Corporate Governance

The root of the word Governance is from ‘gubernate’, which

means to steer. Corporate governance would mean to steer an
organization in the desired direction. The responsibility to steer
lies with the board of directors/ governing board.
Corporate or a Corporation is derived from the Latin term
“corpus” which means a “body”. Governance means
administering the processes and systems placed for satisfying
stakeholder expectation.
When combined, Corporate Governance means a set of
systems, procedures, policies, practices, standards put in place
by a corporate to ensure that relationship with various
stakeholders is maintained in transparent and honest manner.
Concept 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'.
Corporate Governance ensures:
• Adequate disclosures and effective decision making
to achieve corporate objectives;
• Transparency in business transactions;
• Statutory and legal compliances;
• Protection of shareholder interests;
• Commitment to values and ethical conduct of
business;
The heart of Corporate Governance is Transparency,
Disclosure, Accountability and Integrity.
 BASIC PILLARS OF CORPORATE
GOVERNANCE

FAIRNESS ACCOUNTABILITY RESPONSIBILITY TRANSPARENCY

 STAKEHOLDERS

VENDORS

GOVERNMENT CUSTOMERS

SOCIETY EMPLOYEES
Definition of Corporate Governance
James D. Wolfensohn (Ninth President World Bank)

“Corporate Governance is about promoting corporate fairness,

transparency and accountability”.

Cadbury Committee U.K

Corporate Governance is a system of structuring, operating and
controlling a company with the following specific aims:—
(i) Fulfilling long-term strategic goals of owners;
(ii) Taking care of the interests of employees;
(iii) A consideration for the environment and local community;
(iv) Maintaining excellent relations with customers and suppliers;
(v) Proper compliance with all the applicable legal and regulatory
requirements.
Confederation of Indian Industry (CII) –
Desirable Corporate Governance Code (1998)

“Corporate governance deals with laws, procedures, practices and implicit

rules that determine a company’s ability to take informed managerial decisions
vis-à-vis its claimants - in particular, its shareholders, creditors, customers, the
State and employees. There is a global consensus about the objective of ‘good’
corporate governance: maximizing long-term shareholder value.”

Report of N.R. Narayana Murthy Committee on Corporate

Governance constituted by SEBI (2003)

“Corporate Governance is 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 and corporate funds in the management of a company.”
Contribution of Chanakya in
Corporate Governance
 EVIDENCE OF CORPORATE GOVERNANCE
FROM THE ARTHASHASTRA
Kautilya’s Arthashastra maintains that for good governance, all
administrators, including the king are considered servants of the
people. Good governance and stability are completely linked. If
rulers are responsive, accountable, removable, recallable, there
is stability. If not there is instability. These tenets hold good even
today.
Raksha,
Vridhi,
Palana,
Yogakshema
The substitution of the state with the corporation, the king with the
CEO or the board of a corporation, and the subjects with the
shareholders, bring out the quintessence of corporate governance,
because central to the concept of corporate governance is the belief
that public good should be ahead of private good and that the
corporation's resources cannot be used for personal benefit.

(A) Raksha - literally means protection, in the corporate scenario it

can be equated with the risk management aspect.
(B) Vriddhi - literally means growth, in the present day context can be
equated to stakeholder value enhancement
(C) Palana - literally means maintenance/compliance, in the present
day context it can be equated to compliance to the law in letter and
spirit.
(D) Yogakshema - literally means well being and in Kautilya’s
Arthashastra it is used in context of a social security system. In the
present day context it can be equated to corporate social
responsibility.
 Need For Corporate Governance
❖ Corporate Performance
❖ Enhanced Investor Trust
❖ Better Access To Global Market
❖ Combating Corruption
❖ Easy Finance from Institutions
❖ Enhancing Enterprise Valuation
❖ Reduced Risk of Corporate Crisis and Scandals
❖ Accountability
 Objective of Corporate Governance
• To create Social responsibility.
• To create a transparent working System.
• To create a management accountable for corporate
functioning.
• To protect and promote the interest of shareholders.
• To develop an efficient organization culture.
• To aid in achieving social and economic goals.
• To improve social cohesion.
• To minimize wastages, corruption, red-tapaism etc.
Benefits of Corporate Governance
• Good Corporate Governance ensures corporate success
and economic growth.
• Strong corporate governance maintains investors’
confidence, as a result of which, company can raise
capital efficiently and effectively.
• It lowers the capital cost.
• There is a positive impact of share price.
• Good corporate governance also minimize wastages,
corruption, risks and mismanagement.
• It helps in brand formation and development.
Theories of Corporate Governance
The following theories elucidate the basis of
corporate governance :
(A) Agency Theory
(B) Shareholder Theory
(C) Stake Holder Theory
(D) Stewardship Theory
 Agency Theory
According to this theory, managers act as 'Agents' of the corporation. The
owners set the central objectives of the corporation. Managers are
responsible for carrying out these objectives in day-to-day work of the
company. Corporate Governance is control of management through designing
the structures and processes.
In agency theory, the owners are the principals. But principals may not have
knowledge or skill for getting the objectives executed. Thus, principal
authorizes the mangers to act as 'Agents' and a contract between principal
and agent is made. Under the contract of agency, the agent should act in
good faith. He should protect the interest of the principal and should remain
faithful to the goals.
In modern corporations, the shareholdings are widely spread. The
management (the agent) directly or indirectly selected by the shareholders
(the Principals), pursue the objectives set out by the shareholders. The main
thrust of the Agency Theory is that the actions of the management differ
from those required by the shareholders to maximize their return. The
principals who are widely scattered may not be able to counter this in the
absence of proper systems in place as regards timely disclosures, monitoring
and oversight. Corporate Governance puts in place such systems of oversight.
 Stockholder/Shareholder Theory
According to this theory, it is the corporation which is considered as
the property of shareholders/ stockholders. They can dispose off this
property, as they like. They want to get maximum return from this
property.
The owners seek a return on their investment and that is why they
invest in a corporation. But this narrow role has been expanded into
overseeing the operations of the corporations and its mangers to
ensure that the corporation is in compliance with ethical and legal
standards set by the government. So the directors are responsible for
any damage or harm done to their property i.e., the corporation. The
role of managers is to maximize the wealth of the shareholders. They,
therefore should exercise due diligence, care and avoid conflict of
interest and should not violate the confidence reposed in them. The
agents must be faithful to shareholders.
 Stakeholder Theory
According to this theory, the company is seen as an input-output model
and all the interest groups which include creditors, employees, customers,
suppliers, local-community and the government are to be considered.
From their point of view, a corporation exists for them and not the
shareholders alone.
The different stakeholders also have a self interest. The interest of these
different stakeholders are at times conflicting. The managers and the
corporation are responsible to mediate between these different
stakeholders interest. The stake holders have solidarity with each other.
This theory assumes that stakeholders are capable and willing to
negotiate and bargain with one another. This results in long term self
interest.
The role of shareholders is reduced in the corporation. But they should
also work to make their interest compatible with the other stake holders.
This, requires integrity and managers play an important role here. They
are faithful agents but of all stakeholders, not just stockholders.
 Stewardship Theory
The word 'steward' means a person who manages another's property
or estate. Here, the word is used in the sense of guardian in relation to
a corporation, this theory is value based. The managers and employees
are to safeguard the resources of corporation and its property and
interest when the owner is absent. They are like a caretaker. They have
to take utmost care of the corporation. They should not use the
property for their selfish ends. This theory thus makes use of the social
approach to human nature.
The managers should manage the corporation as if it is their own
corporation. They are not agents as such but occupy a position of
stewards. The managers are motivated by the principal’s objective and
the behavior pattern is collective, pro-organizational and trustworthy.
Thus, under this theory, first of all values as standards are identified
and formulated. Second step is to develop training programmes that
help to achieve excellence. Thirdly, moral support is important to fill
any gaps in values