Prerequisites of Corporate Governance

Determinants for Corporate Governance

Determinants of Good Corporate Governance

There are a number of influencing factors shaping the corporate governance system (the corporate governance environment) or prerequisites for good corporate governance.

They are:

  1. A proper system consisting of clearly defined and adequate structure of roles, authority and responsibility.
  2. Vision, principles and norms which indicate the development path, normative considerations, and guidelines for performance.
  3. A proper system for guiding, monitoring, reporting and control.

These factors broadly may be classified

External Determinants:

  1. Government Regulations:

    As the OECD Business Sector Advisory Group’s Report on Corporate Governance (1988) has emphasised, while corporate governance should remain primarily a private sector prerogative, governments have a distinct and important responsibility in providing a regulatory, framework that allows investors and enterprises to adapt corporate governance practices to rapidly changing circumstances, In other words, good corporate governance can best be achieved through a combination of regulatory and voluntary private actions.

On the regulatory side, the Report noted that government interventions are most effective when consistently and expeditiously enforced.

They should focus on:

  1. Fairness –

    protecting shareholder rights and ensuring the enforceability of contracts with resource providers.

  2. Transparency –

    requiring timely disclosure of adequate information on corporate financial performance.

  3. Accountability –

    clarifying governance roles and responsibilities and supporting voluntary efforts to ensure the alignment of managerial and shareholder interests, as monitored by a board of directors – or in certain nations, a board of auditors with some independent members.

  4. Responsibility –

    ensuring corporate compliance with the other laws and regulations that reflect society’s values, including a broad-sensitivity to the objectives of the society in which corporations operate.

The Report, however, stressed that regulatory measures, though necessary, are not sufficient to raise standards. Indeed, the strengthening of corporate governance standards has been advanced by many corporate leaders who recognise that prospering in the long-term requires balancing business objectives with society’s concerns.

In India, the regulatory framework is provided mostly by the Companies Act, the SEBI and the stock exchanges which are regulated by the Securities Contracts (Regulations) Act. Also see the subsection Legal Environment of Corporate Governance in India tinder the section the Indian Scenario.

  1. Other External Influences:

    Other external influences include codes/guidelines, etc., pertaining to corporate governance brought out by industry associations like the CII, international developments in the field of corporate governance, including the several reports on corporate governance as indicated under the section. Further, media and public opinion also play an important role.

Internal Determinants:

The corporate governance culture and practice of an organisation are shaped by factors such as its legacy, vision, mission, policies, norms, governance structure, powers and responsibilities of the key constituents, persons holding key positions in the organisation, etc.

The Birla Committee has identified the three key constituents of corporate governance as the Shareholders, the Board of Directors and the Management and has attempted to identify, in respect of each of these constituents, the roles and responsibilities as also the rights in the context of good corporate governance. Fundamental to this examination is the recognition of the three key aspects of corporate governance, viz., accountability, transparency and equality of treatment for all stakeholders.

  1. Board of Directors:

    The Birla Committee observes that the pivotal role in any system of corporate governance is performed by the board of directors. It is accountable to the stakeholders and directs and controls the Management. It stewards the company, sets its strategic aim and financial goals and oversees their implementation, puts in place adequate internal controls and periodically reports the activities and progress of the company in a transparent manner to the stakeholders.

  2. Shareholders:

    One of the primary purposes of corporate governance shall be the protection of interests of shareholders, who place their trust in corporations to use their investment funds wisely and effectively. The shareholders have a vital role in corporate governance by exercising their powers and rights.

    • According to the Birla Committee, the shareholders’ role in corporate governance is to appoint the directors and the auditors and to hold the board accountable for the proper governance of the company by requiring the board to provide them periodically with the requisite information, in a transparent fashion, of the activities and progress of the company. Also see the sub-section. The Rights of Shareholders and Key Ownership Functions and The Equitable Treatment of Shareholders under the section Principles of Corporate Governance.
  3. Management:

    The third key internal constituent of corporate governance is the management. The Birla Committee points out that the responsibility of the management is to undertake the management of the company in terms of the direction provided by the Board, to put in place adequate control systems and to ensure their operation and to provide information to the board on a timely basis and in a transparent manner to enable the Board to monitor the accountability of management to it.

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