Corporate Governance- Structure, Objectives & Benefits

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Corporate Governance- Structure, Objectives & Benefits

Structure of Corporate Governance

An appropriate structure is prerequisite for proper corporate governance. The corporate governance structure of ITC throws light on this aspect.

The three-tier governance structure ensures that:

  1. Strategic supervision (on behalf of the shareholders), being free from involvement in the task of strategic management of the company, can be conducted by the Board with objectivity, thereby sharpening accountability of management,
  2. Strategic management of the company, uncluttered by the day-to-day tasks of executive management, remains focused and energized, and
  3. Executive management of a Division or SBU, free from collective strategic responsibilities for ITC as a whole, focuses on enhancing the quality, efficiency and effectiveness of the business. The core roles of the key entities flow from this structure.

The core roles, in turn, determine the core responsibilities of each entity. In order to discharge such responsibilities, each entity is empowered formally with requisite powers. The structure, processes and practices of governance are designed to support effective management of multiple businesses while retaining focus on each one of them. The Governance Document that sets out the structure, policies and practices of governance within the organisation is available on the company’s corporate website www.itcportal.com for general information.

Corporate Governance and Corporate Management:

Now, there is a growing recognition of the difference between corporate governance and corporate management and the need to align corporate management with corporate governance. Corporate governance is concerned with compliances, values, vision and visibility. It is about governance structure, the value orientation of the organisation, ethical norms for its performance, the direction of development and social accomplishment of the organisation and the visibility of its performance and practices.

Corporate management is concerned with the “efficiency of the resource use, value addition and wealth creation within the broad parameters of the corporate philosophy established by corporate governance. “In short, the concept of good corporate governance connotes that ethics is as important as economics, fair play as crucial as financial success, morals as vital as market share.”

Objectives of Corporate Governance

Broadly, it seeks to achieve the following objectives:

  1. A properly structured board capable of taking independent and objective decisions is in place at the helm of affairs
  2. The board is balance as regards the representation of adequate number of non-executive and independent directors who will take care of their interests and well-being of all the stakeholders
  3. The board adopts transparent procedures and practices and arrives at decisions on the strength of adequate information
  4. The board has an effective machinery to take care and manage the concerns of stakeholders
  5. The board keeps the shareholders informed of relevant developments impacting the company
  6. The board effectively and regularly monitors the functioning of the management team
  7. The board remains in effective control of the affairs of the company at all times. The overall endeavour of the board should be to take the organisation forward so as to maximize long term value and shareholders’ wealth.

Benefits of Corporate Governance

The major benefits are stated very specifically below:

  1. Good governance provides proper framework for efficient management of the organisation ensuring complete transparency, integrity and accountability of the management.
  2. A well governed company protects the rights and interests of the shareholders and maximises long-term shareholder value. Indeed, one of the primary objectives of corporate governance is maximisation of the long-term value of the company for its shareholders and all other partners.
  3. It leads to a socially justifiable efficient management of the company by striking a proper balance between the different stakeholders and the societal interests. “Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations, and society.”
  4. Good corporate governance provides proper direction for the long-term development of the organisation.
  5. Companies which are governed well enjoy the trust and goodwill of shareholders and other stakeholders. This will have its reflection in the capital market by active trading in the securities, better market capitalisation and ease of raising capital – both equity and debt.

“Sound corporate governance is important not only to attract long-term “patient” foreign capital, but more especially to broaden and deepen local capital markets by attracting local investors – both individual and institutional. Unlike international investors who can diversify their risk, domestic investors are often captive to the system and face greater risks, particularly in an environment that is opaque and does not protect the rights of minority shareholders.”

  1. Companies which are governed properly often enjoy better relationships and terms with suppliers, buyers and marketing intermediaries.
  2. Well governed companies are in a better position to attract foreign capital, technical collaborations and business.
  3. As the Birla Committee has pointed out, strong corporate governance is indispensable to resilient and vibrant capital markets and is an important instrument of investor protection.
  4. Good governance helps a company to attract and retain efficient independent directors, managerial and other human resources.
  5. Good governance will help gain goodwill of consumers and the public.
  6. As India gets integrated in the world market, Indian as well as international investors will demand greater disclosure, more transparent explanation for major decisions and better shareholder value.
  7. As the Birla Committee has observed, good corporate governance, besides protecting the interests of shareholders and all other stakeholders, contributes to the efficiency of a business enterprise, to the creation of wealth and to the country’s economy.

As a World Bank Report observes, there is a growing recognition that “good governance of corporations is a source of competitive advantage and critical to economic and social progress.”

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