. The Differences between Corporate Governance & Corporate Social Responsibility Corporate governance and corporate social responsibility (CSR) are actually quite different business concepts but they have become much more closely linked in the early 21st century due to increased focus on balancing business profits with responsible operations. In fact, the definition of corporate governance has evolved over time to include core aspects of CSR. Corporate Governance Basics Corporate governance has traditionally been defined as the systems and processes used by a corporation to make certain that operations are optimized to produce the best financial results for shareholders and other company financiers. Corporate boards typically develop and oversee these governing systems. However, as broader government and public demands have increased the expectation that companies balance shareholder interests with other stakeholder needs, company boards have routinely incorporated social and environmental responsibility into corporate guidelines. CSR Basics CSR has evolved largely in the early 21st century from basic standards of business ethics. It has taken simple concepts of honest and transparency and added other expectations for companies of social and environmental responsibility. Mal Warwick Associates outlined "The Five Dimensions of CSR." This demonstrates that companies should balance interests of customers, communities, business partners and employees with those of shareholders, to meet public requirements for CSR compliance.
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The Differences between Corporate Governance & Corporate Social
Responsibility
Corporate governance and corporate social responsibility (CSR) are actually quite different business concepts but they have become much more closely linked in the early 21st century due to increased focus on balancing business profits with responsible operations. In fact, the definition of corporate governance has evolved over time to include core aspects of CSR.
Corporate Governance Basics Corporate governance has traditionally been defined as the systems and
processes used by a corporation to make certain that operations are optimized to produce the best financial results for shareholders and other company financiers. Corporate boards typically develop and oversee these governing systems. However, as broader government and public demands have increased the expectation that companies balance shareholder interests with other stakeholder needs, company boards have routinely incorporated social and environmental responsibility into corporate guidelines.
CSR Basics CSR has evolved largely in the early 21st century from basic standards of
business ethics. It has taken simple concepts of honest and transparency and added other expectations for companies of social and environmental responsibility. Mal Warwick Associates outlined "The Five Dimensions of CSR." This demonstrates that companies should balance interests of customers, communities, business partners and employees with those of shareholders, to meet public requirements for CSR compliance.
What Is Corporate Governance?
Corporate governance has traditionally been the way a corporation protects the interests of its shareholders and other financiers. However, with heightened attention on corporation social responsibility (CSR) in the 21st century, the definition of corporate governance has evolved. More focus goes to balancing shareholder interests with those of other key stakeholder groups, including customers, communities and suppliers.
Board of Directors A corporation's board of directors manages the process of corporate
governance. This is the group that provides leadership, direction and oversight for the organization. Shareholders elect board members and it is the duty of the board to adhere to established corporate governance policies of the organization and to provide guidance on helping the organization fulfill its obligations of accountability, fairness and transparency to all stakeholders.
Statement of Purpose Corporate governance guidelines typically include a statement of purpose.
This statement offers direction to board members in guiding the company. Purpose statements commonly identify the board's primary function of representing the interests of their shareholders. However, corporations are expanding their oversight to include both social and institutional factors. Promoting, trust, morality and ethics are among the expanded responsibilities for many boards in the 21st century, according to the Management Study Guide website.
Benefits The number one benefit of effective corporate governance is that it paves
the way for corporate success and growth, according to the Management Study Guide. Good corporate governance also makes shareholders more confident which has positive effects on stock price. Following 21st century CSR guidelines, corporate governance can also help the company maintain good rapport with the public by fulfilling social and environmental responsibilities. Most importantly, corporate governance provides a direction and a purpose for a company, which is critical to building long-term success.
Shareholder Communication Chief executive officers and other company executives more commonly
communicate with the public at shareholder meetings and in press conferences. However, as part of corporate governance, it is the company's
board that must ensure that the company communicates responsibly with its shareholders. This includes openness and accuracy in financial statements, disclosures and announcements. It also means offering shareholders a way to voice their opinions to the company and its leadership.
How to Implement a Corporate Governance
Corporate governance relates to a set of specific policies, laws and institutions, and the processes and customs used to administer a company or business. Corporate governance also involves the stakeholder relationships with regard to the goals that govern the business. Principal stakeholders include shareholders, board of directors, and executive and operational level management. Other stakeholders may involve creditors, regulators, suppliers, employees, customers and the business industry or community.
Educate chief executive officers and all of those involved in the management operations of the company, including senior managers, to gain an understanding of the theory behind corporate governance. All necessary parties should learn about compliance issues and how they directly and indirectly affect the company. Learn about the external marketplace and legislation that can safeguard the company's policies and processes. Read books on the subject of corporate governance such as "Corporate Governance: A Practical Implementation Guide" by Alex Knell. Review the Sarbanes-Oxley Act, designed to restore public confidence in corporate governance, passed by the U.S. federal government in 2002.
Join the International Corporate Governance Network (ICGN) to develop, maintain and revise the company policy according to worldwide corporate governance standards. Participate in the ICGN's knowledge, expertise and networking resources with corporate governance institutional investment, business and policy professionals.
Review the company departments relating to specific corporate governance mandates. Develop a strategy including which types of specific compliance should be addressed immediately and which can wait. Outline an internal system that uses the policies and processes of the company to support shareholder and stakeholder needs. Review appropriate code sections for each level of compliance. Prioritize by using check lists and assigning tasks to appropriate parties.
Develop a measurable corporate governance strategy. Manage the business for the long term by investing in and engaging with companies that deliver sustainable returns. Be prepared to sacrifice short-term opportunities in favor of less risk and better long-term results. Design plans that consist of measurable results that can be monitored.
Create a leadership team of all parties involved. Hold meetings to determine how to use the developed strategy plan. Make sure team members know their roles and responsibilities in governing the company. Refer to the plan for guidance and to create new recommendations as needed. Use the plan as a working document and review it regularly so that it may be adjusted accordingly.
Ensure accountability of certain key individuals in the organization through methods that are designed to reduce or eliminate inefficiency. Use methods that involve procedures designed to add real value to the company. Specific procedures should add to the sale price of the business so that the buying pool would be increased prior to the future sale of the company. Understand that corporate governance standards are an ever-evolving set of business rules, the demands of which continue to expand and rise.
How to Start Corporate Governance
On a general level, modern corporate governance can be described as the management policies and processes that companies use to ensure efficient operations and fair and timely decision making. In the past, corporate governance was more narrowly defined as the specific policies in place to protect shareholder interests, but today the term has evolved to mean a framework of policies and practices that ensure accountability and fairness in the relationship between corporate management (especially the board of directors) and all company stakeholders. And while corporate governance used to be thought of as a business school concept that applied only to large public companies, today it is increasingly being seen and applied as a basic management practice in companies of all sizes.
Research corporate governance structures and practices. Analyze the current organizational structure of your company and decide what type of corporate governance philosophy and structure will work best with your corporate culture.
Organize several brainstorming sessions on corporate governance policy among all stakeholders in the company, and then divide into breakout sessions to tackle specific issues. This process is likely to take at least several weeks, but after you are done, you should have hashed out a set corporate governance policies that represent the interests of all stakeholders.
Assemble representatives from all company stakeholders for final discussions of the results of the specific corporate governance breakout sessions. The goal of these discussions is to finalize a set of corporate
governance policies that ensure fairness and transparency for all stakeholders in any corporate affairs.
Write up the governance policies. Consider working with a corporate governance expert or human resources specialist during this process, as there may be important legal considerations to consider.
How Does Corporate Governance Affect an Organization?
Corporate governance refers to an established body of rules, procedures and legal principles that seek to address the relationship between the stakeholders of a modern corporation, which in most cases is comprised of shareholders, a board of directors and management/employees. The extent to which each of the vested parties effectively discharges their duties or are allowed to fulfill their designated roles will determine whether the particular governing structure proves beneficial or detrimental to the organization.
Governing Structure Stockholders are the owners of a corporation. In a publicly held corporation,
however, there is a separation of ownership and control. Although elected by shareholders, management and control of the corporation is vested exclusively in the board of directors. Senior management reports directly to the board of directors, and it is the responsibility of the directors to establish corporate policy and ensure that the company's strategic goals are implemented consistently with preserving shareholders' equity investment in the enterprise.
Internal Controls One of the most important functions of directors is ensuring that adequate
internal auditing controls and financial reporting mechanisms are in place that will help ensure that the financial statements prepared by senior management accurately and truthfully reflect the financial performance of the corporation. Effective directors will insist that internal audit procedures be performed regularly and scrupulously so as to guard against earnings being either overinflated or fraudulently misstated. Directors also should ensure that the company's auditing firm is truly independent and has no existing or potential conflicts of interest with the corporation or senior executives.
Independent Judgment In order to effectively safeguard the interests of shareholders, the board of
directors must exercise its independent judgment and not merely function as
a captive of senior management. As fiduciaries, the directors owe the corporation and its shareholders the duty of the utmost good faith and loyalty. In order to comply with their fiduciary duties, the directors must do more than reflexively approve, or rubber stamp, without reasonable inquiry, the policies, reports and financial statements prepared by senior management. Directors have an obligation to make an independent inquiry into the feasibility and prudence of the policies implemented by senior executives.
Consequences of Ineffective Corporate Governance The failure of directors to exercise their independent discretion and due
diligence in reviewing the policies and financial reports of senior management can lead to dire consequences for a corporation. The spectacular and precipitous collapse of Enron and WorldCom in the 1990's was in part due to the failure of directors at those companies to exercise their independent judgment in diligently overseeing the policies and procedures of senior management.
Importance of Internal Controls in Corporate Governance
Accounting principles and internal audit rules require that companies establish adequate and functional internal controls to improve corporate governance processes. These principles include generally accepted accounting principles and the Institute of Internal Auditors standards.
Internal Control Definition An internal control is a set of instructions, guidelines and procedures that a
company's senior leadership establishes to prevent operating losses resulting from theft, error, technological malfunction and employee neglect or carelessness. An internal control also helps a company prevent adverse regulatory initiatives, such as fines or litigation.
Corporate Governance Definition Corporate governance consists of all mechanisms, technological processes
and physical systems that department heads and segment chiefs put into place to make sure a company operates effectively. Governance tools include human resources policies and guidelines, as well as departmental work specifications. These tools may also include external elements, such as laws and regulations.
Importance Internal controls play an important role in corporate governance systems.
Controls help a company prepare accurate and complete financial
statements at the end of each month and quarter. A firm may also hedge, or protect against, operating risks by implementing functional controls. These risks may relate to manufacturing activities and technological processes.
The Difference between Corporate Governance & Corporate Management
Corporate management is the general process of making decisions within a company. Corporate governance is the set of rules and practices that ensure that a corporation is serving all of its stakeholders. For example, a corporate management team might decide that a company should purchase a new headquarters; a corporate governance policy would require that the company's CEO not have a relative work as the real-estate broker on that transaction.
Corporate Management Development Corporate management has changed over time as managers have acquired
better tools for understanding the problems they face. Most corporate managers are able to quantify many of the issues they consider, in order to make the correct decision. Managers factor in costs, benefits and the uncertainty of projects they are considering.
A good corporate manager is someone who can perform sustainable functions within the company they work for, while either maximizing revenue or minimizing cost, depending on the department. Since the principles of corporate management are so broad, there are often specific disciplines for different parts of a company. The way a sales team is managed differs from the way the accounting department is managed.
History of Corporate Governance Corporate governance is a newer subject of study. In the past, many
companies were run solely for the benefit of their managers or founders. A company might have outside shareholders, business partners and thousands of employees, but under older ideas of corporate governance, the company would pursue only the goals of their managers. Managers might choose to provide poor benefits for employees, knowing that these employees couldn't find better opportunities. Managers might also pay themselves excessive salaries without paying attention to community standards with respect to such practices.
Rise of Corporate Governance In recent years, many companies have become more conscious of the need
for good corporate governance. As regulations have tightened, it has become
more difficult for companies to exploit workers or harm the environment. In addition, changes in financial markets have made it harder for companies to harm their shareholders. A mismanaged company becomes vulnerable to being purchased by another firm, so managers tend to treat their shareholders better. An increased focus on sustainability as a business practice, not just an ethical position, has also affected corporate governance.
Measuring Corporate Management Success Corporate management's success can generally be measured in terms of
numbers. If the department in question is meant to create a profit (for example, if the entity being measured is a retail store or a factory), a quantity like profit margin or return on investment can demonstrate that it is achieving its goals. For departments that don't have such responsibility (like a shipping department, or an accounting group), many managers measure their results in terms of cost. If a department can accomplish the same functions and spend less money, then by this measure, it's a success.
Integrating Corporate Management and Governance In recent years, many management thinkers have tried to synthesize
corporate management and corporate governance into a single discipline. Since corporate governance is meant to equitably distribute the results of good corporate management, they fit together naturally: the best situation for a company to be in is for it to have good governance and good management. Combining these can take a variety of forms, from giving workers representation in company management to pursuing more efficient manufacturing processes in order to cut costs and help the environment. The most effective companies combine these practices in a mutually reinforcing way.
Risk of Non-Compliance in Corporate Governance
Corporate governance involves all the methods a corporation uses to protect its investments and the interests of its financiers. This includes a thorough definition of the company's infrastructure from how it is directed from the executive level all the way down to entry-level employees. The risk of non-compliance to a company's corporate governance strategy or structure can lead to a lack of confidence in the company and decrease its growth potential.
Loss of Shareholder Confidence A company that does not adhere to its corporate governance strategy runs
the risk of weakening the confidence of its shareholders. This may happen because shareholders feel mislead about the company's organizational structure and business strategy. If shareholders believe bad business decisions are in the company's immediate future, they may begin to sell company stock to avoid a potential loss. A large sell-off of company stock
can lead to falling stock prices which diminishes the overall value of the business.
Difficulty Raising Capital When a corporation's stock value diminishes, it becomes more difficult for
the company to raise capital. This is due in part to a negative perception of the company created by a lack of adherence to its corporate governance strategies. Basically, the view from outside the corporation is the business lacks sufficient infrastructure to make fiscally intelligent decisions. Potential investors may stay away from a company with a low stock value and lack of adequate corporate governance because of a greater risk of losing money.
No Risk Management Non-compliance in corporate governance may lead to a lack of risk
management within a corporation. This may lead a company into bad investments including extending credit to those who may not be able to pay such an extension back. A large amount of risk-laden investments not only hurts the company but may put its ability to repay its own creditors at risk. This can lead to a domino effect of credit defaults which can cripple a corporation and hurt business in other industries with investments tied to the floundering business.
Increased Government Oversight A corporation with a reputation for lack of adherence to corporate
governance strategies may incur increased government oversight from departments looking to verify that the company is operating within the bounds of the law. Oversight may include reviews of business practices including employee pay and relations, quality of manufacturing facilities, impact of business practices on the environment, legality of all investments and honest reporting of all profits, debts and losses. A corporation found to be in violation of government regulations may face fines or even criminal penalties for its executives.
Corporate Governance Objectives
Alan Calder, in his book, “Corporate Governance: A Practical Guide to the Legal Frameworks," states, "Effective corporate governance is transparent, protects the rights of shareholders, includes both strategic and operational risk management, is as interested in long-term earning potential as it is in actual short-term earnings and holds directors accountable for their stewardship of the business." These guidelines include most objectives of a corporate governance policy in any organization.
Transparency and Full Disclosure Good corporate governance aims at ensuring a higher degree of
transparency in an organization by encouraging full disclosure of
transactions in the company accounts. Full disclosure includes compliance with regulations and disclosing any information important to the shareholders. For example, if a manager has close ties with suppliers or has a vested interest in a contract, it must be disclosed. Also, directors should be independent so that the oversight of the company management is unbiased. Transparency involves disclosure of all forms of conflict of interest.
Accountability Jean Du Plisses, James McConvill and Mirko Bagri, in their book, "Principles of
Contemporary Corporate Governance," point out that a corporate governance structure encourages accountability of the management to the company directors and the accountability of the directors to the shareholders. Through hiring independent directors, a company aims to create good corporate governance. The compensation of the chief executive officer has to be approved by the company directors to ensure that the compensation structure is fair and in the best interests of the shareholders. Any discrepancies in the company accounts or malfunctioning of the company are closely watched by the board of directors. The board has a right to question strategic decisions.
Equitable Treatment of Shareholders A corporate governance structure ensures equitable treatment of all the
shareholders of the company. In some organizations, a particular group of shareholders remains active due to their concentrated position and may be better able to guard their interests; such groups include high-net-worth individuals and institutions that have a substantial proportion of their portfolios invested in the company. However, all shareholders deserve equitable treatment, and this equity is ensured by a good corporate governance structure in any organization.
Self Evaluation Corporate governance allows firms to evaluate their behavior before they are
scrutinized by regulatory bodies. Firms with a strong corporate governance system are better able to limit their exposure to regulatory risks and fines. An active and independent board can successfully point out the loopholes in the company operations and help solve issues internally.
Increasing Shareholders' Wealth The main objective of corporate governance is to protect the long-term
interests of the shareholders. Ira Millstein, in his book, "Corporate Governance: Improving Competitiveness and Access to Capital in Global Markets," mentions that firms with strong corporate governance structures are seen to have higher valuation premiums attached to their shares. This shows that good corporate governance is perceived by the market as an incentive for shareholders to invest in the company.
Seven Characteristics of Good Corporate GovernanceIn 1992, the King Committee of Corporate Governance was formed in South Africa with the intent of laying down recommendations for highest standards in corporate governance with a South African perspective. The Committee published its first report in 1994 which established recommended standards for the board of directors of certain listed companies. In 2002, the second King's report was published which updated the Code of Corporate Practices and Conduct. The second King's report also listed seven characteristics of good corporate governance.
Discipline Discipline in corporate governance means that the senior management
should be aware of and committed to adhere to behavior that is universally recognized as correct and proper.
Transparency Transparency is the measure of how easy it is for outsiders to find out and
analyze a company's financial and non-financial fundamentals. Companies should make this information available in timely and accurate press releases to give outsiders a true picture of what is happening within the company.
Independence For good corporate governance, it is important that all decisions are made
objectively with the best interest of the enterprise in mind and without any undue influence from large shareholders or an overbearing chief executive officer. This requires putting in place mechanisms such as having a diversified board of directors and external auditors to avoid any potential conflict of interest.
Accountability People who make decisions in a company must be held accountable for their
decisions and mechanisms must exist to allow effective accountability. In public companies, investors hold individuals running the company accountable for their actions by carrying out routine inquiries to assess the actions of the board.
Responsibility In a corporation, managerial responsibility means that the management be
responsible for their behavior and have means for penalizing the mismanagement. It also means putting in place a system that puts the company on the right path when things go wrong.
Fairness The company must be fair and balanced and take into the account the
interest of all of the company's stakeholders. In this sense, the rights of each of the groups of stakeholders must be recognized and respected.
Social Responsibility A well-managed company must also be ethical and be responsible with
regard to environmental and human rights issues. As such, a socially responsible company would be non-exploitative and non-discriminatory.
Core Principles of Good Corporate Governance
Corporate governance principles are a set of nonbinding standards developed to help guide businesses in their actions and relationships with the stakeholders of the company. Stakeholders are the shareholders, employees, Board of Directions, suppliers, customers and the community in which it operates. Stakeholders usually report issues involving corporate governance to the ombudsman. This is the person primarily responsible for ethical oversight.
Ensuring the Basis for an Effective Corporate Governance Framework
Ensuring the basis for an effective corporate governance framework states that a company should clearly outline the division of labor, especially among supervisory employees and management. Making known legal and regulatory requirements to key personnel is important, as is the ability of management to fulfill any responsibilities regarding those who do not act in accordance to these.
The Rights and Equitable Treatment of Shareholders The basis for the rights and equitable treatment of shareholders is that all
shareholders of the same class receive equitable treatment and that the company denies no rights given to any shareholder. Shareholder rights include the right to vote in shareholder meetings, reception of information regarding necessary company changes, election or removal of board members, transferring shares and obtaining any material relevant to the business in a timely manner. These principles also prohibit insider trading of any kind.
The Role of Stakeholders The role of stakeholders focuses on employee development, reporting of
concerns regarding unethical actions and alerting shareholders and creditors to problems regarding insolvency or inability to pay in a timely manner. It encourages mechanisms to increase employee performance, so long as it is ethical. Making available a means to report unethical actions of any kind is encouraged. Alerting shareholders and creditors about the possible inability to pay bills on time, or at all, is important.
Disclosure and Transparency Adherence to the principle of full disclosure requires publicly revealing
shareholder and ownership rights, financial statements, company objectives
and payment to key executives. Also, including risk factors pertinent to the company, accounting procedures and corporate governance policies is important. Many times this information is available in the annual report of a corporation.
Examples of Good Corporate Governance
What constitutes good corporate governance will vary, depending on the culture in which the corporation operates. What is considered good corporate governance in the United States might be considered unethical in other cultures. Conversely, what another culture might think of as good corporate governance might be considered unethical in the United States. Still, some partial consensus has developed over time.
Communication
Good corporate governance requires timely and accurate communication of a number of aspects of corporate business operations. Things that must be communicated in a timely and accurate fashion can include corporate financial performance, such as sales, profit, and loss data, and relevant economic data. Relevant economic data can include cash reserves and corporate debt load.
The activities in which the company engages in the course of business operations must also be reported in an open and timely fashion. The exact definition of timely can vary, however, depending on the jurisdiction. In general, this information is communicated, at minimum, in annual corporate reports.
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Shareholder Protection
Good corporate governance must protect and promote shareholder interests and rights. Although this is usually interpreted as a fiduciary duty to give shareholders as high a return on their investments as possible, there are some other factors.
Short-term actions that promote short-term profit, but take legal and ethical risks that may result in negative actions against a corporation in the future, are generally not considered acting in the shareholders' interest.
Acting in the shareholders' interest also requires that a board of directors pay close attention to employing competent and skilled senior corporate officers and executives.
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Board Independence
Although the board of directors of a corporation is answerable to shareholders, the board must be able to operate independently. This is especially important in determining the direction of a corporate entity.
In some cases, senior executives may want to take a company in a direction that the board of directors views as contrary to shareholder interests. As a corporate governing body elected by shareholders, the board must have the power to replace senior executives that board members do not think are acting in the best interest of shareholders.
Functions of Corporate Governance
Corporate governance encompasses the policies, initiatives and practices a corporation uses to accomplish its business goals and develop its infrastructure. The functions of corporate governance begin with a corporation's shareholders and are passed to the elected board of directors, who are then in charge of developing governance strategies for the company as a whole.
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Goals and Risk Management A corporation's board of directors sets policies and procedures to effectively
meet the business' short- and long-term investment goals while working to manage risk. Each investment decision is made with the goal of securing long-term company growth and profitable returns. The board of directors manages the risk involved with each new investment opportunity through careful examination of the opportunity's value while determining what problems are the most likely to occur. This allows the company to plan ahead for potential trouble spots and develop strategies to avoid them.
Corporate Accountability Another function of corporate governance is to ensure accountability within
the board of directors as well as the company's larger management structure. This provides a system of checks and balances to make certain company procedures and initiatives are being carried out properly. The board of directors can stay well informed as to the progress of investments and business projects because of this greater level of accountability and communication among the company's management structure. This allows for greater mobility in adjusting goals or project methods should an investment opportunity or business venture produce smaller returns than expected.
Shareholder Meetings Effective corporate governance requires shareholders to remain well
informed of the company's financial health and the status of its ongoing business initiatives. To keep shareholders informed, a corporation's board of
directors schedules regular meetings where the board shares the company's level of profitability, its strategies for achieving goals and any problems it foresees in the market that may cause them to fall short of meeting those goals. Shareholders who are kept well-informed of company practices are more likely to trust the board of directors and remain as corporate investors as opposed to selling company stock.
Government Regulations An integral component of corporate governance is to ensure transparency in
relation to government corporate regulations. These rules involve a wide variety of required procedures, including regular financial reporting, ethical treatment of workers, safe environmental practices and handling of hazardous materials. The BP Deepwater Horizon oil spill of 2010 is an example where a lack of corporate governance led to substandard building practices, which contributed to a large-scale environmental disaster affecting a large portion of the United States.
What Is the Purpose of Corporate Governance?
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Corporate governance is the framework companies use to outline the specific operations and guidelines for their employees. Corporate governance is often a unique framework built around the organization’s mission and values. Large corporations and publicly held companies often use corporate governance to create internal business policies due to the layers of management involved in the company.
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Corporate Governance Objectives Seven Characteristics of Good Corporate Governance
Facts Although corporate governance is usually unique to each company, it has a
few universal elements. Corporate governance controls the internal and external actions of managers, employees and outside business stakeholders. This framework also outlines the duties, privileges and roles of board members or directors to ensure these individuals do not take advantage of the company’s resources. Companies may also include information on the role of shareholders in the organization and their responsibilities for voting on corporate issues.
Features Corporate governance usually outlines the goals and objectives of each
business contract. The rate of return, length of the contract, individuals who can approve contracts and other obligations are usually included in the corporate governance framework. Corporate governance also creates a
checks and balances system to govern internal business departments. This system ensures no one individual or department dominates business decisions or operates outside the company’s mission and values.
Considerations Publicly held corporations may require shareholder approval when setting up
their corporate governance framework. Shareholders are the individuals who have invested money into the business and expect a significant return on their capital. Rather than allowing the board of directors or executive officers the ability to create and implement corporate governance, shareholder approval may be required to ensure that these individuals understand how the company expects to generate financial returns. Shareholders may also be required to approve any changes to the corporate governance framework during the annual shareholders' meeting.
Benefits Companies using corporate governance may be able to streamline business
operations and increase the potential for maximizing profits. Creating guidelines that must be followed by individuals working in the business can help companies ensure a minimum set of operating standards exists in the company. Organizations may also be able to discipline employees or correct inappropriate workplace situations using the rules or procedures outlined in the company’s corporate governance framework.
Expert Insight Management consultants, public accounting firms, law firms or other
professional organizations may be used by a company creating corporate governance. These individuals or groups can help companies ensure that the corporate governance design for the company meets the expectations of all parties involved. Law firms may be used to ensure that the company’s corporate governance framework meets all legal requirements regarding its business operations.
What Are the Functions of the Board of Directors?
A board of directors is initially elected by the incorporator of a corporation or nonprofit organization. In subsequent years the members of the board are elected by shareholders at an annual meeting. The board of directors acts as a group with no single individual forcing an opinion or direction upon the corporation as a whole.
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Chief Executive A corporation's board of directors is responsible for the appointment,
evaluation and, if required, eventual termination of the position of Chief Executive.
Continuity The business affairs of a corporation are managed by the Board of Directors,
which provides continuity for the corporation in the development of the services and products provided.
Objectives In nonprofit organizations the Board of Directors develops policies that fit
into the mission statement and values decided upon by the nonprofit. In the for-profit sector the broad policies and objectives of the corporation are decided upon by the Board of Directors in cooperation with the Chief Executive and the company's employees.
Accountability The Board of Directors is accountable for the quality of the product or service
supplied by the corporation. The Board of Directors is also responsible for the expenditure of corporation funds.
Resources The Board of Directors is responsible for ensuring the finances available to a
corporation are adequate to cover company expenses.
Finances The Board of Directors carries certain fiscal responsibilities including
overseeing and accepting budgets. The Board of Directors is also responsible for financial policies regarding contracts between the corporation and the public.
Corporate Governance Checklist
Corporate governance is a term used for the internal rules that govern the way a company functions. Corporate governance helps shape the behavior of a company's top staff. Affecting this behavior can increase shareholder value and encourage ethical behavior. In order for corporate governance to be effective, however, it needs to contain certain elements. You should ask yourself 10 basic questions about your organization's corporate governance, based on best practices established by the ASX Corporate Governance Council. Follow this checklist of recommendations to develop effective corporate governance for your organization.
Team-Building Activities About Integrity Does it have management oversight?
Your corporate governance should include methods of monitoring the top management of your organization. This does not mean that you need to micromanage your management team, but you should be aware of what they are doing.
Does the board add value? Structure your board in a way that adds value to the company that would not
otherwise be there. In order to add value, board members should be committed and have the proper competences to oversee the organization.
Does it promote ethical behavior? Your corporate governance should provide guidelines and standards that
make explicit what constitutes ethical behavior. Your governance should not leave any gray areas open to interpretation. The board should make its position clear on any controversial issues.
Does it safeguard the organization's financial integrity? Your corporate governance should ensure that the financial information
relating to the organization is accurate and complete. For instance, you should require your chief executive officer and chief financial officer to sign off on all financial reports, acknowledging that the information is complete and truthful.
Does it require timely disclosure? Your corporate governance should include elements requiring accurate and
timely disclosures of information that is of interest to shareholders such as extraordinary losses or gains, significant damage to equipment or anything else that may affect shareholder value.
Does it respect shareholder rights? Corporate governance should provide provisions requiring communication
with shareholders and making shareholder meetings easily accessible. This includes specific requirements to make information available in a timely fashion and to ensure that it is efficiently distributed to shareholders.
Does it manage risk? Your corporate governance should explicitly state a means for assessing risk
and dealing with risk to the organization, such as requiring a committee to oversee and report on risks.
Is remuneration fair? Remuneration, particularly of top executives, should be fair. Corporate
governance should make it clear that remuneration should be at a level to
maintain a qualified and competitive workforce without excessive costs. Disclose to shareholders your executives' annual salaries and bonuses.
Does it monitor board performance? Your corporate governance should provide a means of monitoring the
performance of board members. Additionally, it should make programs available to increase and encourage the performance of board members.
Does it recognize legitimate interests of stakeholders? Stakeholders include shareholders, governments, citizens, interest groups
and others. Your corporate governance should require that legitimate concerns from these groups be dealt with effectively.
What Is the Importance of Corporate Governance?
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Business management is the coordination and distribution of economic resources throughout an organization. While smaller businesses typically rely on business owners to complete these functions, large companies often have several layers of management to oversee operations. Corporate governance is a managerial tool for extremely large or publicly held companies.
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Significance Corporate governance protects the financial interests of individuals in a
company, whether they are owners, managers, employees or outside stakeholders. Governance includes guidelines or policies that provide a framework individuals must follow when working in the company. Publicly held companies often have a board of directors as the overseers of corporate governance.
Features Companies use corporate governance to set a minimum standard of
acceptable behavior for employees in the business. These features can include honesty, integrity, accountability transparency, fairness and proper relationships with other companies in the business environment.
Effects Using corporate governance can create a competitive advantage for
companies in the business environment. Governance that provides specific responsibilities for each owner, manager and employee in the company ensures little or no confusion for competing activities or tasks related to business functions.
Corporate governance principles are a set of nonbinding standards developed to help guide businesses in their actions and relationships with the stakeholders of the company. Stakeholders are the shareholders, employees, Board of Directions, suppliers, customers and the community in which it operates. Stakeholders usually report issues involving corporate governance to the ombudsman. This is the person primarily responsible for ethical oversight.
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Seven Characteristics of Good Corporate Governance Examples of Good Corporate Governance
Ensuring the Basis for an Effective Corporate Governance Framework
Ensuring the basis for an effective corporate governance framework states that a company should clearly outline the division of labor, especially among supervisory employees and management. Making known legal and regulatory requirements to key personnel is important, as is the ability of management to fulfill any responsibilities regarding those who do not act in accordance to these.
The Rights and Equitable Treatment of Shareholders The basis for the rights and equitable treatment of shareholders is that all
shareholders of the same class receive equitable treatment and that the company denies no rights given to any shareholder. Shareholder rights include the right to vote in shareholder meetings, reception of information regarding necessary company changes, election or removal of board members, transferring shares and obtaining any material relevant to the business in a timely manner. These principles also prohibit insider trading of any kind.
The Role of Stakeholders The role of stakeholders focuses on employee development, reporting of
concerns regarding unethical actions and alerting shareholders and creditors to problems regarding insolvency or inability to pay in a timely manner. It encourages mechanisms to increase employee performance, so long as it is ethical. Making available a means to report unethical actions of any kind is encouraged. Alerting shareholders and creditors about the possible inability to pay bills on time, or at all, is important.
Disclosure and Transparency Adherence to the principle of full disclosure requires publicly revealing
shareholder and ownership rights, financial statements, company objectives and payment to key executives. Also, including risk factors pertinent to the company, accounting procedures and corporate governance policies is
important. Many times this information is available in the annual report of a corporation.
Models of Corporate Governance
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Corporate governance is the process by which large companies are run. There are various different models that are applied across the world. There is disagreement over which is the best or most effective model as there are different advantages and disadvantages with each model. Methods are developed according to the laws and other factors specific to the country of origin.
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Anglo-US Model The Anglo-US model is based on a system of individual or institutional
shareholders that are outsiders of the corporation. The other key players that make up the three sides of the corporate governance triangle in the Anglo-US model are management and the board of directors. This model is designed to separate the control and ownership of any corporation. Therefore the board of most companies contains both insiders (executive directors) and outsiders (non-executive or independent directors). Traditionally, though, one person holds the position of CEO and chairman of the board of directors. This concentration of power has led many companies to include more outside directors now. The Anglo-US system relies on effective communication between shareholders, management and the board with important decisions being put to the vote of the shareholders.
Japanese Model The Japanese model involves a high level of ownership by banks and other
affiliated companies and "keiretsu," industrial groups linked by trading relationships and cross-shareholding. The key players in the Japanese system are the bank, the keiretsu (both major inside shareholders), management and the government. Outside shareholders have little or no voice and there are few truly independent or outside directors. The board of directors is usually made up entirely of insiders, often the heads of the different divisions of the company. However, remaining on the board of directors is conditional on the company's continuing profits, therefore the bank or keiretsu may remove directors and appoint its own candidates if a company's profits continue to fall. Government is also traditionally influential in the management of corporations through policy and regulations.
German Model As in Japan, banks hold long-term stakes in corporations and their
representatives serve on boards. However they serve on boards continuously, not just during times of financial difficulty as in Japan. In the German model, there is a two-tiered board system consisting of a management board and a supervisory board. The management board is made up of inside executives of the company and the supervisory board is made up of outsiders such as labor representatives and shareholder representatives. The two boards are completely separate, and the size of the supervisory board is set by law and cannot be changed by the shareholders. Also in the German model, there are voting right restrictions on the shareholders. They can only vote a certain share percentage regardless of their share ownership.
The Four Management Styles of Corporate Governance
The Four Management Styles of Corporate Governance
Corporate governance is the system used to operate and control a company. It can be thought of as a framework used to balance the roles of the management, board of directors and shareholders. The style of corporate governance should help to meet the goals of the owners, while also caring for the interests of employees, the needs of customers and the local environment. There are many ways to define management styles of corporate governance, but there are four main styles.
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Chaos Management In this style, top management has little involvement in the strategic
management process and focuses on operational policies. The board of directors may also be only minimally involved in strategy, which can occur in a company that was founded by a strong leader who is no longer involved with the company. This style works best in companies in the production phase, when there may be few major strategic and operational decision to make.
Entrepreneurship Management In this style, the board of directors has little involvement, but management
acts to provide strategic and operational policies. Top management is allowed to make changes and largely run the company. This is also called a Controlled Board style of governance, because often top management serves on or controls the board of directors. It works best in companies in a dynamic growth phase because it allows management to make quick decisions and adapt rapidly to a changing market.
Marionette Management Here, the board of directors controls all strategic planning, while the top
management handles operational decisions. There is usually minimal involvement by shareholders. This style, which may also be called Influenced Board, suits mature companies whose main focus is on continuing to yield high dividends. It may also come about when a company is without a CEO for a long period of time.
Partnership Management In this style, the board of directors and the top management work closely
together to develop the company's strategies, mission and operational policies. Board members may be active in some day-to-day operations and committees. This style may also involve mechanisms to increase shareholder representation on the board, and is most common in companies in the financing stage, when both management and the board must show they can be trusted to make decisions that will lead to business success.
What Are Internal Controls in Corporate Governance?
Internal controls are policies designed to implement a system of checks and balances among an organization's employees. Corporate governance is the act of creating, implementing and maintaining policies to govern the administration and inner workings of a corporation. Internal controls are a vital part of corporate governance, as they can reduce or eliminate opportunities for theft, fraud, mishandling of assets and collusion by involving a range of employees in activities with multiple components or steps.
Separation of Duties
Separation of duties is a major component of any system of internal controls. Separating related duties in accounting or inventory management makes internal theft more difficult, as it spreads access to and accountability for company funds and inventory over a larger group of people.
An example of separation of duties in inventory management includes separating purchasing, receiving and inventory accounting duties between three people. If a single person was responsible for all three duties, he could falsify purchasing and receipt records to take inventory for himself on the company's dime, or inflate purchase prices to line his own pockets.
Administrative Controls The terms "bureaucracy" and “red tape” carry negative connotations in the
business world, but red tape exists for a reason. Signed authorization forms and multi-tiered approval processes can be effective internal controls that increase accountability on the front line, as well as within the ranks of management. The more people that know about any particular decision, the
less likely the decision maker is to act unethically. Signed authorization forms leave a paper trail, pinpointing exactly who was responsible for valuable assets at every turn.
Audits Internal audits are another powerful internal control. Any company that relies
heavily on inventory or large volumes of materials -- such as steel, glue or ink toner -- should conduct regular and random audits to ensure that the inventory and materials they have on hand matches purchase and sales records.
Separation of duties comes into play in audits, as well. Never allow someone with the ability to steal inventory or materials to perform an audit. Assign the task to people who do not work directly with your company's assets whenever possible, such as someone from the accounting department.
Accounting Audits Cash is just as valuable to a company as its inventory and materials, and
cash can often be easier to steal than other assets. Perform regular and random audits of your accounting system to ensure that your internal records match up with sales receipts, bank records and suppliers' records. Bank and supplier records cannot be altered from within your company, so if your records do not match theirs, there may be an issue in your accounting system.
Separating accounting and financial audit duties can be difficult, since your accounting department may be the only employees capable of performing the audit. Consider using an outside CPA to audit your books from time to time.
Corporate Governance Issues & Challenges
Corporate governance refers to the structure of a large business and how the business decides its policies and growth strategy. Corporate governance typically means that a board of directors controls the entire corporation while an executive board (possibly the same thing) makes key business decisions, and layers of management progress beneath them into different departments. Corporate governance is a key issue in society and can be a struggle for corporations on several levels.
Bureaucratic Layers First, corporate governance structures are very top heavy. They require
many layers of management and long lists of vice presidents and presidents for information to pass through. This makes it very difficult for the company leaders to receive accurate, important data from the lower levels of the company, especially if managers along the way want to distort the message to make themselves sound better. Ultimately, the chain of command
becomes so long that the business is unwieldy, responding slowly to change. Flat business structures with few layers of management are the goal of many corporations.
Accountability Corporate governance has earned a negative connotation in society, mostly
because of the questionable practices of key executives and board members. Not all corporations commit fraud, of course, but those that do receive a lot of attention, and many executives have become used to taking questionably large bonuses even in a contracting economy. This has lead to an atmosphere of distrust among consumers and investors, which corporations fight by showing increased transparency in their work and mission.
Governance Standards Internally, corporate governance faces a different type of struggle. A board
of executives can make good decisions on company policy and propagate standards throughout the business. But what if managers prefer not to listen? Rebellious managers can ignore or subvert corporate decisions at many levels of the business, and there are often a few troublemakers in all businesses. Corporate boards need methods of enforcing standards and disciplining managers when necessary, a component of governance few boards consider.
Board Terms Board terms are a complex issue. In a board of directors, directors typically
only sit on the board for a brief term, rarely more than several years. Life-term board members can cause problems with ingrained beliefs and concentration of power, so businesses prefer to cycle board members. But the corporation must decide how to cycle. If all directors switch around at the same time, the corporation may be left open for a hostile acquisition. If the board decides to stagger member terms, it must decide when to stagger and how to accomplish it.
Corporate Governance Effects
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Corporate governance is the internal structure of a corporation from its lowest level workers all the way up to its executives. The term is also used to describe how a corporation makes its decisions regarding business-related activities from reaching its short-term and long-term goals to communicating with shareholders. Corporate governance has far-reaching effects not only for the business itself but for the financial market as a whole.
Shareholder Confidence Effective corporate governance can have a positive affect on shareholder
confidence by reassuring them that the company is making smart business decisions and is well organized internally. Confident shareholders are likely to invest larger amounts of money in an effectively governed company because a positive return on the investment is likely. This can lead to increased market confidence in the company, which can serve to increase its overall stock value. When the stock value of a company rises, so does its overall value.
Business Growth and Development As the value of a corporation increases, so does its ease in generating capital
to make purchases aimed at sustaining growth. Corporate governance can have a positive effect on business growth by making it easier for a corporation to raise the necessary capital to acquire new territories or develop new products. Raising capital is easier because investors believe they are extending money to a well-run company with the secure infrastructure necessary to make smart financial decisions.
Economic Effects A corporation with poor corporate governance strategies can have a
negative influence on the business market and the larger economy. A lack of effective corporate governance at the executive and management level can lead to bad business decisions, which can lower the overall value of the company and make it more difficult for the business to meet its financial obligations. This was seen during the economic crisis of 2009 when poor corporate decisions lead to cascading failures in the real estate and automobile markets, which in turn caused large-scale job layoffs and economic slowing.
Public Perception of Business Corporate governance strategies can have an impact on the public
perception of a corporation. A company with strong corporate governance strategies relating to responsible spending, treatment of workers and environmental concerns can generate a large amount of good will among the people. Likewise, a company with little concern for the environmental impact of its business practices or the health of its workers can generate a large amount of public distrust. This lack of faith also can manifest itself as increased government oversight of a company as federal and state departments closely monitor the corporation to ensure it is adhering to all appropriate regulations.
Three Types of Corporate Governance Mechanisms
Corporate governance is the policies and procedures a company implements to control and protect the interests of internal and external business stakeholders. It often represents the framework of policies and guidelines for each individual in the business. Larger organizations often use corporate governance mechanisms to manage their businesses because of their size and complexity. Publicly held corporations are also primary users of corporate governance mechanisms.
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Board of Directors A board of directors protects the interests of a company’s shareholders. The
shareholders use the board to bridge the gap between them and company owners, directors and managers. The board is often responsible for reviewing company management and removing individuals who don't improve the company’s overall financial performance. Shareholders often elect individual board members at the corporation’s annual shareholder meeting or conference. Large private organizations may use a board of directors, but their influence in the absence of shareholders may diminish.
Audits Audits are an independent review of a company’s business and financial
operations. These corporate governance mechanisms ensure that businesses or organizations follow national accounting standards, regulations or other external guidelines. Shareholders, investors, banks and the general public rely on this information to provide an objective assessment of an organization. Audits also can improve an organization’s standing in the business environment. Other companies may be more willing to work with a company that has a strong track record of operations.
Balance of Power Balancing power in an organization ensures that no one individual has the
ability to overextend resources. Segregating duties between board members, directors, managers and other individuals ensures that each individual’s responsibility is well within reason for the organization. Corporate governance also can separate the number of functions that one division or department completes within an organization. Creating well-defined roles also keep the organization flexible, ensuring that operational changes or new hires can be made without interrupting current operations.
Corporate governance is the framework companies use to protect themselves from financial difficulties or hardships. A large part of corporate governance focuses on the accounting department and financial internal controls.
Facts
Because U.S. accounting standards are interpretive by nature, corporate governance must decide how their company will handle certain accounting procedures. An accounting policy is written to ensure that all company accountants correctly account for all financial information.
Function Internal controls are the performance measures instituted by corporate
management to ensure all financial standards and policies are followed by employees. Internal controls may also relate to the daily business operations.
Considerations While most corporate governance for accounting is handled by the chief
financial officer and controller, other management personnel may be involved in the process. This ensures companies create guidelines that cover all aspects of financial information.
Benefits Corporate governance provides a blueprint for employees to follow when
recording and reporting financial information to internal and external stakeholders. This blueprint also alleviates any conflicts of interest that may arise in the accounting workflow.
Expert Insight Executive management may consult public accounting firms or attorneys
when developing their corporate governance. These consultants ensure that any liability issues are addressed by the accounting policy.
1. The Role of Corporate Governance in Accounting
The Role of Corporate Governance in Accounting
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Corporate governance is the framework companies use to protect themselves from financial difficulties or hardships. A large part of corporate governance focuses on the accounting department and financial internal controls.
Facts Because U.S. accounting standards are interpretive by nature, corporate
governance must decide how their company will handle certain accounting procedures. An accounting policy is written to ensure that all company accountants correctly account for all financial information.
Function Internal controls are the performance measures instituted by corporate
management to ensure all financial standards and policies are followed by employees. Internal controls may also relate to the daily business operations.
Considerations While most corporate governance for accounting is handled by the chief
financial officer and controller, other management personnel may be involved in the process. This ensures companies create guidelines that cover all aspects of financial information.
Benefits Corporate governance provides a blueprint for employees to follow when
recording and reporting financial information to internal and external stakeholders. This blueprint also alleviates any conflicts of interest that may arise in the accounting workflow.
Expert Insight Executive management may consult public accounting firms or attorneys
when developing their corporate governance. These consultants ensure that any liability issues are addressed by the accounting policy.
The Role of Corporate Governance in Strategic Decision Making
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One of the most important roles of corporate governance is to ensure that strategic decisions are made in the interest of those with a stake in successful outcomes. Boards have increasingly become more focused on corporate shareholders, but a shift may be beginning to occur.The interests of stakeholders, such as customers, potential customers and non-customers impacted by the decisions of a company, may begin to get attention as corporate governance plays an increasingly strategic role.
Policy Setting
Corporate governance is the system used to direct and control organizations. One of the many important roles played by corporate boards and executive committees is to establish and enforce policies deemed necessary for the effective operation of the company. These may include codes of ethical
conduct towards customers, vendors, employees and shareholders, input into the organization's structure, as well as approval of functional positions and responsibilities. This may include input into the corporate culture, or a host of subtle governance cues that affect the transparency or opaqueness of strategic decision making.
Establishing Corporate Strategy An organization's corporate board must be intimately involved with
establishing a clear definition for the organization's purpose and desired outcomes. If a company sets the goal to become the global leader in telecom technology for the military market, for instance, then corporate objectives, strategic plans, financial allocations and measurable outcomes should all be measured against their ability to move the company toward that goal. If resources are being allocated to places that do not support this strategic goal, then the board's due diligence must identify the reason why and give input into which is off-strategy: the strategic goal itself or the resource actions that appear initially to be out-of-sync.
Assurance That Actions Support Strategic Positions A company's executive team is directly accountable to the board of directors.
This requires that major corporate decisions and results tracked against the corporate goals should be vetted, if not by the full board, then by the board's executive committee. Key strategic actions, such as mergers and acquisitions, major new market entries, exiting markets, closing plants, or changing the diversification mix or pricing position, are examples of decisions that require the oversight of corporate governance.
Monitoring Investment Decisions and Capital Investments It is the responsibility of the corporate board to review and understand the
financial statements of the company and to guide the prudent investment of funds to maximize net income and returns. Especially since the Sarbanes-Oxley Act of 2002 which introduced new responsibilities for financial reporting, corporate boards must be vigilant regarding the strategic impact of new requirements for internal controls. Corporate boards must also review and understand product portfolio and support the executive management team, offering strategic oversight regarding adjustments to the product mix, approving or shifting capital investment to product categories with the most potential to maintain and grow revenue streams and manage expenses. At the same time, corporate board members have a difficult task: helping the executive team balance the short-term goals so desired by shareholders with the long-term investment necessary to ensure the company's future.
Accountability to Stakeholders From a governance perspective, accountability, while often focused on stock
shareholders, can sometimes become something heretofore unconsidered. Historically, business school curriculum has emphasized responsibility
primarily for stock shareholder returns, leaving the responsibilities of a corporation to be a good corporate citizen often overlooked. As stock prices and quarterly dividends have taken center stage, long-term investments are often set aside. Critical aspects of corporate governance responsibilities, such as infrastructure investment, plant retooling, workplace safety or disaster planning, have often been ignored or delayed past safe time parameters. The Gulf oil disaster in 2010 demonstrated questionable judgment by the corporate governance of British Petroleum (BP). While the lapse was perhaps shared by many oil producers, it followed years of unprecedented revenue growth and shareholder returns. As unprecedented profits rolled in, it appeared that little to no corporate investment was designated to technology, safety inspections or deep water disaster response plans, even as oil reserves were tapped in deeper and deeper water. Surely the stakeholders in this disaster go far beyond BP shareholders and include the fishermen and small business people whose livelihoods were destroyed, the wildlife being killed by it and the people of the Gulf, whose lives would be impacted for decades to come. A corporate board that does not prepare for crisis, or consider the broad impact of their operational decisions, is not fulfilling its board mandate.
The Role of Shareholders & Directors in Corporate Governance
Corporations are business entities that are legally separate from the owners of the corporation. When a corporation is properly set up and managed, the owners of the corporation can not be held liable for the activities of the corporation. This means the corporation may be sued but its owners may not be. The process of managing a corporation is known as corporate governance.
Shareholders Shareholders are the owners of the corporation. There are different classes
and types of shares that a shareholder may own, but all shareholders are owners of the company in some way. Shares of the company may also be referred to as shares of corporate stock, so shareholders are also called stockholders.
Board of Directors Shareholders nominate a Board of Directors to manage the affairs of the
corporation. In small companies the shareholders typically nominate themselves to manage the company. In large companies this is not always the case.
Officers Corporate officers run the corporation day to day. Popular job titles that are
corporate officers include: CFO, CEO, and CTO. Corporate officers may be held personally liable for the activities of the corporation if it can be proved that the officer acted in bad faith.
Directors Meetings The board of directors is required to meet at least annually to hold a formal
meeting. During this meeting the shareholders nominate new directors to manage the company next year and the board of directors nominates new officers to run the company during the next year.
Importance of Corporate Governance Many small business owners assume that they can ignore corporate
formalities such as annual shareholders' meetings and the nomination of directors and officers. While large corporations find these processes more important due to the size and complexity of their business, even small businesses need to follow these formalities.
Corporate Ethics & Corporate Governance
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Corporate ethics and corporate governance become increasingly important issues as companies become larger and more powerful. While many blast such corporations as being inherently amoral or worse, many chief executive officers, as well as practical philosophers, see the clout and wealth of these businesses as being capable of service to society as well as themselves.
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Ethics Overview Ethics refers to the branch of philosophy dealing with issues such as
morality, justice, virtue and responsibility. With regard to corporate ethics, the two most commonly applied divisions of moral philosophy are normative ethics and descriptive ethics. Normative ethics comments on what is right or wrong and how people and organizations should act; descriptive ethics comments on how people actually behave and how that affects organizations.
Ethics in Business History For thousands of years, merchants, traders, artisans and their customers
dealt with each other face-to-face, and the line between business transaction and social engagement was indistinct, if present at all. The idea that the moral or immoral actions of individuals could be differentiated from the morality of businesses had little currency. But as corporations became more common and more powerful, everyday products increasingly were provided by a “faceless" business entity, raising the possibility of a larger sphere for ethics.
Corporate Responsibility Defining the responsibilities of the corporation and determining to whom it is
responsible lie at the center of corporate ethics. One school of thought is that the corporation is responsible to its shareholders above all else. Proponents of this attitude do not defend profit at all costs as being virtuous, but rather point out that consumers and governments will take action to constrain unethical corporate behavior. Legal mandates for financial reporting, antitrust actions and boycotts of companies are just a few examples of how that can be done.
Societal Responsibilities Most corporations today publicly voice a commitment to social responsibility.
Companies may offer benefits or wages above what law or the market demands, while others avoid materials or products whose acquisition is tainted by exploitation or human rights abuses. “Conflict-free diamonds” and “fair-trade chocolate,” for example, have become niche products driven by ethical concerns about guerrilla wars and child slavery rather than legislation.
Shareholders and Consumers The structure of corporate governance distributes more than dividends. The
fact that shareholders elect members of the board of directors means that they can demand ethical action, even if it seems counterintuitive with regard to profit. Directors who refuse to comply with shareholder wishes can simply be dismissed when their terms expire. Voters can also influence business practices. Companies that feel cornered by unethical but competitive practices may even welcome legislation barring them and their competitors from continuing the practice.
What Are the Considerations of Ethics in Corporate Governance?
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Ethics is defined as how someone behaves toward other humans, whether his attitude is good or wrong and how his conduct should be judged to be good or wrong. Corporate governance involves the processes, policy and rules that affect the way a company is administered and controlled based on the principles of transparency, independence, accountability and integrity. These principles are inter-related with ethics.
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Ethics and Transparency Ethics play an important role in an organization to ensure smooth operation
and to gain investors' and the public's confidence. The environment in which businesses operate has changed because of the explosion of information and communication technology. This rapid development prompted the public to be vigilant and demand higher standards of ethics and transparency to prevent any form of corruption within an organization. Unethical practice includes manipulation of figures in a financial report, such as by WorldCom, the biggest U.S. communication company. It is essential to ensure that good ethical value and a transparent system are practiced to minimize the risk of unhealthy activities by top management level.
Transparency is one of the ethical values that a company should enforce.
Independence and Professionalism A high level of independence and professionalism needs to be maintained to
fulfill good ethical values in the corporate governance system. Accountants often face threats from clients while performing their duties. Instructions such as manipulating financial accounts and not to investigate random and big payments further can be a challenge. Accountants must perform their duties independently with a high level of integrity and without fear that they will lose clients. Lack of independence leads to failure to fulfill professional requirements, undermining the credibility of the accounting profession and the standard it enforces.
Accountability and Integrity Company management is required to be accountable and answerable for its
actions and should possess a high level of integrity in it duties. Employees perform better if a manager has a sense of accountability and integrity and they can gain the trust of the manager. It is the responsibility of an employee and his manager to be accountable to each other to help provide a better working environment. Employees should be able to express their views and ideas without fear or hesitancy and with the expectation that their views will be taken on board by their line managers. Managers, on the other hand, have to be responsive to their employees' views and problems to strengthen the working relationships within the organization. The process of sharing views, information and ideas help to improve employees’ performance, creating a more effective and efficient working environment.
Confidentiality In this high technology era, people are becoming more sophisticated and
more equipped with modern technology. Confidential information regarding business transactions can be obtained easily through access to a company’s information system. A business' accountants and managers play important roles to ensure that all confidential information is not used for personal or a third party’s benefit, which may adversely affect the business.
The Definition of Corporate Governance
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Corporate governance is the term used to describe both a company's over-arching business strategy and the way it functions internally. This can include everything from the construction of its board of directors to how new employees are interviewed and screened for hiring. A business without an effective corporate governance strategy risks its investors losing confidence along with a large chunk of money.
The Definition Corporate governance is the accumulated rules, policies, procedures and
laws affecting the way in which a corporation operates, makes decisions and develops its relationships with shareholders and the public at large. Accountability is another major facet of corporate governance with executives and other decision-makers bound by the agreed-upon policies of the corporate governance plan to always act in the best interests of the company and its shareholders or stakeholders.
Why Corporate Governance is Important Every business needs a strategy for how it plans to run its internal operations
from top to bottom. How effectively a business implements its plans relating to corporate governance can have a dramatic impact on its stock value and its public perception, according to the United Nations Global Compact. Additionally, if lending institutions believe a corporation or other business is run poorly due to a lack of corporate governance, the business could find it difficult to raise capital.
Anti-Corruption Measures in Corporate Governance An effective corporate governance strategy can work to eliminate internal
corporate corruption by creating a climate of transparency where shareholders are fully informed of business decisions and long-term business plans. This also affects investment demand; more consumers will want to be a part of a company that is doing business responsibly and with the impact of business decisions on the world community in mind.
Corporate Governance and Integrity As of 2010, in the wake of eroding pension plans and vanishing life savings,
many Americans have lost confidence in Wall Street and publicly traded companies. High standards of corporate governance relating to integrity and responsible business practices can help restore consumer confidence in financial investment in the stock market. Responsible business practices may include sticking to the plans for growth disclosed to shareholders, handling money investments responsibly, and managing risk factors as well as government regulations and the environmental impact of doing business.
What Are the Benefits of Corporate Governance?
Corporate governance comprises of a set of processes, policies and laws that impact the way in which a company is administered. Corporate governance gives importance to shareholders' welfare and also includes the relationships between the strategic goal of the company and its stakeholders. This relationship helps to sustain the business for a longer period.
Management
Good corporate governance allows even outsiders to assess the company on how well it is being governed. The core of corporate governance is its transparency and disclosure principles. An advantage with corporate governance is that the benefits are measurable. Good corporate governance ensures higher market valuation. Corporate governance initiatives should ensure that the board of control and management take the necessary steps that are in the best interest of the business of the company.
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Transparency
Corporate governance encourages more transparency of the business, thereby attaining the trust of its stakeholders. This transparency is brought forward by improving access to capital and financial markets. Raising capital also becomes easier because of the support the company earns from its stakeholders. Asset diversification through mergers and acquisitions is made easier with a company that follows good corporate governance. Corporate governance practices encourage a system of internal control, which in turn leads to better profit margins. Thus, for a company, corporate governance initiatives make it possible to attract equity investors. The corporate value of the company is increased by adopting good corporate governance practices. If two companies have comparable financial records, institutional investors prefer to invest in the one that has shown a proven record as a well-governed company.
Benefits to Shareholders
Good corporate governance initiatives can assist the board of control and the management to act on objectives that are in the best interest of both the company and the shareholders. The shareholders also have greater security on the investments they have made because of the transparency and access to investment details. The shareholders are better informed on all important decisions of management, such as the sale of assets and amendments to articles.
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Benefits to the National Economy
If a country has a reputation for its strong governance practices, this leads to greater confidence in the investors, which in turn leads to a good flow in capital. The reporting and accounting standards adopted by the country are also an important factor to bring in investments. Thus, good corporate governance practices can be beneficial for any country's national economy.
Agency Theory in Corporate Governance
Agency theory relative to corporate governance assumes a two-tier form of firm control: managers and owners. Agency theory holds that there will be some friction and mistrust between these two groups. The basic structure of the corporation, therefore, is the web of contractual relations among different interest groups with a stake in the company.
Features
In general, there are three sets of interest groups within the firm. Managers, stockholders and creditors (such as banks). Stockholders often have conflicts with both banks and managers, since their general priorities are different. Managers seek quick profits that increase their own wealth, power and reputation, while shareholders are more interested in slow and steady growth over time.
Function The purpose of agency theory is to identify points of conflict among
corporate interest groups. Banks want to reduce risk while shareholders want to reasonably maximize profits. Managers are even more risky with profit maximization, since their own careers are based on the ability to turn profits to then show the board. The fact that modern corporations are based on these relations creates costs in that each group is trying to control the others.
Costs One of the major insights of agency theory is the concept of costs of
maintaining the division of labor among credit holders, shareholders and managers. Managers have the advantage of information, since they know the firm close up. They can use this to enhance their own reputations at the expense of shareholders. Limiting the control of managers itself contains costs (such as reduced profits), while profit seeking in risky ventures might alienate banks and other financial institutions. Monitoring and limiting managers itself contains sometimes substantial costs to the firm.
Significance The agency model of corporate governance holds that firms are basically
units of conflict rather than unitary, profit-seeking machines. This conflict is not aberrant but built directly into the structure of modern corporations.
Effects It is possible, if one accepts the premises of agency theory, that corporations
are actually groups of connected fiefs. Each fief has its own specific interest and culture and views the purpose of the firm differently. In analyzing the function of a corporation, one can assume that managers will behave in a way to maximize their own profit and reputation, even at the expense of shareholders. One might even understand the manager's role as one of institutionalized deceit, where the asymmetry of knowledge permits managers to operate with almost total independence.
Governance Meeting Protocol
business colleagues preparing for business meeting image by Vladimir Melnik from Fotolia.com
An effective business meeting--such as between board members or company officers--incorporates various factors. When every member understands these factors, the meeting has a firm foundation for productive communication leading to improved company leadership.
Details According to the book "Group Work," by Timothy B. Kelly, Toby Berman-Rossi
and Susanne Palomb, beneficial results occur when meeting protocol involves four key parts: thorough preparation, followed by a clear beginning, work period and ending. These components should also be complemented by a productive board chair or group leader who carries the meeting forward.
Benefits With the four components implemented, each participant has a stronger
likelihood of contributing to and benefiting from the meeting, thus strengthening the entire group. Preparation especially benefits the meeting protocol, contributing to a stronger focus on essential details and a more productive use of time.
Frequency Regular and frequent governance meetings often help companies stay better
attuned to business needs, and aid a spirit of teamwork as each member feels more involved. The book "Nonprofit Kit for Dummies" by Stan Hutton and Frances Phillips, notes that frequent meetings can appear less burdensome if kept to two hours or less.
The Differences Between Corporate Governance & Ethics
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Thematically, the main difference between corporate governance and ethics is that the ethics are the philosophical and morally decent standards that a corporation attempts to stand by, while governance processes are the means by which a corporation attempts to remain as ethical as possible while still making a profit. The governance obligations and operations of a corporation vary depending on its type. For example, a sole-proprietorship--a business owned by a single person--has different financial necessities and legal obligations than a massive, publicly-traded corporation.
Public Corporate Governance
Publicly-trade corporations have a legally-mandated fiduciary duty to their shareholders to maximize the profit of the company. Thus, ethical standards are less important than legal standards in the pursuit of making profit, which explains why corporations will often "cut corners" when trying to meet expensive legal standards. For example, a congressional investigation found that British Petroleum (BP) cut corners on the safety protocols of its investment in the Gulf of Mexico. In this rare case, BP's decision to cut corners facilitated a massive oil spill in 2010 that could theoretically drive BP into bankruptcy. In this instance, the fiduciary responsibility to maximize the short-term profits of BP's stockholders caused BP executives to compromise the company's ethical obligation to protect the environment surrounding its deep-sea oil investment.
Private Corporate Governance Privately owned corporations do not have a legally-mandated fiduciary
responsibility to maximize shareholder revenue (because there are no shareholders), allowing them greater and (potentially) substantially less flexibility when making corporate decisions. For example, a privately-corporation may be able to sacrifice a portion of its profit margin to meet regional environmental and ecological standards. At the same time, however, because the liquidity of a such a corporation is provided privately and usually by other investors, the tolerance of the corporation for sacrificing profit to meet ethical obligations could be incredibly short. Because an impatient investor can always threaten to remove their investment unless profits increase, a privately owned company may be under even greater pressure to cut corners to make a profit.
Profit vs. Ethics The main source of conflict between corporate governance and ethical
obligations is the fact that a corporation exists to make a profit, and ethics exist to benefit the social good. Entrepreneur and Nobel Prize laureate Muhammad Yunus writes that people are "80 percent self-interested and 20 percent something else." Yunus believes that "something else" to be an orientation toward the community and social good, and that the cultivation of social businesses--businesses that exist to do more social good rather
than make a profit--would be a way to merge the objectives of corporate governance and social ethics.
Factors of Corporate Governance
Good corporate governance is a highly relative concept, made even more slippery by the post-war global business environment. Well-known corporate scandals throughout the first decade of the 2000s, such as the accounting fraud at Enron, have brought corporate governance to new prominence, and governments, in response, have engaged in tightening corporate accounting standards.
Features The basic factors in good corporate governance are the board of directors,
shareholders en masse, and management. How these three power centers work together can make all the difference for a company. The basic structure is to keep management accountable for its actions, maintain good cash flow, and satisfy the shareholders as a group.
Function These factors, working together, are meant to keep a firm not only profitable
but reputable. Investors want to be a part of a firm that is well-run, ethical, and still profitable. For these reasons, the makeup of the board of directors is extremely important. How often they meet and the specific areas of expertise of its members are important to keep not only a watch on management and corporate activities, but also to do so in an environment of competence.
Significance Few will deny that both investors and governments have become more
cynical since the corporate scandals typified by Enron and Tyco. More than ever, the state has become a major factor in corporate governance. This means that governments have clamped down on anything that smells of a conflict of interest and, importantly, the lack of independence of any independent accounting firm. A strict "separation of powers" among the factors of corporate governance has been necessitated by the desirability of independent auditing.
Considerations New factors have been introduced in the first decade of the 2000s. The basic
model of board-management-shareholders is still valid, but newer actors, or modified actors, have also presented themselves. Increased government oversight, especially in auditing, has caused a new legal culture to emerge in firm governance. Globalization, as always, is forcing leaner, tighter firms to compete against major companies in the European Union and Asia. Increased media and public oversight and sensitivity to corporate ethical concerns
might well be in the process of changing the very nature of governance in a firm.
Benefits While the newer factors in corporate governance have made it more difficult
to do business, they can have the long-term effect of restoring confidence in corporate America. New rules and government oversight have increased the costs of doing business and have introduced a new sensitivity among managers and stockholders, which may result in a healthier and more competitive American corporate culture.
How to Create a Corporate Culture
Corporate culture is a defining measure of organizational behavior. It has been linked to competitive strategy and brand awareness. It is also directly related to recruiting and retention efforts. The mission statement and core corporate values of any organization provide the foundation for corporate governance. This article will show you how to create a defined corporate culture in 6 steps.
Creating Corporate Culture
Define your core values and link them to your mission statement. Your mission statement should include all internal stakeholders of your organization, not just senior management. Understanding what you want the company to be in 10 to 20 years and how you want it to get there will help in this determination. While your core values will remain the same, the direction of your organization may change and your mission must adapt to this change.
Start a marketing campaign. This can include contests or seminars which allow employees to learn more about the mission and vision of the organization. Employees should be encouraged to contribute to this vision. If senior management dictates the culture, you will have buy-in, but it will be limited. Allowing your employees to develop interdepartmental mission statements aligned to this vision will foster a bottom-up mentality and help to disseminate the culture throughout the organization faster.
Share your vision with external stakeholders. Investors and creditors can help define your culture by providing perspective and contrast. Don't be afraid to make inquiries on your culture by asking potential recruits or even customers their opinion of your corporate culture compared to other organizations. Is it in line with expectations?
Define your goals through your mission and connect your mission to your goals. These must be defined and measurable. Use key performance indicators (KPI's) as a way to shape the common language of your organization. Hold employees accountable to these goals and make sure they are reported with accuracy and regularity to the entire organization.
Reward employees. Recognition is key to defining corporate culture. The way a company rewards its employees speaks to its values and sincerity in achieving corporate goals. Happy employees are more productive employees, so put a system in place which rewards those who achieve corporate objectives. Rewards do not need to be monetary. Recognition comes in many forms.
Develop an organizational behavior survey. Ask employees to fill out a short survey once a year. Once you do, be sure to report on the findings and show a clear effort to improve upon lower-scoring areas. Employees will take the survey seriously if they know it will produce change. The results of the survey should be used as a tool to refine and adapt the mission of the organization
The Advantages of the Separation of Ownership & Management
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Separation of ownership and management in corporate governance involves placing the management of the firm under the responsibility of professionals who are not its owners. Owners of a company may include shareholders, directors, government entities, other corporations and the initial founders. This separation allows skilled managers to conduct the complicated business of running a large company.
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The Role of Shareholders & Directors in Corporate Governance What Represents Ownership or Equity in a Corporation?
Professional Managerial Skills The growth of a company comes with the demand for different skills to
manage the operations of the company, meaning the owners of a company may not have all of the necessary skills and experience needed for certain managerial roles. Creating a management team separate from the ownership enables the company to be run by professionals with diverse skills such as in marketing, corporate financing and public relations.
Easier Performance Appraisals Performance appraisals are an essential part of good corporate governance,
as they enable managers to evaluate the company and to point out areas of improvement. It can be complex to evaluate performance where there is a lack of separation of ownership and management. But separation makes it easier for the board and those in management to be evaluated objectively. Owners can freely deal with the chief executive officer and other senior managers, even after the appraisals.
Capital Utilization Capital utilization involves the arrangements that determine the way in
which resources and assets are managed in a company. Separating personal
assets and liabilities from the business assets and liabilities may prove difficult for company owners. Managers come in to devise ways in which business assets are managed to generate the highest profits for all shareholders.
Checks and Balances Separate managers and owners in a firm ensure that a system of checks and
balances is in place. Managers act as a buffer between the company and stakeholders such that they can alleviate negative impacts of stakeholder activities and avoid hitches in public relations. Managers are well suited to put in place strategies that will lessen losses to the rest of the stakeholders as a result of the actions of another stakeholder.
. Relation between CSR and Corporate Governance Both CSR and Corporate Governance (CG) by definition feature as an issue of company‟s
management practices and therefore sometimes get confused with each other.1 The question mainly moves round the fact whether the CSR and CG go the same way of company‟s management or they have their respective way of management. Question also arises whether CSR is part of CG or vice-versa. It is already known that CSR is based on self-regulatory principles linked to internal and external management of the company. On the other hand the term „corporate governance‟ indicates to an idea of company‟s governance and management issue. So a clear understanding of the concept of corporate governance and its nature is a crucial matter in order to point out the relation between CSR and CG. According to the observation of Australian Parliamentary Joint Committee on Corporations and Financial Services, compared to CSR, CG is a broad issue of company management practices. It involves the conduct of board of directors and the relationship between the board, management and shareholders.2 Transparency in corporate decision making and accountability to shareholders are the core points of CR.3 Grant says, „Corporate governance is a broad theory concerned with the alignment of management and shareholder interests.‟4 Arthur Levitt defines it as the relationship between the investor, the management team and the board of directors of a company.5 Corporate governance is concerned with holding the balance between economic and social goal and between individual and communal goals.6 It virtually attributes importance to the efficient use 1 Australian Parliamentary Joint Committee on Corporations and Financial Services, above n 4, 6. 2 Ibid. 3 Ibid. 4 Grant, G.H „ The Evolution of Corporate Governance and its impact on modern corporate America‟ (2003) 41: 9 Management Decision 923,925. 5 Ahmmed, Momtaz Uddin amd Mohammad Abu Eusuf, „Corporate Governance: Bangladesh Perspective‟ (Nov.- Dec. 2005) 33: 6 The Cost and Management 18, 19. 6 Ibid. of resources and in the same way requires accountability for the preservation and stewardship of those resources.7 Organisation for Economic Co-operation and Development (OECD) has provided a model framework for corporate governance known as OECD Principles of Corporate Governance. These principles have stated some fundamental aspects of companies‟ governance. They are summarized as follows;8 Distribution of duties and responsibilities among different supervisory, regulatory and enforcement authorities ; Protection and facilitation of the exercise of shareholder rights; Ensuring equitable treatment of all shareholders, including minority and foreign shareholders; Recognition of the rights of stakeholders established by law or through mutual agreements; Encouraging active co-operation between corporations and stakeholders in creating wealth, jobs,
and the sustainability of financially sound enterprises Publication of regular and accurate disclosure concerning company’s financial situation, performance, ownership and governance and Providing strategic guidance, composition and functions of the board of directors and their accountability to the company and shareholders. In the light of the synthesis of OECD principles of corporate governance and above mentioned definitions of CG it becomes clear that the CG is a broad issue of company’s management process covering a plethora of internal and external management. The corporate governance framework is the widest control mechanism, both internally and externally to stimulate the proper and efficient use of corporate resources and in the same way to require accountability for taking care of those resources.9 The aim of CG is to align the interests of individuals, corporations and the society 7 Ibid. 8 OECD, Principles of Corporate Governance (2004) < www.oecd.org/dataoecd/32/18/31557724 > 05 May 2007. Through an ethical basis and to fulfill the long term strategy of the owners. Corporate governance is considered as a means to the maintenance of balance between economic and social goals as well as between individual and community goals. Against the said backdrop CG is the broader issue of management of a company than CSR. Australian Parliamentary Joint Committee on Corporations and Financial Services considers CSR as a part of total governance framework as it remarks „corporate responsibility is only one aspect of an organization’s governance and risk management process.‟ 10 In addition, CSR has also been mentioned as one the four pillars on which the edifice of corporate governance built.11 The four pillars are: compliance with all regulatory requirements; equitable treatment of all stakeholders such as suppliers, employees, consumers and so on; full and fair disclosure of all material information with specific stress or emphasis on accurate and objective presentation of financial information; and respects for norms of business and social responsibility. However, Mark Walsh and John Lowry in their joint article on CSR and Corporate Governance under the head of „relationship between CG and CSR hold the reverse opinion saying „corporate governance is an increasingly important aspects of CSR.... to provide the more solid foundations on which broader CSR principles and business ethics can be further enhanced.‟12 In fact both the authors in their joint work have used the term „corporate governance‟ in its narrower sense to draw an important distinction between CSR and corporate governance. To them the corporate governance is more concerned with the enhancement of shareholder value and the protection of the shareholder interests. 13 It encourages management to develop the business in the best interest 9 Imam, Mahmud Oman, „ Firm Performance and Corporate Governance through ownership Structure: Evidence from Bangladesh Stock market‟( Paper presented a ICMB Conference on Corporate Governance –Bangladesh Perspective , Dhaka, Bangladesh, September 2006) 31. 10 Australian Parliamentary Joint Committee on Corporations and Financial Services, above n 4, 124, p.7 11 Hammed, and Mohammad ,above n 128 , 18-19. 12 Walsh, Mark and Lowry, John, „CSR and Corporate Governance‟ in Ramon Muller at (ed.) Corporate Social Responsibility: The Corporate Governance of 21st Century (2005)38, 39. of the shareholders and does not allow it waste, misuse or divert the corporate assets.14 On the other hand, despite legal underpinnings, the environmental, labor and consumer obligations are more in connection with CSR than corporate governance.15 CSR expects from the companies to do more than what the concerned laws requires.16 Corporate governance more often moves round the narrower constituency, that is, the interests of the shareholders. The conflicting opinions as the relation of CG with CSR as revealed by above discussion chiefly lie on how it has been defined. For example, if it is narrowly defined it concerns the relationship of company to its shareholders. If it is broadly defined the relationship of the company extends to the society. A careful review of the model governance
framework of OECD shows that corporate governance covers a range of issues for the protection of the interests of shareholders and stakeholders. Moreover, there are two models of corporate governance, shareholders and stakeholders. In the shareholder model governance system, the responsibility for decision –maker is to maximize shareholders‟ wealth as this model introduces classical principal and agent theory where manager is considered as an agent of the shareholder principal.17 According to stakeholder model, it has been viewed that the corporation in fact cannot be run without the contributions of different stakeholder groups like customers, employees, suppliers, the community of which it is a part and the environment and therefore at the event of decision-making , the corporate should take into account how their decisions impact these constituents.18 Although the shareholder model has the 13 Ibid. 14 Ibid. 15 Ibid. 16 Ibid. 17 Hammed, Montez Udine mad Mohammad Abu Yusuf, above n 128, 134,p. 18-19; See also Colin Mayer, „Corporate Governance, Competition, and Performance‟ (March 1997) 24: 1 Journal of Law and Society 152, 154. 18Ibid. preference over the stakeholder model which is growing slowly as a part of governance framework, the exercise of both the models suggest that there is no scope to look narrowly into the corporate governance aspects. Rather it is better to say, CSR is a model of „extended corporate governance whereby corporate responsibilities range from its fiduciary duties towards the owners to the analogous fiduciary duties towards all the firms stakeholders.19 it is admittedly a hard task to distinguish between CSR and CG. Erik Belgrade of Sweden’s SEB Bank views “corporate governance and corporate social responsibility are both extremely important to a company. But it is not a natural thing to separate them. If you have well formed corporate governance programmed in place that would probably take care of most CSR issues.”20 However, it can be argued that CSR issues are of voluntary or softer nature and it is based on the self regulatory corporate codes and the corporate governance is more often mandatory based on statutory provisions applicable at national level. For example, the company law of a country defines the composition of the board of directors, their rights and duties towards shareholders, duties of the managers and other organizational activities. Security and Exchange law provides the principles regarding the mandatory financial disclosures, auditing and so on. The duties of the managers and directors may be of softer issues when they concern the promotion of ethical behavior towards the shareholders.21 As regards the distinction between CSR and CG the views of Weinberg and Randolph is noteworthy. They said: 19 Lorenzo Scone, Corporate Social Responsibility (CSR) as a Model of “Extended” Corporate Governance. An Explanation based on the Economic Theories of Social Contract, Reputation and Reciprocal Conformism (2004) UE Research Project < www.biblio.liuc.it/liucpap/pdf/142.pdf> 15 August 2007. 20 SEB Bank Sweden Bank, A fine line between corporate governance and corporate social responsibility (2007) < www.iccwbo.org/uploadfle/CG? social issues are enforced by stakeholders‟ pressure, boycotts, compliance with the self-regulatory codes of conduct. 22 Danette Winberge and Phillip H. Randolph, Corporate Social Responsibil
I. Ensuring the Basis for an Effective Corporate Governance Framework II. The corporate governance framework should promote transparent and
Corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed.[1]Governance structures and principles identify the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and includes the rules and procedures for making decisions in corporate affairs.[2] Corporate governance includes the processes through which corporations' objectives are set and pursued in the context of the social, regulatory and market environment. Governance mechanisms include monitoring the actions, policies, practices, and decisions of corporations, their agents, and affected stakeholders. Corporate governance practices are affected by attempts to align the interests of stakeholders.[3][4] Interest in the corporate governance practices of modern corporations, particularly in relation to accountability, increased following the high-profile collapses of a number of large corporations during 2001–2002, most of which involved accounting fraud; and then again after the recent financial crisis in 2008. Corporate scandals of various forms have maintained public and political interest in the regulation of corporate governance. In the U.S., these include Enron and MCI Inc. (formerly WorldCom). Their demise is associated with the U.S. federal government passing the Sarbanes-Oxley Act in 2002, intending to restore public confidence in corporate governance. Comparable failures in Australia (HIH, One.Tel) are associated with the eventual passage of theCLERP 9 reforms.[5] Similar corporate failures in other countries stimulated increased regulatory interest (e.g., Parmalat in Italy).
In contemporary business corporations, the main external stakeholder groups are shareholders, debtholders, trade creditors and suppliers, customers, and communities affected by the corporation's activities. Internal stakeholders are the board of directors, executives, and other employees.
Much of the contemporary interest in corporate governance is concerned with mitigation of the conflicts of interests between stakeholders.[6] In large firms where there is a separation of ownership and management and no controlling shareholder, the principal–agent issue arises between upper-management (the "agent") which may have very different interests, and by definition considerably more information, than shareholders (the "principals"). The danger arises that, rather than overseeing management on behalf of shareholders, the board of directors may become insulated from shareholders and beholden to management.[7] This aspect is particularly present in contemporary public debates and developments in regulatory policy.[3]
Ways of mitigating or preventing these conflicts of interests include the processes, customs, policies, laws, and institutions which have an impact on the way a company is controlled.[8][9] An important theme of governance is the nature and extent of corporate accountability. A related discussion at the macro level focuses on the impact of a corporate governance system on economic efficiency, with a strong emphasis on shareholders' welfare.[10] This has resulted in a literature focussed on economic analysis.[11][12][13]
Corporate governance has also been more narrowly defined as "a system of law and sound approaches by which corporations are directed and controlled focusing on the internal and external corporate structures with the intention of monitoring the actions of management and directors and thereby, mitigating agency risks which may stem from the misdeeds of corporate officers."[14]
One source defines corporate governance as "the set of conditions that shapes the ex post bargaining over the quasi-rents generated by a firm."[15] The firm itself is modelled as a governance structure acting through the mechanisms of contract.[16][10] Here corporate governance may include its relation to corporate finance.[17] happy days
Principles[edit]
Contemporary discussions of corporate governance tend to refer to principles raised in three documents released since 1990: The Cadbury Report (UK, 1992), the Principles of Corporate Governance (OECD, 1998 and 2004), the Sarbanes-Oxley Act of 2002 (US, 2002). The Cadbury and Organisation for Economic Co-operation and Development(OECD) reports present general principles around which businesses are expected to operate to assure proper governance. The Sarbanes-Oxley Act, informally referred to as Sarbox or Sox, is an attempt by the federal government in the United States to legislate several of the principles recommended in the Cadbury and OECD reports.
Rights and equitable treatment of shareholders:[18][19][20] Organizations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by openly and effectively communicating information and by encouraging shareholders to participate in general meetings.
Interests of other stakeholders:[21] Organizations should recognize that they have legal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers.
Role and responsibilities of the board:[22][23] The board needs sufficient relevant skills and understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment.
Integrity and ethical behavior:[24][25] Integrity should be a fundamental requirement in choosing corporate officers and board members. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making.
Disclosure and transparency:[26][27] Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.
Different models of corporate governance differ according to the variety of capitalism in which they are embedded. The Anglo-American "model" tends to emphasize the interests of shareholders. The coordinated or [Multistakeholder Model] associated with Continental Europe and Japan also recognizes the interests of workers, managers, suppliers, customers, and the community. A related distinction is between market-orientated and network-orientated models of corporate governance.[28]
Some continental European countries, including Germany and the Netherlands, require a two-tiered Board of Directors as a means of improving corporate governance.[29] In the two-tiered board, the Executive Board, made up of company executives, generally runs day-to-day operations while the supervisory board, made up entirely of non-executive directors who represent shareholders and employees, hires and fires the members of the executive board, determines their compensation, and reviews major business decisions.[30]
India[edit]
The Securities and Exchange Board of India Committee 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."[31]
United States, United Kingdom[edit]
The so-called "Anglo-American model" of corporate governance emphasizes the interests of shareholders. It relies on a single-tiered Board of Directors that is normally dominated by non-executive directors elected by shareholders. Because of this, it is also known as "the unitary system".[32][33] Within this system, many boards include some executives from the company (who are ex officio members of the board). Non-executive directors are expected to outnumber executive directors and hold key posts, including audit and compensation committees. In the United Kingdom, the CEO generally does not also serve as Chairman of the Board, whereas in the US having the dual role is the norm, despite major misgivings regarding the impact on corporate governance.[34]
In the United States, corporations are directly governed by state laws, while the exchange (offering and trading) of securities in corporations (including shares) is governed by federal legislation. Many US states have adopted the Model Business Corporation Act, but the dominant state law for publicly traded corporations is Delaware, which continues to be the place of incorporation for the majority of publicly traded corporations.[35] Individual rules for corporations are based upon the corporate charter and, less authoritatively, the corporate bylaws.[35] Shareholders cannot initiate changes in the corporate charter although they can initiate changes to the corporate bylaws.[35]
Corporations are created as legal persons by the laws and regulations of a particular jurisdiction. These may vary in many respects between countries, but a corporation's legal person status is fundamental to all jurisdictions and is conferred by statute. This allows the entity to hold property in its own right without reference to any particular real person. It also results in the perpetual existence that characterizes the modern corporation. The statutory granting of corporate existence may arise from general purpose legislation (which is the general case) or from a statute to create a specific corporation, which was the only method prior to the 19th century.[citation needed]
In addition to the statutory laws of the relevant jurisdiction, corporations are subject to common law in some countries, and various laws and regulations affecting business practices. In most jurisdictions, corporations also have a constitution that provides individual rules that govern the corporation and authorize or constrain its decision-makers. This constitution is identified by a variety of terms; in English-speaking jurisdictions, it is usually known as the Corporate Charter or the [Memorandum] and Articles of Association. The capacity of shareholders to modify the constitution of their corporation can vary substantially.[citation needed]
The U.S. passed the Foreign Corrupt Practices Act (FCPA) in 1977, with subsequent modifications. This law made it illegal to bribe government officials and required corporations to maintain adequate accounting controls. It is enforced by the U.S. Department of Justice and the Securities and Exchange Commission (SEC). Substantial civil and criminal penalties have been levied on corporations and executives convicted of bribery.[36]
The UK passed the Bribery Act in 2010. This law made it illegal to bribe either government or private citizens or make facilitating payments (i.e., payment to a government official to perform their routine duties more quickly). It also required corporations to establish controls to prevent bribery.
Sarbanes-Oxley Act[edit]
The Sarbanes-Oxley Act of 2002 was enacted in the wake of a series of high-profile corporate scandals. It established a series of requirements that affect corporate governance in the U.S. and influenced similar laws in many other countries. The law required, along with many other elements, that:
The Public Company Accounting Oversight Board (PCAOB) be established to regulate the auditing profession, which had been self-regulated prior to the law. Auditors are responsible for reviewing the financial statements of corporations and issuing an opinion as to their reliability.
The Chief Executive Officer (CEO) and Chief Financial Officer (CFO) attest to the financial statements. Prior to the law, CEO's had claimed in court they hadn't reviewed the information as part of their defense.
Board audit committees have members that are independent and disclose whether or not at least one is a financial expert, or reasons why no such expert is on the audit committee.
External audit firms cannot provide certain types of consulting services and must rotate their lead partner every 5 years. Further, an audit firm cannot audit a
company if those in specified senior management roles worked for the auditor in the past year. Prior to the law, there was the real or perceived conflict of interest between providing an independent opinion on the accuracy and reliability of financial statements when the same firm was also providing lucrative consulting services.[37]
Codes and guidelines[edit]
Corporate governance principles and codes have been developed in different countries and issued from stock exchanges, corporations, institutional investors, or associations (institutes) of directors and managers with the support of governments and international organizations. As a rule, compliance with these governance recommendations is not mandated by law, although the codes linked to stock exchange listing requirements may have a coercive effect.
Organisation for Economic Co-operation and Development principles[edit]
One of the most influential guidelines has been the Organisation for Economic Co-operation and Development (OECD) Principles of Corporate Governance—published in 1999 and revised in 2004.[3] The OECD guidelines are often referenced by countries developing local codes or guidelines. Building on the work of the OECD, other international organizations, private sector associations and more than 20 national corporate governance codes formed the United Nations Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) to produce their Guidance on Good Practices in Corporate Governance Disclosure.[38] This internationally agreed[39]benchmark consists of more than fifty distinct disclosure items across five broad categories:[40]
Auditing Board and management structure and process Corporate responsibility and compliance in organization Financial transparency and information disclosure Ownership structure and exercise of control rights
Stock exchange listing standards[edit]
Companies listed on the New York Stock Exchange (NYSE) and other stock exchanges are required to meet certain governance standards. For example, the NYSE Listed Company Manual requires, among many other elements:
Independent directors: "Listed companies must have a majority of independent directors...Effective boards of directors exercise independent judgment in carrying out their responsibilities. Requiring a majority of independent directors will increase the quality of board oversight and lessen the possibility of damaging conflicts of interest." (Section 303A.01) An independent director is not part of management and has no "material financial relationship" with the company.
Board meetings that exclude management: "To empower non-management directors to serve as a more effective check on management, the non-management directors of each listed company must meet at regularly scheduled executive sessions without management." (Section 303A.03)
Boards organize their members into committees with specific responsibilities per defined charters. "Listed companies must have a nominating/corporate governance committee composed entirely of independent directors." This committee is responsible for nominating new members for the board of directors. Compensation and Audit Committees are also specified, with the latter subject to a variety of listing standards as well as outside regulations. (Section 303A.04 and others)[41]
Other guidelines[edit]
The investor-led organisation International Corporate Governance Network (ICGN) was set up by individuals centered around the ten largest pension funds in the world 1995. The aim is to promote global corporate governance standards. The network is led by investors that manage 18 trillion dollars and members are located in fifty different countries. ICGN has developed a suite of global guidelines ranging from shareholder rights to business ethics.[citation needed]
The World Business Council for Sustainable Development (WBCSD) has done work on corporate governance, particularly on Accounting and Reporting, and in 2004 releasedIssue Management Tool: Strategic challenges for business in the use of corporate responsibility codes, standards, and frameworks. This document offers general information and a perspective from a business association/think-tank on a few key codes, standards and frameworks relevant to the sustainability agenda.
In 2009, the International Finance Corporation and the UN Global Compact released a report, Corporate Governance - the Foundation for Corporate Citizenship and Sustainable Business, linking the environmental, social and governance responsibilities of a company to its financial performance and long-term sustainability.
Most codes are largely voluntary. An issue raised in the U.S. since the 2005 Disney decision[42] is the degree to which companies manage their governance responsibilities; in other words, do they merely try to supersede the legal threshold, or should they create governance guidelines that ascend to the level of best practice. For example, the guidelines issued by associations of directors, corporate managers and individual companies tend to be wholly voluntary but such documents may have a wider effect by prompting other companies to adopt similar practices.[citation needed]
History[edit]
Robert E. Wright argues in Corporation Nation that the governance of early U.S. corporations, of which there were over 20,000 by the Civil War, was superior to that of corporations in the late 19th and early 20th centuries because early corporations were run like "republics" replete with numerous "checks and balances" against fraud and usurpation of power of managers or large shareholders.[43]
In the 20th century in the immediate aftermath of the Wall Street Crash of 1929 legal scholars such as Adolf Augustus Berle, Edwin Dodd, and Gardiner C. Means pondered on the changing role of the modern corporation in society.[44] From the Chicago school of economics, Ronald Coase[45] introduced the notion of transaction costs into the understanding of why firms are founded and how they continue to behave.[46]
US expansion after World War II through the emergence of multinational corporations saw the establishment of the managerial class. Studying and writing about the new class were several Harvard Business School management professors: Myles Mace (entrepreneurship), Alfred D. Chandler, Jr. (business history), Jay Lorsch (organizational behavior) and Elizabeth MacIver (organizational behavior). According to Lorsch and MacIver "many large corporations have dominant control over business affairs without sufficient accountability or monitoring by their board of directors."[citation needed]
In the 1980s, Eugene Fama and Michael Jensen[47] established the principal–agent problem as a way of understanding corporate governance: the firm is seen as a series of contracts.[48]
Over the past three decades, corporate directors’ duties in the U.S. have expanded beyond their traditional legal responsibility of duty of loyalty to the corporation and its shareholders.[49][vague]
In the first half of the 1990s, the issue of corporate governance in the U.S. received considerable press attention due to the wave of CEO dismissals (e.g.: IBM, Kodak,Honeywell) by their boards. The California Public Employees' Retirement System (CalPERS) led a wave of institutional shareholder activism (something only very rarely seen before), as a way of ensuring that corporate value would not be destroyed by the now traditionally cozy relationships between the CEO and the board of directors (e.g., by the unrestrained issuance of stock options, not infrequently back dated).
In the early 2000s, the massive bankruptcies (and criminal malfeasance) of Enron and Worldcom, as well as lesser corporate scandals, such as Adelphia Communications, AOL,Arthur Andersen, Global Crossing, Tyco, led to increased political interest in corporate governance. This is reflected in the passage of the Sarbanes-Oxley Act of 2002. Other triggers for continued interest in the corporate governance of organizations included the financial crisis of 2008/9 and the level of CEO pay [50]
East Asia[edit]
In 1997, the East Asian Financial Crisis severely affected the economies of Thailand, Indonesia, South Korea, Malaysia, and the Philippines through the exit of foreign capital after property assets collapsed. The lack of corporate governance mechanisms in these countries highlighted the weaknesses of the institutions in their economies.[citation needed]
Iran[edit]
The Tehran Stock Exchange introduced a corporate governance code in 2007 that reformed "board compensation polices, improved internal and external audits, ownership concentration and risk management. However, the code limits the directors’ independence and provides no guidance on external control, shareholder rights protection, and the role of stakeholder rights."[51] A 2013 study found that most of the companies are not in an appropriate situation regarding accounting standards and that managers in most companies conceal their real performance implying little transparency
and trustworthiness regarding operational information published by them. Examination of 110 companies' performance found that companies with better corporate governance had better performance.[51]
Saudi Arabia[edit]
In November 2006, the Capital Market Authority (Saudi Arabia) (CMA) has issued a corporate governance code in the Arabic language.[52] The Kingdom of Saudi Arabia has made considerable progress with respect to the implementation of viable and culturally appropriate governance mechanisms (Al-Hussain & Johnson, 2009).[53]
Al-Hussain, A. and Johnson, R. (2009) found a strong relationship between the efficiency of corporate governance structure and Saudi bank performance when using return on assets as a performance measure with one exception that government and local ownership groups were not significant. However, when using stock return as a performance measure, there was a weak positive relationship between the efficiency of corporate governance structure and bank performance.[54]
Stakeholders[edit]
Key parties involved in corporate governance include stakeholders such as the board of directors, management and shareholders. External stakeholders such as creditors, auditors, customers, suppliers, government agencies, and the community at large also exert influence. The agency view of the corporation posits that the shareholder forgoes decision rights (control) and entrusts the manager to act in the shareholders' best (joint) interests. Partly as a result of this separation between the two investors and managers, corporate governance mechanisms include a system of controls intended to help align managers' incentives with those of shareholders. Agency concerns (risk) are necessarily lower for a controlling shareholder.[citation needed]
Responsibilities of the board of directors[edit]
Former Chairman of the Board of General Motors John G. Smale wrote in 1995: "The board is responsible for the successful perpetuation of the corporation. That responsibility cannot be relegated to management."[55] A board of directors is expected to play a key role in corporate governance. The board has responsibility for: CEO selection and succession; providing feedback to management on the organization's strategy; compensating senior executives; monitoring financial health, performance and risk; and ensuring accountability of the organization to its investors and authorities. Boards typically have several committees (e.g., Compensation, Nominating and Audit) to perform their work.[56]
The OECD Principles of Corporate Governance (2004) describe the responsibilities of the board; some of these are summarized below:[3]
Board members should be informed and act ethically and in good faith, with due diligence and care, in the best interest of the company and the shareholders.
Review and guide corporate strategy, objective setting, major plans of action, risk policy, capital plans, and annual budgets.
Select, compensate, monitor and replace key executives and oversee succession planning.
Align key executive and board remuneration (pay) with the longer-term interests of the company and its shareholders.
Ensure a formal and transparent board member nomination and election process. Ensure the integrity of the corporations accounting and financial reporting systems,
including their independent audit. Ensure appropriate systems of internal control are established. Oversee the process of disclosure and communications. Where committees of the board are established, their mandate, composition and
working procedures should be well-defined and disclosed.
Stakeholder interests[edit]
All parties to corporate governance have an interest, whether direct or indirect, in the financial performance of the corporation. Directors, workers and management receive salaries, benefits and reputation, while investors expect to receive financial returns. For lenders, it is specified interest payments, while returns to equity investors arise from dividend distributions or capital gains on their stock. Customers are concerned with the certainty of the provision of goods and services of an appropriate quality; suppliers are concerned with compensation for their goods or services, and possible continued trading relationships. These parties provide value to the corporation in the form of financial, physical, human and other forms of capital. Many parties may also be concerned with corporate social performance.[citation needed]
A key factor in a party's decision to participate in or engage with a corporation is their confidence that the corporation will deliver the party's expected outcomes. When categories of parties (stakeholders) do not have sufficient confidence that a corporation is being controlled and directed in a manner consistent with their desired outcomes, they are less likely to engage with the corporation. When this becomes an endemic system feature, the loss of confidence and participation in markets may affect many other stakeholders, and increases the likelihood of political action. There is substantial interest in how external systems and institutions, including markets, influence corporate governance.[citation needed]
Control and ownership structures[edit]
Control and ownership structure refers to the types and composition of shareholders in a corporation. In some countries such as most of Continental Europe, ownership is not necessarily equivalent to control due to the existence of e.g. dual-class shares, ownership pyramids, voting coalitions, proxy votes and clauses in the articles of association that confer additional voting rights to long-term shareholders.[57] Ownership is typically defined as the ownership of cash flow rights whereas control refers to ownership of control or voting rights.[57] Researchers often "measure" control and ownership structures by using some observable measures of control and ownership concentration or the extent of inside control and ownership. Some features or types of control and ownership structure involving corporate groups include pyramids, cross-shareholdings, rings, and webs. German "concerns" (Konzern) are legally recognized corporate groups with complex structures.
Japanese keiretsu (系列) and South Koreanchaebol (which tend to be family-controlled) are corporate groups which consist of complex interlocking business relationships and shareholdings. Cross-shareholding are an essential feature of keiretsu and chaebol groups [5]. Corporate engagement with shareholders and other stakeholders can differ substantially across different control and ownership structures.
Family control[edit]
Family interests dominate ownership and control structures of some corporations, and it has been suggested the oversight of family controlled corporation is superior to that of corporations "controlled" by institutional investors (or with such diverse share ownership that they are controlled by management). A recent study by Credit Suisse found that companies in which "founding families retain a stake of more than 10% of the company's capital enjoyed a superior performance over their respective sectorial peers." Since 1996, this superior performance amounts to 8% per year.[58] Forget the celebrity CEO. "Look beyond Six Sigma and the latest technology fad. One of the biggest strategic advantages a company can have is blood ties," according to a Business Week study[59][60]
Diffuse shareholders[edit]
The significance of institutional investors varies substantially across countries. In developed Anglo-American countries (Australia, Canada, New Zealand, U.K., U.S.), institutional investors dominate the market for stocks in larger corporations. While the majority of the shares in the Japanese market are held by financial companies and industrial corporations, these are not institutional investors if their holdings are largely with-on group.[citation needed]
The largest pools of invested money (such as the mutual fund 'Vanguard 500', or the largest investment management firm for corporations, State Street Corp.) are designed to maximize the benefits of diversified investment by investing in a very large number of different corporations with sufficient liquidity. The idea is this strategy will largely eliminate individual firm financial or other risk and. A consequence of this approach is that these investors have relatively little interest in the governance of a particular corporation. It is often assumed that, if institutional investors pressing for will likely be costly because of "golden handshakes" or the effort required, they will simply sell out their .[citation needed]
Mechanisms and controls[edit]
Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse selection. There are both internal monitoring systems and external monitoring systems.[61] Internal monitoring can be done, for example, by one (or a few) large shareholder(s) in the case of privately held companies or a firm belonging to a business group. Furthermore, the various board mechanisms provide for internal monitoring. External monitoring of managers' behavior, occurs when an independent third party (e.g. the external auditor) attests the accuracy of information provided by management to investors. Stock analysts and debt holders may also conduct such external monitoring. An ideal monitoring and control system should regulate both motivation and ability, while providing incentive alignment toward
corporate goals and objectives. Care should be taken that incentives are not so strong that some individuals are tempted to cross lines of ethical behavior, for example by manipulating revenue and profit figures to drive the share price of the company up.[46]
Internal corporate governance controls[edit]
Internal corporate governance controls monitor activities and then take corrective action to accomplish organisational goals. Examples include:
Monitoring by the board of directors: The board of directors, with its legal authority to hire, fire and compensate top management, safeguards invested capital. Regular board meetings allow potential problems to be identified, discussed and avoided. Whilst non-executive directors are thought to be more independent, they may not always result in more effective corporate governance and may not increase performance.[62] Different board structures are optimal for different firms. Moreover, the ability of the board to monitor the firm's executives is a function of its access to information. Executive directors possess superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes, ex ante. It could be argued, therefore, that executive directors look beyond the financial criteria.[citation needed]
Internal control procedures and internal auditors: Internal control procedures are policies implemented by an entity's board of directors, audit committee, management, and other personnel to provide reasonable assurance of the entity achieving its objectives related to reliable financial reporting, operating efficiency, and compliance with laws and regulations. Internal auditors are personnel within an organization who test the design and implementation of the entity's internal control procedures and the reliability of its financial reporting[citation needed]
Balance of power: The simplest balance of power is very common; require that the President be a different person from the Treasurer. This application of separation of power is further developed in companies where separate divisions check and balance each other's actions. One group may propose company-wide administrative changes, another group review and can veto the changes, and a third group check that the interests of people (customers, shareholders, employees) outside the three groups are being met.[citation needed]
Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. It may be in the form of cash or non-cash payments such as shares and share options, superannuation or other benefits. Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behavior, and can elicit myopic behavior.[citation needed]
Monitoring by large shareholders and/or monitoring by banks and other large creditors: Given their large investment in the firm, these stakeholders have the incentives, combined with the right degree of control and power, to monitor the management.[63]
In publicly traded U.S. corporations, boards of directors are largely chosen by the President/CEO and the President/CEO often takes the Chair of the Board position for him/herself (which makes it much more difficult for the institutional owners to "fire"
him/her). The practice of the CEO also being the Chair of the Board is fairly common in large American corporations.[64]
While this practice is common in the U.S., it is relatively rare elsewhere. In the U.K., successive codes of best practice have recommended against duality.[citation needed]
External corporate governance controls[edit]
External corporate governance controls encompass the controls external stakeholders exercise over the organization. Examples include:
competition debt covenants demand for and assessment of performance information (especially financial
statements) government regulations managerial labour market media pressure takeovers
Financial reporting and the independent auditor[edit]
The board of directors has primary responsibility for the corporation's internal and external financial reporting functions. The Chief Executive Officer and Chief Financial Officerare crucial participants and boards usually have a high degree of reliance on them for the integrity and supply of accounting information. They oversee the internal accounting systems, and are dependent on the corporation's accountants and internal auditors.
Current accounting rules under International Accounting Standards and U.S. GAAP allow managers some choice in determining the methods of measurement and criteria for recognition of various financial reporting elements. The potential exercise of this choice to improve apparent performance increases the information risk for users. Financial reporting fraud, including non-disclosure and deliberate falsification of values also contributes to users' information risk. To reduce this risk and to enhance the perceived integrity of financial reports, corporation financial reports must be audited by an independent external auditor who issues a report that accompanies the financial statements.
One area of concern is whether the auditing firm acts as both the independent auditor and management consultant to the firm they are auditing. This may result in a conflict of interest which places the integrity of financial reports in doubt due to client pressure to appease management. The power of the corporate client to initiate and terminate management consulting services and, more fundamentally, to select and dismiss accounting firms contradicts the concept of an independent auditor. Changes enacted in the United States in the form of the Sarbanes-Oxley Act (following numerous corporate scandals, culminating with the Enron scandal) prohibit accounting firms from providing both auditing and management consulting services. Similar provisions are in place under clause 49 of Standard Listing Agreement in India.
Demand for information: In order to influence the directors, the shareholders must combine with others to form a voting group which can pose a real threat of carrying resolutions or appointing directors at a general meeting.[65]
Monitoring costs: A barrier to shareholders using good information is the cost of processing it, especially to a small shareholder. The traditional answer to this problem is theefficient-market hypothesis (in finance, the efficient market hypothesis (EMH) asserts that financial markets are efficient), which suggests that the small shareholder will free ride on the judgments of larger professional investors.[65]
Supply of accounting information: Financial accounts form a crucial link in enabling providers of finance to monitor directors. Imperfections in the financial reporting process will cause imperfections in the effectiveness of corporate governance. This should, ideally, be corrected by the working of the external auditing process.[65]
Issues[edit]
Executive pay[edit]Main article: Say on pay
Increasing attention and regulation (as under the Swiss referendum "against corporate Rip-offs" of 2013) has been brought to executive pay levels since the financial crisis of 2007–2008. Research on the relationship between firm performance and executive compensation does not identify consistent and significant relationships between executives' remuneration and firm performance. Not all firms experience the same levels of agency conflict, and external and internal monitoring devices may be more effective for some than for others.[50][66] Some researchers have found that the largest CEO performance incentives came from ownership of the firm's shares, while other researchers found that the relationship between share ownership and firm performance was dependent on the level of ownership. The results suggest that increases in ownership above 20% cause management to become more entrenched, and less interested in the welfare of their shareholders.[66]
Some argue that firm performance is positively associated with share option plans and that these plans direct managers' energies and extend their decision horizons toward the long-term, rather than the short-term, performance of the company. However, that point of view came under substantial criticism circa in the wake of various security scandals including mutual fund timing episodes and, in particular, the backdating of option grants as documented by University of Iowa academic Erik Lie[67] and reported by James Blander and Charles Forelle of the Wall Street Journal.[66][68]
Even before the negative influence on public opinion caused by the 2006 backdating scandal, use of options faced various criticisms. A particularly forceful and long running argument concerned the interaction of executive options with corporate stock repurchase programs. Numerous authorities (including U.S. Federal Reserve Board economist Weisbenner) determined options may be employed in concert with stock buybacks in a manner contrary to shareholder interests. These authors argued that, in part, corporate stock buybacks for U.S. Standard & Poors 500 companies surged to a
$500 billion annual rate in late 2006 because of the impact of options. A compendium of academic works on the option/buyback issue is included in the study Scandal by author M. Gumport issued in 2006.
A combination of accounting changes and governance issues led options to become a less popular means of remuneration as 2006 progressed, and various alternative implementations of buybacks surfaced to challenge the dominance of "open market" cash buybacks as the preferred means of implementing a share repurchase plan.
Separation of Chief Executive Officer and Chairman of the Board roles[edit]
Shareholders elect a board of directors, who in turn hire a Chief Executive Officer (CEO) to lead management. The primary responsibility of the board relates to the selection and retention of the CEO. However, in many U.S. corporations the CEO and Chairman of the Board roles are held by the same person. This creates an inherent conflict of interest between management and the board.
Critics of combined roles argue the two roles should be separated to avoid the conflict of interest and more easily enable a poorly performing CEO to be replaced. Warren Buffettwrote in 2014: "In my service on the boards of nineteen public companies, however, I’ve seen how hard it is to replace a mediocre CEO if that person is also Chairman. (The deed usually gets done, but almost always very late.)"[69]
Advocates argue that empirical studies do not indicate that separation of the roles improves stock market performance and that it should be up to shareholders to determine what corporate governance model is appropriate for the firm.[70]
In 2004, 73.4% of U.S. companies had combined roles; this fell to 57.2% by May 2012. Many U.S. companies with combined roles have appointed a "Lead Director" to improve independence of the board from management. German and UK companies have generally split the roles in nearly 100% of listed companies. Empirical evidence does not indicate one model is superior to the other in terms of performance. However, one study indicated that poorly performing firms tend to remove separate CEO's more frequently than when the CEO/Chair roles are combined.[71]
The company agrees to comply with the following provisions: I. Board of Directors (A) Composition of Board i. The Board of directors of the company shall have an optimum combination of executive and non-executive directors with not less than fifty percent of the board of directors comprising of non-executive directors. ii. Where the Chairman of the Board is a non-executive director, at least one-third of the Board should comprise of independent directors and in case he is an executive director, at least half of the Board should comprise of independent directors. Provided that where the non-executive Chairman is a promoter of the company or is related to any promoter or person occupying management positions at the Board level or at one level below the Board, at least one-half of the Board of the company shall consist of independent directors. Explanation-For the purpose of the expression “related to any promoter” referred to in sub-clause (ii): a. If the promoter is a listed entity, its directors other than the independent directors, its employees or its nominees shall be deemed to be related to it; b. If the promoter is an unlisted entity, its directors, its employees or its nominees shall be deemed to be related to it.” iii. For the purpose of the sub-clause (ii), the expression ‘independent director’ shall mean a non executive director of the company who: a. apart from receiving director’s remuneration, does not have any material pecuniary relationships or transactions with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates which may affect independence of the director; b. is not related to promoters or persons occupying management positions at the board level or at one level below the board; c. has not been an executive of the company in the immediately preceding three financial years; d. is not a partner or an executive or was not partner or an executive during the preceding three years, of any of the following: i. the statutory audit firm or the internal audit firm that is associated with the company, and ii. the legal firm(s) and consulting firm(s) that have a material association with the company. e. is not a material supplier, service provider or customer or a lessor or lessee of the company, which may affect independence of the director; f. is not a substantial shareholder of the company i.e. owning two percent or more of the block of voting shares. g. is not less than 21
years of age Clause 49- Corporate Governance Explanation For the purposes of the sub-clause (iii): a. Associate shall mean a company which is an “associate” as defined in Accounting Standard (AS) 23, “Accounting for Investments in Associates in Consolidated Financial Statements”, issued by the Institute of Chartered Accountants of India. b. “Senior management” shall mean personnel of the company who are members of its core management team excluding Board of Directors. Normally, this would comprise all members of management one level below the executive directors, including all functional heads. c. “Relative” shall mean “relative” as defined in section 2(41) and section 6 read with Schedule IA of the Companies Act, 1956. d. Nominee directors appointed by an institution which has invested in or lent to the company shall be deemed to be independent directors. Explanation: “Institution’ for this purpose means a public financial institution as defined in Section 4A of the Companies Act, 1956 or a “corresponding new bank” as defined in section 2(d) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 or the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 [both Acts].” (B) Non executive directors’ compensation and disclosures All fees/compensation, if any paid to non-executive directors, including independent directors, shall be fixed by the Board of Directors and shall require previous approval of shareholders in general meeting. The shareholders’ resolution shall specify the limits for the maximum number of stock options that can be granted to non-executive directors, including independent directors, in any financial year and in aggregate. Provided that the requirement of obtaining prior approval of shareholders in general meeting shall not apply to payment of sitting fees to non-executive directors, if made within the limits prescribed under the Companies Act, 1956 for payment of sitting fees without approval of the Central Government. (C) Other provisions as to Board and Committees i. The board shall meet at least four times a year, with a maximum time gap of four months between any two meetings. The minimum information to be made available to the board is given in Annexure– I A. ii. A director shall not be a member in more than 10 committees or act as Chairman of more than five committees across all companies in which he is a director. Furthermore it should be a mandatory annual requirement for every director to inform the company about the committee positions he occupies in other companies and notify changes as and when they take place. Explanation: Clause 49- Corporate Governance 1. For the purpose of considering the limit of the committees on which a director can serve, all public limited companies, whether listed or not, shall be included and all other companies including private limited companies, foreign companies and companies under Section 25 of the Companies Act shall be excluded. 2. For the purpose of reckoning the limit under this sub-clause, Chairmanship/membership of the Audit Committee and the Shareholders’ Grievance Committee alone shall be considered. iii. The Board shall periodically review compliance reports of all laws applicable to the company, prepared by the company as well as steps taken by the company to rectify instances of non-compliances. iv. An independent director who resigns or is removed from the Board of the Company shall be replaced by a new independent director within a period of not more than 180 days from the day of such resignation or removal, as the case may be: Provided that where the company fulfils the requirement of independent directors in its Board even without filling the vacancy created by such resignation or removal, as the case may be, the requirement of replacement by a new independent director within the period of 180 days shall not apply (D) Code of Conduct i. The Board shall lay down a code of conduct for all Board members and senior management of the company. The code of conduct shall be posted on the website of the company. ii. All Board members and senior management personnel shall affirm compliance with the code on an annual basis. The Annual Report of the company shall contain a
declaration to this effect signed by the CEO. Explanation: For this purpose, the term “senior management” shall mean personnel of the company who are members of its core management team excluding Board of Directors. Normally, this would comprise all members of management one level below the executive directors, including all functional heads. II. Audit Committee (A) Qualified and Independent Audit Committee A qualified and independent audit committee shall be set up, giving the terms of reference subject to the following: i. The audit committee shall have minimum three directors as members. Two-thirds of the members of audit committee shall be independent directors. ii. All members of audit committee shall be financially literate and at least one member shall have accounting or related financial management expertise. Clause 49- Corporate Governance Explanation 1: The term “financially literate” means the ability to read and understand basic financial statements i.e. balance sheet, profit and loss account, and statement of cash flows. Explanation 2: A member will be considered to have accounting or related financial management expertise if he or she possesses experience in finance or accounting, or requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities. iii. The Chairman of the Audit Committee shall be an independent director; iv. The Chairman of the Audit Committee shall be present at Annual General Meeting to answer shareholder queries; v. The audit committee may invite such of the executives, as it considers appropriate (and particularly the head of the finance function) to be present at the meetings of the committee, but on occasions it may also meet without the presence of any executives of the company. The finance director, head of internal audit and a representative of the statutory auditor may be present as invitees for the meetings of the audit committee; vi. The Company Secretary shall act as the secretary to the committee. (B) Meeting of Audit Committee The audit committee should meet at least four times in a year and not more than four months shall elapse between two meetings. The quorum shall be either two members or one third of the members of the audit committee whichever is greater, but there should be a minimum of two independent members present. (C) Powers of Audit Committee The audit committee shall have powers, which should include the following: 1. To investigate any activity within its terms of reference. 2. To seek information from any employee. 3. To obtain outside legal or other professional advice. 4. To secure attendance of outsiders with relevant expertise, if it considers necessary. (D) Role of Audit Committee The role of the audit committee shall include the following: 1. Oversight of the company’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible. 2. Recommending to the Board, the appointment, re-appointment and, if required, the replacement or removal of the statutory auditor and the fixation of audit fees. Clause 49- Corporate Governance 3. Approval of payment to statutory auditors for any other services rendered by the statutory auditors. 4. Reviewing, with the management, the annual financial statements before submission to the board for approval, with particular reference to: a. Matters required to be included in the Director’s Responsibility Statement to be included in the Board’s report in terms of clause (2AA) of section 217 of the Companies Act, 1956 b. Changes, if any, in accounting policies and practices and reasons for the same c. Major accounting entries involving estimates based on the exercise of judgment by management d. Significant adjustments made in the financial statements arising out of audit findings e. Compliance with listing and other legal requirements relating to financial statements f. Disclosure of any related party transactions g. Qualifications in the draft audit report. 5. Reviewing, with the management, the quarterly
financial statements before submission to the board for approval 5A. Reviewing, with the management, the statement of uses / application of funds raised through an issue (public issue, rights issue, preferential issue, etc.), the statement of funds utilized for purposes other than those stated in the offer document/prospectus/notice and the report submitted by the monitoring agency monitoring the utilisation of proceeds of a public or rights issue, and making appropriate recommendations to the Board to take up steps in this matter. 6. Reviewing, with the management, performance of statutory and internal auditors, adequacy of the internal control systems. 7. Reviewing the adequacy of internal audit function, if any, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit. 8. Discussion with internal auditors any significant findings and follow up there on. 9. Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board. 10. Discussion with statutory auditors before the audit commences, about the nature and scope of audit as well as post-audit discussion to ascertain any area of concern. 11. To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non payment of declared dividends) and creditors. 12. To review the functioning of the Whistle Blower mechanism, in case the same is existing. 12A. Approval of appointment of CFO (i.e., the whole-time Finance Director or any other person heading the finance function or discharging that function) after assessing the qualifications, experience & background, etc. of the candidate. 13. Carrying out any other function as is mentioned in the terms of reference of the Audit Committee. Clause 49- Corporate Governance Explanation (i): The term "related party transactions" shall have the same meaning as contained in the Accounting Standard 18, Related Party Transactions, issued by The Institute of Chartered Accountants of India. Explanation (ii): If the company has set up an audit committee pursuant to provision of the Companies Act, the said audit committee shall have such additional functions / features as is contained in this clause. (E) Review of information by Audit Committee The Audit Committee shall mandatorily review the following information: 1. Management discussion and analysis of financial condition and results of operations; 2. Statement of significant related party transactions (as defined by the audit committee), submitted by management; 3. Management letters / letters of internal control weaknesses issued by the statutory auditors; 4. Internal audit reports relating to internal control weaknesses; and 5. The appointment, removal and terms of remuneration of the Chief internal auditor shall be subject to review by the Audit Committee III. Subsidiary Companies i. At least one independent director on the Board of Directors of the holding company shall be a director on the Board of Directors of a material non listed Indian subsidiary company. ii. The Audit Committee of the listed holding company shall also review the financial statements, in particular, the investments made by the unlisted subsidiary company. iii. The minutes of the Board meetings of the unlisted subsidiary company shall be placed at the Board meeting of the listed holding company. The management should periodically bring to the attention of the Board of Directors of the listed holding company, a statement of all significant transactions and arrangements entered into by the unlisted subsidiary company. Explanation 1: The term “material non-listed Indian subsidiary” shall mean an unlisted subsidiary, incorporated in India, whose turnover or net worth (i.e. paid up capital and free reserves) exceeds 20% of the consolidated turnover or net worth respectively, of the listed holding company and its subsidiaries in the immediately preceding accounting year. Explanation 2: The term “significant transaction or arrangement” shall mean any individual transaction or arrangement that exceeds or is likely to exceed 10% of
the total revenues or total expenses or total assets or total liabilities, as the case may be, of the material unlisted subsidiary for the immediately preceding accounting year. Explanation 3: Where a listed holding company has a listed subsidiary which is itself a holding company, the above provisions shall apply to the listed subsidiary insofar as its subsidiaries are concerned. IV. Disclosures Clause 49- Corporate Governance (A) Basis of related party transactions i. A statement in summary form of transactions with related parties in the ordinary course of business shall be placed periodically before the audit committee. ii. Details of material individual transactions with related parties which are not in the normal course of business shall be placed before the audit committee. iii. Details of material individual transactions with related parties or others, which are not on an arm’s length basis should be placed before the audit committee, together with Management’s justification for the same.. (B) Disclosure of Accounting Treatment Where in the preparation of financial statements, a treatment different from that prescribed in an Accounting Standard has been followed, the fact shall be disclosed in the financial statements, together with the management’s explanation as to why it believes such alternative treatment is more representative of the true and fair view of the underlying business transaction in the Corporate Governance Report. (C) Board Disclosures – Risk management The company shall lay down procedures to inform Board members about the risk assessment and minimization procedures. These procedures shall be periodically reviewed to ensure that executive management controls risk through means of a properly defined framework. (D) Proceeds from public issues, rights issues, preferential issues etc. When money is raised through an issue (public issues, rights issues, preferential issues etc.), it shall disclose to the Audit Committee, the uses / applications of funds by major category (capital expenditure, sales and marketing, working capital, etc), on a quarterly basis as a part of their quarterly declaration of financial results. Further, on an annual basis, the company shall prepare a statement of funds utilized for purposes other than those stated in the offer document/prospectus/notice and place it before the audit committee. Such disclosure shall be made only till such time that the full money raised through the issue has been fully spent. This statement shall be certified by the statutory auditors of the company. Furthermore, where the company has appointed a monitoring agency to monitor the utilisation of proceeds of a public or rights issue, it shall place before the Audit Committee the monitoring report of such agency, upon receipt, without any delay. The audit committee shall make appropriate recommendations to the Board to take up steps in this matter. (E) Remuneration of Directors i. All pecuniary relationship or transactions of the non-executive directors vis-à-vis the company shall be disclosed in the Annual Report. Clause 49- Corporate Governance ii. Further the following disclosures on the remuneration of directors shall be made in the section on the corporate governance of the Annual Report: a. All elements of remuneration package of individual directors summarized under major groups, such as salary, benefits, bonuses, stock options, pension etc. b. Details of fixed component and performance linked incentives, along with the performance criteria. c. Service contracts, notice period, severance fees. d. Stock option details, if any – and whether issued at a discount as well as the period over which accrued and over which exercisable. iii. The company shall publish its criteria of making payments to non-executive directors in its annual report. Alternatively, this may be put up on the company’s website and reference drawn thereto in the annual report. iv. The company shall disclose the number of shares and convertible instruments held by non-executive directors in the annual report. v. Non-executive directors shall be required to disclose their shareholding (both own or held by / for other persons on a beneficial basis) in the listed company in which they are proposed to be appointed as directors, prior to their appointment. These details should be
disclosed in the notice to the general meeting called for appointment of such director (F) Management i. As part of the directors’ report or as an addition thereto, a Management Discussion and Analysis report should form part of the Annual Report to the shareholders. This Management Discussion & Analysis should include discussion on the following matters within the limits set by the company’s competitive position: 1. Industry structure and developments. 2. Opportunities and Threats. 3. Segment–wise or product-wise performance. 4. Outlook 5. Risks and concerns. 6. Internal control systems and their adequacy. 7. Discussion on financial performance with respect to operational performance. 8. Material developments in Human Resources / Industrial Relations front, including number of people employed. ii. Senior management shall make disclosures to the board relating to all material financial and commercial transactions, where they have personal interest, that may have a potential conflict with the interest of the company at large (for e.g. dealing in company shares, commercial dealings with bodies, which have shareholding of management and their relatives etc.) Explanation: For this purpose, the term "senior management" shall mean personnel of the company who are members of its. core management team excluding the Board of Directors). This would also include all members of management one level below the executive directors including all functional heads. (G) Shareholders Clause 49- Corporate Governance i. In case of the appointment of a new director or re-appointment of a director the shareholders must be provided with the following information: a. A brief resume of the director; b. Nature of his expertise in specific functional areas; c. Names of companies in which the person also holds the directorship and the membership of Committees of the Board; and d. Shareholding of non-executive directors as stated in Clause 49 (IV) (E) (v) above ia. Disclosure of relationships between directors inter-se shall be made in the Annual Report, notice of appointment of a director, prospectus and letter of offer for issuances and any related filings made to the stock exchanges where the company is listed. ii. Quarterly results and presentations made by the company to analysts shall be put on company’s web-site, or shall be sent in such a form so as to enable the stock exchange on which the company is listed to put it on its own web-site. iii. A board committee under the chairmanship of a non-executive director shall be formed to specifically look into the redressal of shareholder and investors complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends etc. This Committee shall be designated as ‘Shareholders/Investors Grievance Committee’. iv. To expedite the process of share transfers, the Board of the company shall delegate the power of share transfer to an officer or a committee or to the registrar and share transfer agents. The delegated authority shall attend to share transfer formalities at least once in a fortnight. V. CEO/CFO certification The CEO, i.e. the Managing Director or Manager appointed in terms of the Companies Act, 1956 and the CFO i.e. the whole-time Finance Director or any other person heading the finance function discharging that function shall certify to the Board that: a. They have reviewed financial statements and the cash flow statement for the year and that to the best of their knowledge and belief : i. these statements do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading; ii. these statements together present a true and fair view of the company’s affairs and are in compliance with existing accounting standards, applicable laws and regulations. b. There are, to the best of their knowledge and belief, no transactions entered into by the company during the year which are fraudulent, illegal or violative of the company’s code of conduct. c. They accept responsibility for establishing and maintaining internal controls for financial reporting and that they have evaluated the effectiveness of internal control systems of the company pertaining to financial reporting and they have disclosed to the auditors and the Audit Committee,
deficiencies in the design or operation of such internal controls, if any, of which they are aware and the steps they have taken or propose to take to rectify these deficiencies. Clause 49- Corporate Governance d. They have indicated to the auditors and the Audit committee i. significant changes in internal control over financial reporting during the year; ii. significant changes in accounting policies during the year and that the same have been disclosed in the notes to the financial statements; and iii. instances of significant fraud of which they have become aware and the involvement therein, if any, of the management or an employee having a significant role in the company’s internal control system over financial reporting. VI. Report on Corporate Governance i. There shall be a separate section on Corporate Governance in the Annual Reports of company, with a detailed compliance report on Corporate Governance. Noncompliance of any mandatory requirement of this clause with reasons thereof and the extent to which the non-mandatory requirements have been adopted should be specifically highlighted. The suggested list of items to be included in this report is given in Annexure- I C and list of non-mandatory requirements is given in Annexure – I D. ii. The companies shall submit a quarterly compliance report to the stock exchanges within 15 days from the close of quarter as per the format given in Annexure I B. The report shall be signed either by the Compliance Officer or the Chief Executive Officer of the company VII. Compliance 1. The company shall obtain a certificate from either the auditors or practicing company secretaries regarding compliance of conditions of corporate governance as stipulated in this clause and annex the certificate with the directors’ report, which is sent annually to all the shareholders of the company. The same certificate shall also be sent to the Stock Exchanges along with the annual report filed by the company. 2. The non-mandatory requirements given in Annexure – I D may be implemented as per the discretion of the company. However, the disclosures of the compliance with mandatory requirements and adoption (and compliance) / non-adoption of the nonmandatory requirements shall be made in the section on corporate governance of the Annual Report. Annexure I A Information to be placed before Board of Directors 1. Annual operating plans and budgets and any updates. 2. Capital budgets and any updates. 3. Quarterly results for the company and its operating divisions or business segments. 4. Minutes of meetings of audit committee and other committees of the board. 5. The information on recruitment and remuneration of senior officers just below the board level, including appointment or removal of Chief Financial Officer and the Company Secretary. Clause 49- Corporate Governance 6. Show cause, demand, prosecution notices and penalty notices which are materially important 7. Fatal or serious accidents, dangerous occurrences, any material effluent or pollution problems. 8. Any material default in financial obligations to and by the company, or substantial nonpayment for goods sold by the company. 9. Any issue, which involves possible public or product liability claims of substantial nature, including any judgement or order which, may have passed strictures on the conduct of the company or taken an adverse view regarding another enterprise that can have negative implications on the company. 10. Details of any joint venture or collaboration agreement. 11. Transactions that involve substantial payment towards goodwill, brand equity, or intellectual property. 12. Significant labour problems and their proposed solutions. Any significant development in Human Resources/ Industrial Relations front like signing of wage agreement, implementation of Voluntary Retirement Scheme etc. 13. Sale of material nature, of investments, subsidiaries, assets, which is not in normal course of business. 14. Quarterly details of foreign exchange exposures and the steps taken by management to limit the risks of adverse exchange rate movement, if material. 15. Non-compliance of any regulatory, statutory or listing requirements and shareholders service such as non-payment of dividend, delay in share transfer
etc. Annexure I B Format of Quarterly Compliance Report on Corporate Governance Name of the Company: Quarter ending on: Particulars Clause of Listing agreement Compliance Status Yes/No Remarks I. Board of Directors 491 (A) Composition of Board 49 (IA) (B) Non-executive Directors’ compensation & disclosures 49 (IB) (C) Other provisions as to Board and Committees 49 (IC) (D) Code of Conduct 49 (ID) II. Audit Committee 49 (II) (A) Qualified & Independent Audit Committee 49 (IIA) (B) Meeting of Audit Committee 49 (IIB) (C) Powers of Audit Committee 49 (IIC) (D) Role of Audit Committee 49 II(D) (E) Review of Information by Audit Committee 49 (IIE) Clause 49- Corporate Governance Particulars Clause of Listing agreement Compliance Status Yes/No Remarks III. Subsidiary Companies 49 (III) IV. Disclosures 49 (IV) (A) Basis of related party transactions 49 (IV A) (B) Disclosure of Accounting Treatment 49 (IV B) (C) Board Disclosures 49 (IV C) (D) Proceeds from public issues, rights issues, preferential issues etc. 49 (IV D) (E) Remuneration of Directors 49 (IV E) (F) Management 49 (IV F) (G) Shareholders 49 (IV G) V. CEO/CFO Certification 49 (V) VI. Report on Corporate Governance 49 (VI) VII. Compliance 49 (VII) Note: 1. The details under each head shall be provided to incorporate all the information required as per the provisions of the Clause 49 of the Listing Agreement. 2. In the column No.3, compliance or non-compliance may be indicated by Yes/No/N.A.. For example, if the Board has been composed in accordance with the Clause 49 I of the Listing Agreement, "Yes" may be indicated. Similarly, in case the company has no related party transactions, the words “N.A.” may be indicated against 49 (IV A) 3. In the remarks column, reasons for non-compliance may be indicated, for example, in case of requirement related to circulation of information to the shareholders, which would be done only in the AGM/EGM, it might be indicated in the "Remarks" column as – “will be complied with at the AGM”. Similarly, in respect of matters which can be complied with only where the situation arises, for example, "Report on Corporate Governance" is to be a part of Annual Report only, the words "will be complied in the next Annual Report" may be indicated. Annexure I C Suggested List of Items to Be Included In the Report on Corporate Governance in the Annual Report of Companies 1. A brief statement on company’s philosophy on code of governance. 2. Board of Directors: a. Composition and category of directors, for example, promoter, executive, nonexecutive, independent non-executive, nominee director, which institution represented as lender or as equity investor. b. Attendance of each director at the Board meetings and the last AGM. c. Number of other Boards or Board Committees in which he/she is a member or Chairperson. d. Number of Board meetings held, dates on which held. Clause 49- Corporate Governance 3. Audit Committee: i. Brief description of terms of reference ii. Composition, name of members and Chairperson iii. Meetings and attendance during the year 4. Remuneration Committee: i. Brief description of terms of reference ii. Composition, name of members and Chairperson iii. Attendance during the year iv. Remuneration policy v. Details of remuneration to all the directors, as per format in main report. 5. Shareholders Committee: i. Name of non-executive director heading the committee ii. Name and designation of compliance officer iii. Number of shareholders’ complaints received so far iv. Number not solved to the satisfaction of shareholders v. Number of pending complaints 6. General Body meetings: i. Location and time, where last three AGMs held. ii. Whether any special resolutions passed in the previous 3 AGMs iii. Whether any special resolution passed last year through postal ballot – details of voting pattern iv. Person who conducted the postal ballot exercise v. Whether any special resolution is proposed to be conducted through postal ballot vi. Procedure for postal ballot 7. Disclosures: i. Disclosures on materially significant related party transactions that may have potential conflict with the interests of company at large. ii. Details of non-compliance by the company, penalties,
strictures imposed on the company by Stock Exchange or SEBI or any statutory authority, on any matter related to capital markets, during the last three years. iii. Whistle Blower policy and affirmation that no personnel has been denied access to the audit committee. iv. Details of compliance with mandatory requirements and adoption of the nonmandatory requirements of this clause 8. Means of communication. i. Quarterly results Clause 49- Corporate Governance ii. Newspapers wherein results normally published iii. Any website, where displayed iv. Whether it also displays official news releases; and v. The presentations made to institutional investors or to the analysts. 9. General Shareholder information: i. AGM : Date, time and venue ii. Financial year iii. Date of Book closure iv. Dividend Payment Date v. Listing on Stock Exchanges vi. Stock Code vii. Market Price Data : High., Low during each month in last financial year viii. Performance in comparison to broad-based indices such as BSE Sensex, CRISIL index etc. ix. Registrar and Transfer Agents x. Share Transfer System xi. Distribution of shareholding xii. Dematerialization of shares and liquidity xiii. Outstanding GDRs/ADRs/Warrants or any Convertible instruments, conversion date and likely impact on equity xiv. Plant Locations xv. Address for correspondence Annexure I D Non-Mandatory Requirements 1. The Board The Board - A non-executive Chairman may be entitled to maintain a Chairman's office at the company's expense and also allowed reimbursement of expenses incurred in performance of his duties. Independent Directors may have a tenure not exceeding, in the aggregate, a period of nine years, on the Board of a company. The company may ensure that the person who is being appointed as an independent director has the requisite qualifications and experience which would be of use to the company and which, in the opinion of the company, would enable him to contribute effectively to the company in his capacity as an independent director." 2. Remuneration Committee i. The board may set up a remuneration committee to determine on their behalf and on behalf of the shareholders with agreed terms of reference, the company’s policy on specific remuneration packages for executive directors including pension rights and any compensation payment. ii. To avoid conflicts of interest, the remuneration committee, which would determine the remuneration packages of the executive directors may comprise Clause 49- Corporate Governance of at least three directors, all of whom should be non-executive directors, the Chairman of committee being an independent director. iii. All the members of the remuneration committee could be present at the meeting. iv. The Chairman of the remuneration committee could be present at the Annual General Meeting, to answer the shareholder queries. However, it would be up to the Chairman to decide who should answer the queries. 3. Shareholder Rights A half-yearly declaration of financial performance including summary of the significant events in last six-months, may be sent to each household of shareholders. 4. Audit qualifications Company may move towards a regime of unqualified financial statements. 5. Training of Board Members A company may train its Board members in the business model of the company as well as the risk profile of the business parameters of the company, their responsibilities as directors, and the best ways to discharge them. 6. Mechanism for evaluating non-executive Board Members The performance evaluation of non-executive directors could be done by a peer group comprising the entire Board of Directors, excluding the director being evaluated; and Peer Group evaluation could be the mechanism to determine whether to extend / continue the terms of appointment of nonexecutive directors. 7. Whistle Blower Policy The company may establish a mechanism for employees to report to the management concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy. This mechanism could also provide for adequate safeguards against victimization of employees who avail of the mechanism and also provide for direct access to the Chairman of
the Audit committee in exceptional cases. Once established, the existence of the mechanism may be appropriately communicated within the