consumer who is our stakeholder.

5. CODE OF CONDUCT:-

There are certain code of conduct is given that has to be followed by company. When they preparing the reports. It should be according to the company act 1956 and also the with accounting standard which lay down in the memorandum of the company.

6 FOREIGN INVESTORS:-

There is various foreign financial investors’ available or present market they like to invest in the company. But they have to follow the good corporate governance. Because they expect the about the quality of managements.

7 OPPORTUNITIES:-

It also helps to company to take advantages of the opportunities such as the joint venture, licensed facilities and acquiring companies abroad. Also expand the company or diversification take place.

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REASONS FOR RECENT AWARENESS IN CORPORATE GOVERNANCE

Following are some reasons for recent awareness of corporate governance:

· Directors of the company must realize that their job is to represent the shareholders and other stakeholders and not offer themselves as the rubber stamp of the managing director.

· There is rise of institutional investors and safeguard their interest.

· In the wake of globalization, there are numerous takeover moves in corporate world.

· Advent of investigating reporting in business journalism.

· Activism of regulatory bodies such as SEBI.

· Corporate governance has to do with power and accountability.

Numerous companies have now laid elaborate systems, structures and procedures as part of corporate governance. Companies now highlight their practices of corporate governance in their annual reports.

The corporate government movement in India picked up momentum after the debacle of big companies such as Enron, WorldCom and BCCI bank. Those where times when the confidence of the financial community, shareholders and investors took a beating the world over. It was around that time that the foreign financial institutions started investing money in Indian companies, which also triggered the need for greater accountability. Today, fund managers view firms such as Tata Motors, ITC, Ranbaxy, Infosys and Hero Honda Motors as having higher governing standards.

The economic times did a survey of Indian Corporate Governance and published its findings in its issue dated August 19, 2005. The criteria used by the economic time survey to identify the winners are as follows;

Ø Accounting Quality.

Ø Value creation focus.

Ø Fair policies and actions.

Ø Communication.

Ø Effective governing board.

Ø Reliability.

Rankings given to the companies are as follows:

1. INFOSYS TECHNOLOGIES.

2. TATA STEEL

3. WIPRO

4. HDFC BANK

5. HDFC

6. TATA MOTORS

7. RELIANCE INDUSTRIES

8. ITC

9. RANBAXY LABORATORIES

10. HINDUSTAN LEVER

11. HERO HONDA MOTORS

12. LARSEN & TOUBRO

13. STATE BANK OF INDIA

14. BAJAJ AUTO

15. ONGC

16. GUJARAT AMBUJA CEMENT

17. HINDLCO INDUSTRIES

18. GRASIM INDUSTRIES

19. CIPLA

20. BPCL.

(Source: The Economic Times August 19, 2005)

REASONS FOR INCREASING DEMAND FOR CORPORATE GOVERNANCE

Ø The need for a corporate governance has been described by SEBI

The need for a system of corporate governance has been described by SEBI by pointing out the background of the appointment of the Kumar Mangalam Birla Committee on Corporate Governance.

Ø Inadequacies and failures of an existing system often brings forth

the need for Corporate Governance

Inadequacies and failures of an existing system often bring to the fore the need for norms and codes to remedy them. This is true of corporate governance too. In the U.K, deficiencies in the Accounting Standards became more evident after many companies, in their eagerness to increase earnings and accelerate growth, exploited the weaknesses in the accounting standards to show inflated profits and understate liabilities while companies grew phenomenally, accounting standards went haywire.

Ø The tendency to combine the roles of chairman and chief

executive in one person and Board structures that were not conducive tended to make matters very undesirable.

The resultant failure of several companies raised serious concerns regarding corporate governance and this eventually led to the appointment of the Sir Adrian Cadbury Committee on Corporate Governance by the London Stock Exchange and the Financial Reporting Council in Britain in 1991. Several other notable reports and codes on the subject were also published internationally, like the Report of the Greenbury Committee, the Combined Code of the London Stock Exchange, the OECD Code on Corporate Governance and The Blue Ribbon Committee on Corporate Governance in the US. In India, the CII has published a Code of Corporate Governance.

Ø There was an increasing concern about standards of financial

reporting and accountability, with better reporting practices

There was an increasing concern about standards of financial reporting and accountability, especially after losses suffered by investors and lenders which could have been avoided, with better and more transparent reporting practices. Investors suffered on account of unscrupulous management of the companies, which have raised capital from the market at high valuations and have performed much worse than the past reported figures, leave alone the future projections at the time of raising money. Another example of bad governance had been the allotment of promoter’s shares, on preferential basis at preferential prices, disproportionate to market valuation of shares, leading to further dilution of wealth of minority shareholders. This practice has, however, since been contained.

Ø Companies did not pay attention to the basic procedures for

shareholders’ service

There were also many companies, which are not paying adequate attention to the basic procedures for shareholders’ service; for example, many of these companies do not pay adequate attention to redress investors’ grievances such as delay in transfer of shares, delay in dispatch of share certificates and dividend warrants and non-receipt of dividend warrant; companies also do not pay sufficient attention to timely dissemination of information too investors as also to the quality of such information. While enough laws existed to take care of many of these investor grievances, the implementation and inadequacy of penal provisions left a lot to be desired.

Ø Corporate Governance is considered an important instrument of

Investor Protection

Corporate governance is considered an important instrument of investor protection, and it is, therefore, a priority on SEBI’s agenda. To further improve the level of corporate governance, need was felt for a comprehensive approach at this stage of development of the capital market, to accelerate the adoption of globally acceptable practices of corporate governance. This would ensure that the Indian investors are in no way less informed and protected as compared to their counterparts in the best-developed capital markets and economies of the world.

Ø The financial crisis in the Asian markets in the recent past have

highlighted the need for improved level of corporate governance

Securities market regulators in almost all developed an emerging markets have for sometime been concerned about the importance of the subject and the need to raise the standards of corporate governance. The financial crisis in the Asian markets in the recent past have highlighted the need for improved level of corporate governance and the lack of it in certain countries have been mentioned as one of the causes of the crisis.

Indeed corporate governance has been a widely discussed topic at the recent meetings of the International Organization of Securities Commissions (IOSCO). Besides in an environment in which emerging markets increasingly compete for global capital, it is evident that global capital will flow to markets which are better regulated and observe higher standards of transparency, efficiency and integrity.