Corporate Governance- Meaning & Scope
Meaning of Corporate Governance
Corporate Governance may be defined as a set of systems, processes and principles which ensure that a company is governed in the best interest of all stakeholders.
It is the system by which companies are directed and controlled. It is about promoting corporate fairness, transparency and accountability. In other words, ‘good corporate governance’ is simply ‘good business’
Report of SEBI committee (India) on Corporate Governance defines corporate governance as “the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders.
It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company.
Scope of Corporate Governance
Corporate governance involves around various parties in and around the company. The scope of governance would include Shareholders, Board of Directors, Management, Market Intermediaries, Finance market, contractual shareholders, customers, suppliers, government entities/other regulating authority, media and society. Apart from these, external auditors also play a vital role in corporate governance. Their auditing is one of the core most way to ensure that an organization is financially functioning well within the setup rules and policies. Since so many of the stakeholders are directly and indirectly involved in it, importance of corporate governance becomes even more significant. The Scope of corporate governance is depicted in following chart-
- Central to the scope of corporate governance is its shareholders, Board of Directors and the management team. Shareholders appoint the board of directors to act on their behalf and enforce the governance in an organization. Whereas these appointed Board of Directors decide on the management and its structure which is directly responsible for operation of an organization within the boundary of corporate governance set. Through Annual General Meeting (AGM), shareholders may also pass forward the important agendas and approve the plans & policies through voting on issues that would significantly impact the course of action of a company. These decisions could include mergers and acquisitions, liquidation, etc.
- Shareholders’ right to vote is their tool to control over the corporate governance of the organization. Time and again, AGM may also be used to reshape the corporate governance of an organization if needed and change the directors or management team. Also, shareholders have the right to inspect the financial performance of the company and if not timely provided the reports as in the designated schedule, they can legally take action against the management team. The company where employees are themselves shareholders, they can stay motivated with long term interest in company which greatly influence the corporate governance as well.
- Board of Directors, on the other hand, are hugely responsible for corporate governance. They choose and appoint a CEO who is responsible to lead day to day operations of company within the governance framework BOD directed. Board of Directors sets the long term objective, vision and mission for the company. It is CEO who brings those objectives to fruition. To attain these objectives and smooth governing of organization and staffs, CEO along with various managers such as HR managers, with approval or modifications/recommendations from BOD, setup the details of organizational structure and job roles which are the major foundation of corporate governance.
- External auditors also have a crucial role to play in the corporate governance. They are the one who check and balance against the potential fraud or errors and ensure that company is functioning smoothly. Generally in a company, accountant keeps all, the financial records which may be verified by internal auditors. Basic function of internal auditors is to review the design for of internal controls, document any irregularities to enable further investigation by management (which is done with support of external auditors) and recommend informally the improvement in internal controls or other aspect about company to the management. In some cases, company may not have internal auditors and may directly refer to external auditors to check and verify the standing of the company.
- For public companies, share market along with rules & regulations that regulates the listed companies has a major influence over governance of these companies. These rules and policies are laid down to protect the market and shareholders against possible unethical practices and hence are vital to the good and healthy governance of these public. listed companies. This regulations are also deployed to control or protect the economy of the country.
- While corporate governance should focuses on interrelation between company and its shareholders, be it dominant or minority shareholders, and also adhere to the exchange it is listed upon; however, it should also focus on the non-equity capital providers as well. The interest of these debt providers should also be included in the governance of a company. In the past individual shareholders used to hold the majority of share but the scenario is changing in contemporary world. Now the institutional investors hold the majority of the shares in public companies. These institutional investors could be investment funds, life insurance funds, pension funds, hedge funds, etc. Apart from that, there are lot of market intermediaries who play a big role in modern corporate governance. These market intermediaries may act as middle man between the actual investors and the company of whose share is being held. For example, investment bank can act as underwriters while writing launching shares during an IPO (Initial Public Offering).
- There are other intermediaries such as brokers, merchant banks, etc. which can hold shares on behalf of others. Besides, financial institutions may lend the shares of shareholders as security in exchange for various transactions which can add to the complication on the part of company to determine who is the actual shareholder and who can issue a proxy vote. Hence, these market intermediaries are also part of overall scope of corporate governance.
- Apart from rules and regulations of stock market, companies are also subjected to various acts, rules and regulations of government as well as other regulating body in the domain they are working on. These rules and regulations, to some extent, can also restraint the activities of a company. Companies are subjected to various government requirements such as tax payments, auditing of the company, renewal of license, etc. which is duly needed to be fulfilled. Companies may also need to comply with articles and code of conduct of various unions and associations in their domain. Hence, all these requirements also influence the governance of an organization.
- Securities Exchange Board of India (SEBI) whose main function is to enforce securities laws, regulating the securities industry, proposing new or improvements in securities rules. It is also responsible for regulating the nation’s stock and options exchanges, and other activities and organizations, including the electronic securities markets in India. The main reason SEBI has been effective in India because of its ability to take legal action, with independence, against cases of false information, insider trading and accounting fraud.
- Some of the direct subject to corporate governance also includes parties like employees, suppliers, customers and other various contractual stakeholders. These stakeholders can lie in the downstream or upstream of the value chain. Downstream chain can include distributers, wholesalers, retailers and finally the customers. In the past, press or media had a very little interest or indulgence in corporate activities. They showed little care unless and until there was a major event that was worth the main stream news. However, today’s investigative press and media has been a vital aspect of corporate governance. They now act as the external societal force to enforce ethical and legal governance practice within the business.
- Last but not the least, society and societal influences have been the major scope of corporate governance recently. In the past, society hardly cared about corporate activities and left them alone to make profit without any interference as long as they were functioning within the boundaries of law. However, in today’s context, companies are expected to be socially more responsible beyond the legalities and to some extent contribute to the society as well. Increasing trend of Corporate Social Responsibility (CSR) activities and NRB’s mandatory rule to contribute certain percentage of financial institution’s operating profit in CSR programs also highlights this fact. This CSR would include not just donations or charity but also the ethical practices such as treating employees fairly, paying good salary on time, not polluting the environment and rather taking initiatives to conserve it, saving energy as much as possible, etc. Hence, these social aspects and demand also in some way influence the corporate governance.
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