Corporate Governance & Business Ethics

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Corporate governance &

business ethics

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UNIT-I

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Meaning of corporate governanceCorporate governance involves a set of relationships between

a companys management, its board, its shareholders and

other stakeholders. Corporate governance also provides the

structure through which the objectives of the company are

set, and the means of attaining those objectives andmonitoring performance are determined

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Corporate governance is:

1. a relationship among stakeholders used to determine and

control the strategic direction and performance oforganisations.

2. Concerned with identifying ways to ensure that strategic

decisions are made effectively.

3. Used in corporations to establish order between firms ownersand its top level managers.

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An Indian Definition

fundamental objective of corporate

governance is the enhancement of the long-

term shareholder value while at the same

time protecting the interests of other

stakeholders.

SEBI (Kumar Mangalam Birla) Report on CorporateGovernance, January, 2000

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Corporate governance involves a set of relationshipsbetween a companys management, its board, its

shareholders and other stakeholders ..also the

structure through which objectives of the companyare set, and the means of attaining those objectives

and monitoring performance are determined.

Preamble to the OECD Principles of Corporate Governance, 2004

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Corporate governance is the process whereby people in

power direct, monitor and lead corporations and thereby

create ,destroy the structures and systems under which they

operate. Corporate governors are both potential agents for

change and also guardians of existing ways of working. As

such they are therefore, a significant part of the fabric of oursociety. Corporate governance deals with the ways in which

suppliers of finance to corporations assure themselves of

getting a return on their investment.

- The journal of Finance.

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NATURE OF CORPORATE GOVERNANCE

The term corporate governance, although commonly used,

has no standard definition. It encompasses a wide range of

items and activities, and holds different meanings for different

user groups.

In the CGC Report, corporate governance refers to the

processes and structure by which the business and affairs of

the company are directed and managed, in order to enhance

long-term shareholder value through enhancing corporate

performance and accountability, whilst taking into accountthe interests of other stakeholders

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Board of Directors, management, owners

Business partners

Current and retired employees, and their families

Suppliers

Lenders Customers

Government

Communities where business operates and sells

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The growth of modern ideas of CG from the USA:

The seeds of CG were sown by the Watergate scandal

during the Nixon presidency in the U.S.

Legislation of Foreign & corrupt practices Act of 1977 inAmerica that reviews the internal control in anestablishment.

In the same year (SEC) proposed mandatory reporting oninternal financial controls.

In 1985 a series of high profile business failures rockedthe US which led the government to appoint the

Treadway Commission. It highlighted the need forproper control mechanisms, independent auditcommittees & an objective Internal Audit system.

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England catches up:

Famous corporations in the UK collapsed due to

poor mgmt & lack of control.The Cadbury committee:

Realizing the inefficacy of existing legislation & self-

regulation a committee under the chairmanship of

Sir Adrian Cadbury was appointed by the London

Stock Exchange in 1991.

It was assigned the task of drafting a code of

practices to assist corporations in England for limitingtheir exposure to financial loss.

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The aftermath of the Cadbury Report:

The committee submitted its report along with code

of best practices in December 1992. The most controversial of the Cadburys

recommendations was that the directors should

report on the effectiveness of a companys system of

internal control After 5 years of publication of the report peoples

confidence was again shaken by scandals. To deal

with the situation a committee on CG headed by Ron

Hampel was constituted to assess the Cadbury report

& develop further guidelines.

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The final report of the Hampel committee in 1998contained extension of directors responsibilities to

all control objectives including risk assessment &minimising the risk of fraud.

A amalgam of these codes known as the combinedcode was subsequently derived. It is appended in the

listing rules of London Stock Exchange. Scandals such as Enron, Tyco, and WorldCom shook

investor confidence in financial statements andrequired an overhaul of regulatory standards.

An act was passed by U.S. Congress in 2002,theSarbanes-Oxley Act (SOX) in response to theaccounting scandals in the early 2000s.

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Need for corporate governance

Separation of ownership from management.

Global capital.

Investor protection

Foreign investments Financial reporting and accountability

Banks and financial institutions

Globalisation of economy

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Importance of corporate governance

It shapes the growth and future of capital market in the economy.

It helps in raising funds from capital markets.

It links management with its financial reporting system

It helps management to take rational decisions within the legal

framework of accountability.

It makes corporate accounting practices transparent.

It avoids insider- trading

It is an instrument of economic growth

It improves international image and helps to raise global funds.

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Principles of corporate Governance

Rights and equitable treatment of shareholders:

Organizations should respect the rights of shareholders andhelp shareholders to exercise those rights. They can helpshareholders exercise their rights by openly and effectivelycommunicating information and by encouraging shareholdersto participate in general meetings.

Interests of other stakeholders: Organizations should

recognize that they have legal, contractual, social, and marketdriven obligations to non-shareholder stakeholders, includingemployees, investors, creditors, suppliers, local communities,customers, and policy makers.

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Role and responsibilities of the board: The board needs sufficientrelevant skills and understanding to review and challengemanagement performance. It also needs adequate size and

appropriate levels of independence and commitment

Integrity and ethical behavior: Integrity should be a fundamentalrequirement in choosing corporate officers and board members.Organizations should develop a code of conduct for their directorsand executives that promotes ethical and responsible decisionmaking.

Disclosure and transparency: Organizations should clarify and makepublicly known the roles and responsibilities of board and

management to provide stakeholders with a level of accountability.They should also implement procedures to independently verifyand safeguard the integrity of the company's financial reporting.Disclosure of material matters concerning the organization shouldbe timely and balanced to ensure that all investors have access toclear, factual information.

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Characteristics of corporate governance

DisciplineAll involved parties will have a commitment to adhere to procedures,processes, and authority structures established by the organization.

TransparencyAll actions implemented and their decision support will be available forinspection by authorized organization and provider parties.

IndependenceAll processes, decision-making, and mechanisms used will be establishedso as to minimize or avoid potential conflicts of interest.

Accountability

Identifiable groups within the org