Corporate Governance 2

COPORATE GOVERNANCE
It seems corporate governance and God have something in

common. Both are remembered in times of crisis.
Understanding Corporate Governance
Governance refers specifically to the set of rules, controls, policies, and resolutions put
in place to dictate corporate behavior. Proxy advisors and shareholders are important
stakeholders who indirectly affect governance, but these are not examples of
governance itself. The board of directors is pivotal in governance, and it can have major
ramifications for equity valuation.
A company’s corporate governance is important to investors since it shows a company’s

direction and business integrity. Good corporate governance helps companies build
trust with investors and the community. As a result, corporate governance helps
promote financial viability by creating a long-term investment opportunity for market
participants.
Communicating a firm’s corporate governance is a key component of community

and investor relations. On Apple Inc.’s investor relations site, for example, the firm
outlines its corporate leadership—its executive team, its board of directors—and its
corporate governance, including its committee charters and governance documents,
such as bylaws, stock ownership guidelines and articles of incorporation.
Most companies strive to have a high level of corporate governance. For many
shareholders, it is not enough for a company to merely be profitable; it also needs to
demonstrate good corporate citizenship through environmental awareness, ethical
behavior, and sound corporate governance practices. Good corporate governance
creates a transparent set of rules and controls in which shareholders, directors, and
officers have aligned incentives.
Corporate Governance and the Board of Directors
The board of directors is the primary direct stakeholder influencing corporate

governance. Directors are elected by shareholders or appointed by other board
members, and they represent shareholders of the company. The board is tasked with
making important decisions, such as corporate officer appointments, executive
compensation, and dividend policy. In some instances, board obligations stretch beyond
financial optimization, as when shareholder resolutions call for certain social or
environmental concerns to be prioritized.
Boards are often made up of inside and independent members. Insiders are major
shareholders, founders, and executives. Independent directors do not share the ties of
the insiders, but they are chosen because of their experience managing or directing
other large companies. Independents are considered helpful for governance because
they dilute the concentration of power and help align shareholder interest with those of
the insiders.
The board of directors must ensure that the company's corporate governance policies
incorporate the corporate strategy, risk management, accountability, transparency, and
ethical business practices.
Bad Corporate Governance
Bad corporate governance can cast doubt on a company's reliability, integrity, or

obligation to shareholders—all of which can have implications on the firm's financial
health. Tolerance or support of illegal activities can create scandals like the one that
rocked Volkswagen AG starting in September 2015. The development of the details of
"Dieselgate" (as the affair came to be known) revealed that for years, the automaker
had deliberately and systematically rigged engine emission equipment in its cars in
order to manipulate pollution test results, in America and Europe. Volkswagen saw its
stock shed nearly half its value in the days following the start of the scandal, and its
global sales in the first full month following the news fell 4.5%.
Public and government concern about corporate governance tends to wax and wane.
Often, however, highly publicized revelations of corporate malfeasance revive interest in
the subject. For example, corporate governance became a pressing issue in the United
States at the turn of the 21st century, after fraudulent practices bankrupted high-profile
companies such as Enron and WorldCom. It resulted in the 2002 passage of
the Sarbanes-Oxley Act in USA, which imposed more stringent recordkeeping
requirements on companies, along with stiff criminal penalties for violating them and
other securities laws. The aim was to restore public confidence in public companies and
how they operate.
Other types of bad governance practices include:

 Companies do not cooperate sufficiently with auditors or do not select auditors
with the appropriate scale, resulting in the publication of spurious or
noncompliant financial documents.
 Bad executive compensation packages fail to create an optimal incentive for
corporate officers.
 Poorly structured boards make it too difficult for shareholders to oust ineffective
incumbent
In unlisted companies, the shareholders have various rights such as proceeding against
the company for oppression or mismanagement and proceeding towards winding up of
the company, while they do not have any statutory right to mandate the company to
make disclosures to them as required under the Corporate Governance mechanism.
Thus, the inadequacy of the rights to the shareholders in unlisted companies shall be
addressed only by formulating a legal framework in order to provide that the corporate
governance shall be mandatorily followed by the unlisted companies. The issue of rights
of minority shareholders shall also be examined with respect to the corporate
governance mechanism in India. The Companies Act, 2013 has provided for class
action suits and thus has taken a leap in protecting the interests of minority
shareholders.
The role of institutional investors in mandating the company to follow corporate

governance practices has come to the fore in recent past. The institutional investors can
play a significant role in influencing the company to follow good corporate governance
practices. The concept of shareholder activism is also a significant issue in terms of
corporate governance practices. Shareholder Activism entails that the shareholders
shall take a proactive role in formulating a dialogue with the management of the
company on a regular basis. The reforms in India which highlighted the aspect of
shareholder activism have also been taken forward.
Corporate Governance in India should be based on the maintenance of transparency in
the company to ensure protection of investors.
LEGAL AND REGULATORY FRAMEWORK OF CORPORATE GOVERNANCE IN

INDIA
CORPORATE GOVERNANCE
Corporations receive huge pool of capital from an investor base in domestic as well as
international markets. Investment by the shareholders may thus be termed as an act
reflecting faith of the investors in the ability of the management. The investors expect
the management to act as trustees of the investment and earn a higher rate of return as
compared to the cost of capital. Hence, the investors expect the management to adopt
good corporate governance practices and act in the best interests of the investors. The
Narayana Murthy Committee defined Corporate Governance as the acceptance by the
corporation's management of the inalienable rights of the shareholders as the owners of
the corporate entity and the role of the management as trustees of the investment of the
shareholders. Hence, corporate governance is about conducting the business in an
ethical manner, commitment towards values and drawing a distinction between personal
and corporate funds in the management of a company. 1
Corporate Governance may be defined in terms of bringing the interests of the investors
and managers into line and ensuring that the corporate entity functions in the best
interests of the investors. It deals with the interrelationship of the internal governance of
the corporation and corporate accountability towards the society. It lays down the
procedures and processes in accordance with which a corporate entity may be directed
and controlled. The structure of corporate governance defines the distribution of rights
and responsibilities of the managers, stakeholders, shareholders and other participants
and specifies the rules and procedure of decision making.
Promotion of corporate fairness, accountability and transparency is the aim of corporate

governance. In simple terms Corporate Governance can be defined as a set of laws,
rules, regulations, systems, principles, process by which a company is governed.
The need for corporate governance lies in the fact that every corporation should be fair
and transparent in its dealings. Maintenance of transparency and an ethical conduct is
essential for attracting and retaining capital investment from the stakeholders.

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COPORATE GOVERNANCE

It seems corporate governance and God have something in

Understanding Corporate Governance

A company’s corporate governance is important to investors since it shows a company’s

Communicating a firm’s corporate governance is a key component of community

Corporate Governance and the Board of Directors

The board of directors is the primary direct stakeholder influencing corporate

Bad Corporate Governance

Bad corporate governance can cast doubt on a company's reliability, integrity, or

Other types of bad governance practices include:

The role of institutional investors in mandating the company to follow corporate

LEGAL AND REGULATORY FRAMEWORK OF CORPORATE GOVERNANCE IN

Promotion of corporate fairness, accountability and transparency is the aim of corporate

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