Emerging Trends in Corporate Governance

INTRODUCTION

In the last few years, the subject of Corporate Governance

has come to the fore. Corporate governance mechanisms
differ between different countries and corporate. The
governance mechanism in each country and corporate is
shaped by various factors like political, economic and
social history, legal framework, values and ethics of the
promoters, managerial practices etc. The Business
entities, Banks, Corporations, Financial institutions
around the world are increasingly relying on corporate
governance as a means to achieve highest standards to
raise the confidence level of stakeholders. The term
“corporate governance” has now become common
parlance but its usage has not been very consistent, as the
corporate have assimilated the concept in their own way
based on their values and ethics. Corporate governance is
the set of processes, customs, policies, laws, and
institutions affecting the way a corporation (or company)
is directed, administered or controlled. Corporate
governance also includes the relationships among the
many stakeholders involved and the goals for which the
corporation is governed. The principal stakeholders are
the shareholders, the board of directors, employees,
customers, creditors, suppliers, and the community at
large.

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 Emerging Trends in Corporate Governance

KEY ELEMENTS IN CORPORATE

GOVERNANCE

Good corporate governance relates to systems of supervision and

monitoring that maximise long term shareholder value of a
company, and also addresses the interests of all other stakeholders
in the enterprise. Although corporate governance varies across
countries, there is a growing consensus about the need for four key
elements.

These are:

✒ Transparency - a commitment that the business is

managed along transparent lines.

✒ Fairness- to all stakeholders in the company, but

especially to minority shareholders.

✒ Disclosure - of all relevant financial and non-financial

information in an easily

understood manner.

✒ Supervision - of the company’s activities by a

professionally competent and independent board of
directors.

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Good corporate governance deals with building trust with

customers, suppliers, creditors and diverse investors-trust that
the company will be manage properly, will successfully
perpetuate its businesses, will protect and enhance the capital of
its investors, and will increase corporate value for its
shareholders.

CORPORATE GOVERNANCE
DISCLOSURES-CII RECOMMENDATIONS
In April 1998, Confederation of Indian Industry (CII)
took the initiative to improve corporate governance by
publishing Desirable Corporate Governance.

Basic Concept
Corporate governance is a set of system and processes
to ensure that a company is managed to suit the best
interests of all stakeholders. The stakeholders may be
internal stakeholders (promoters, members, workmen
and executives) and external stakeholders
(shareholders, customers, lenders, dealers, venders,
bankers, community, government and regulators)

According to Cadbury committee on financial aspects

of corporate governance, it is the system by which
companies are directed and controlled.

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 Emerging Trends in Corporate Governance

Itis a system of making management accountable to

the stakeholders for effective management of the
companies, in the interests of the company and also
with adequate concern for ethics and values. It is
inclusive of the structures, process, cultures, and
systems through which the company sets out its
objectives and defines the means of attaining that
objective and monitoring its performance. It is
generally understood to mean the system that defines
the distribution of rights and responsibilities among
different participants in the corporation, such as the
board, managers, shareholders and other
stakeholders, and spells out rules and procedures for
making decisions in corporate affairs.

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Need for Corporate Governance

This subject of corporate governance has attracted so

much attention due to some fundamental reasons. The
pressure for good corporate governance in the
financial sector arises from fundamental, long-term
changes in the environment mentioned below.

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 Emerging Trends in Corporate Governance

• Globalization has increased the freedom,

opportunities and economic power of the corporate in
the financial sector..

• Privatization of state owned enterprises puts huge

assets in the hands of the new private management.

• Accessibility to technology, know-how, means to run

corporate made many entrepreneurs jump into
creation of new business entities.

• Appearance and expose of scandals in the form of

suppression of crucial financial information, diversion
of funds, and misuse of facilities hampers the interest
of all stakeholders.

• As we live in a more volatile and inter-linked world,

effects are instantaneous. If one Letter of Credit fails,
it may affect other countries and the institutions with
greater national and international attention.

• Liberalization and deregulation the world over has

given sufficient freedom to operate. As greater
freedom implies greater responsibilities it is necessary
to have transparency.

• What happens in a particular corporation is a

concern of all. Fear of contagion and systemic
implication is a cause for concerns. Relatively small
and isolated events in financial institutions, has
affected a lot of institutions, including some several
times larger.

Aims of Corporate governance

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Economics is indicative of the profit earning capacity. However,

profits must be earned with ethical means with due
consideration to environmental effects. This would lead to
harmonization of conflicting interests of various stakeholders.
Corporate governance aims in bringing this harmonization in
the following way.

• It holds the balance between economic and social goals and

between individual and commercial goals.
• It ensures efficient use of resources and accountability for the
stewardship of those resources.
• It aligns the interest of individuals, corporations and society.
• It helps corporations and those who own and manage them to
adopt internationally acceptable governance standards, which
will assist them to achieve their corporate aims and attract
investment.
• It encourages and strengthens the economy and discourages
fraud and mismanagement.
• It ensures openness and disclosure and thereby enhances
public confidence.

Corporate Governance- Different

Perspective
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 Emerging Trends in Corporate Governance

The literature on corporate governance covers a variety of

aspects. Important among them are protection of shareholders’
rights, enhancing shareholders’ value. Board issues including its
composition and role, disclosure requirements, the integrity of
accounting practices, the control systems, in particular the
internal control systems, in particular the internal control
systems, insider trading etc as for as financial sector is
concerned. These factors can however be broadly classified
under two different perspectives. Viz,

A. Corporation’s Perspective
Corporate governance is about maximizing value to
stakeholders subject to meeting the corporation’s financial and
other legal and contractual obligations. This inclusive definition
stresses the need for board of directors to balance the interest of
share holders with those of other stake holders like employees,
customers, suppliers, investors and communities in order to
achieve long term sustained value for the corporation.

B. Public Policy Perspective

Corporate governance is about nurturing enterprises while
ensuring accountability in the exercise of power and patronage
by firms for larger public goodness. The role of public policy is
to provide firms with incentives and discipline to minimize the
divergence between private and social returns and to protect the
interest of stakeholders.These two perspectives provide a
framework for corporate governance that reflects an interplay
between internal incentives which defines the relationships
among the key players in the corporation and external forces
like policy, Legal, regulatory that together govern the behavior.

Compelling Reasons for Corporate

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 Emerging Trends in Corporate Governance

Governance
All well governed corporate organizations should recognize the
importance of good business ethics and take cognizance of the
environmental and social interests of the communities in which
they operate. While the corporate governance principles
incorporate codes that are intended to protect interests of the
shareholders they arte also expected to give due importance to
safeguarding interests of the stakeholders like employees,
creditors, suppliers, customers, environment, etc. Effective co-
operation of all the stakeholders is essential for creating wealth
for the shareholders and building financially sound
corporations.
Few compelling reasons for corporate governance in financial
sector are:

 Inadequacies and failures of existing system-leading to need

for norms and codes to remedy them.

 Deficiencies in the accounting standards – when became

evident after many companies in their eagerness to increase
earnings and accelerate growth, exploited the weakness in
accounting standards to show inflated profits and understate
liabilities.
 Financial crises in the Asian Market-highlighted the need for
improved level of corporate governance as the lack of it in
certain countries have been responsible for collapse of many
corporations.

 Differing interest – the interest of those who have effective

control over a firm can differ from the interest of those who
supply the firm with external finance.
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 Mismanagement- loss suffered by the investors and bankers

on account of unscrupulous management of the companies
which gave raised capital from the market at high values.
 Inadequate attention- to the basic procedures for
shareholders’ service-delay in transfer of shares, dispatch of
share certificates and dividend warrants, no timely
dissemination of information to investors.

Corporate governance attempts to remedy the above problems

and promotes the adoption of globally acceptable practices.

Drivers for Corporate Governance in

India

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1. Necessitating Factors

Two sets of factors have contributed to the development of

corporate governance. These factors have acted as drivers for
growth of corporate governance. They are:

 Mandatory requirement resulting from recommendation of the

Birla committee on corporate governance set up by SEBI.

 Liberalization efforts of the government with associated

regulatory requirement.
 Transparency demanded by the foreign investors,
collaborators and buyers in respect of functioning of Indian
corporate.
 Keenness shown by the Indian investors in this front.

2. Facilitating factors
 Growing awareness and enthusiasm in corporate Indian to
embrace good corporate governance.
 Keenness exhibited by many captions of industry, corporate
leaders and top executives to usher in corporate governance.

RECENT TRENDS IN CORPORATE

GOVERNANCE
In this, the most important factor is sharing the information and
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developments in the corporation and industry, with the investors

and others to establish and maintain the corporate democracy.
Corporate Governance is now at the centre stage of reforms in view
of the shareholders’ education by the companies.

This make their balancesheet more transparent than ever

before.Present corporate scenario has witnessed tremendous
advancement in the process of re-engineering of annual reports by
the companies. Discussed below are various issues emerging out of
such re-engineering process.

Modern Voluntary Disclosures

Many new areas have been included in the annual reports of the
major Indian Companies recently. This is the outcome of both
voluntary effort on the part of companies to educate the
shareholders and to give a better insight of the management,
operations, economy and prospects of the corporation. They are
explained below:

1. Management Policies &overview of company

The current trend in annual accounts is to impart more
transparency by disclosing various corporate and management
objectives and policies, profile of the company and analyses of
financial conditions and prospects. Some major heads are :

 Products and Product range

 Area of Specilisation
 Customers Profile and Market Stage
 Competitors
 Future plans and trends
 Financial goals
 Financial condition and analysis
 Government Policy
 Risks and Threats

2. Economic Value Added (EVA) : Traditional

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 Emerging Trends in Corporate Governance

approaches to measure ‘Shareholders Value Creation’ have used

parameters such as earnings capitalization, market capitalization
and present value of future cash flows. Extensive equity research
has now established that it is not earnings per share , but value
which is important. EVA is a new concept being applied to
understand and evaluate financial performance. In other words,
EVA represents the Value Added to the shareholders by generating
operating profits over and above the cost of capital employed in the
business. It is those companies which earn higher returns than cost
of capital, that create value. The Companies which earn lower
returns than cost of capital are destroyers of shareholder value.

3. Brand Value : A balance sheet discloses the financial

position of a company which is influenced by the economic sources
it controls its financial structure, liquidity and solvency, and its
capacity to adapt to changes in the environment. However, it is
becoming increasingly clear that intangible assets have a significant
role in the growth of a company, so quite often to search for the
value quite often leads back to understanding, evaluating and
enhancing the intagible assets of the business.
A brand is much more than a trade mark or a logo. It is a trust mark
of promise of quality and authenticity that client can rely upon.
Brand equity is the value addition provided to a product or compnay
by its brand (name). It is the financial presuit that a buyer is willing
to pay for the brand over a generic or less worthy brand. It is not
created overnight. It is the result of valueless pursuit of quality in
manufacturing, selling services, advertising and marketing.
The task of measuring brand value is a complex one. Several models
are available for accomplishing this e.g. brand-earnings multiple
model, utility cost method, return on capital method, premium
profit methods etc. These models are however, still subject of debate
among researchers and using such models and data in predicting
the future of any company, is risky, and should be adjudged
critically.

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 Emerging Trends in Corporate Governance

4. Human Resource Accounting : Human resources

represent the collective expertise, innovations, leadership,
entrepreneurial , professional and managerial skills evolved in the
employees of an organisation. The non human asset is reorganized
as an asset and is therefore, recorded in the books and reported in
the financial statements, whereas the human assets is totally
ignored by accountants. The fact that intellectual capital is an
important and valuable asset has been validly recognized. Valuation
of the same, popularly called as human resources accounting is
globally prevailing, though it is a recent development in Indian
annual reports.

5. Corporate Governance : In brief, it denotes of

voluntary ethical code of business and management of companies.
It aims to maximize the effectiveness and accountability of the
brand of directors. Corporate Governance deals with terms,
procedure, practices and implicit rules that determines a company’s
ability to take managerial decisions to maximize long term
shareholders value and also to take care of all other shareholders in
the enterprise. Cadburey Committee England and CII in India has
framed certain rules for desirable corporate governance.

6. Segment : Financial in respect of business and geographical

segments is one of the suggested accounting procedures followed in
U.S.A. and U.K. A segment report can further be sub-divided into a
primary segment report concerning core segment and a secondary
segment report concentrating on other important segments. by
recovers the defects of nullifying effect of profitable segments and
unprofitable segments. It provide the user of financial information
data relating to relative size, profit, contribution and growth trend
of diffent business and geographical segments.

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7. Other voluntary Disclosures : Other voluntary

disclosures under development which are yet to be adopted by
Indian Corporates are:

(i) Incorporation of the impact of inflation in the accounting

information towards providing a better picture of entity’s financial
position during inflationary period.
(ii)Corporate social is a new achievement in the public sector
enterprises to discharge their social obligations. In India, the
Directors’ Report discharge this obligation by briefly touching upon
the issues related to the social responsibilities. However, recent
developments include new financial tools like social income
statement, Social Balance Sheet and Corporate Social Report.
(iii) The concept of accounting and disclosure of environmental
matter has been rapidly emerging as an important dimension in
corporate reports particularly in manufacturing organisation.
Ecological Balance Sheets could become a part of the annual reports

Conclusion
Good corporate governance practice would assist the
corporate to develop a credible opinion on its
management quality and responsiveness towards the
interest of all its financial stakeholders. Improved
perception of investors may in turn influence its valuation
and facilitate rising of funds at favorable terms. The
corporate governance practice in the financial sector also
improves the comfort level of the statutory authorities and
regulators. It can also be used as a check to determine the
relative standing of the company with respect to the
benchmarks of best corporate practices in the industry
and county. This alone can help the corporate to survive in
the globalize era.

Thus the corporate scenario at present is moving towards the

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concept of shareholders education, transparency of Balance Sheets

and fulfillment of social obligations. Current trends alongwith the
appropriate guidance from regulatory authorities can result in
substantial developments in the presentation of structured on line
information to investors. This reduces the timing difference in the
information used by investors and the management. But how far an
investor is interested and takes benefit of these developments for
himself is still a question-mark that needs to be answered in the
days to come.

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