CS Professional:GRMCE [Ch-1 Conceptual Framework of Corporate Governance]

CORPORATE GOVERNANCE

Definitions

1. Framework of rules,relationships,systems and processes within and by which authority is exercised and controlled within corporations.
2. Mechanism by which companies and management are held accountable.
3. Institute of Company Secretaries of India: application of best management practices,law compliance and adherence to ethical standards.
4. To steer an organisation in desired direction for effective strategic decisions.

Advantages

• Corporate success and Economic growth
• Investor confidence leading to more capital acquisition
• Increasing share price
• Adequate inducement to achieve shareholder's and organisation's objectives
• Minimizes wastage,corruption,risks,mismanagement
• Brand Formation and/or development
• Dynamic Management
• Cost reduction,long term sustenance.

Elements/Scope

• Board of Directors
1. primary intermediaries between company and stakeholders
2. responsible for value creation
3. entrusted with major decision making powers
4. role should be clearly documented in a Board Charter
5. necessary expertise and skill to manage an organisation
6. appointment complementary with the designation; systematic appointments outlining duties and responsibilities
7. induction+training
8. independence
• Legislation
1. clear and unambiguous
2. easy to decipher
3. relevant
• Management Environment
1. clear objectives
2. appropriate ethical framework
3. due processes combined with transparency
4. encouraging risk assessment
5. apt performance evaluation measures
• Code of Conduct
1. as per the organisation
2. compliant with relevant legislation
3. measures to evaluate adherence
• Setting a Strategy
• Business and Community Obligations
1. stakeholders informed of past and present initiatives
2. corporate social responsibility
3. organisation giving back to the community
4. clearly documented road-maps and material results stated in official documents
• Financial/Operating Reporting
1. financial statements and reports
2. filing relevant returns and documents
3. brief and concise
4. status reports to measure growth and potential improvement areas
• Committees
1. to oversee and measure performance of various departments
2. specialized reporting
3. adequacy of internal/external procedures
4. efficiency
• Risk Management
1. potential barriers
2. effective measures to combat hurdles
3. reasonable assessment to be relied upon
4. precautionary action plans
5. identification-analysis-treatment

Evolution Via Theories

Agency Theory:

this theory assumes a relationship of Agent-Principal between the Management and the Shareholders. corporate governance aims to put forth such systems and processes that administrate the activities done by the agent or the management. it establishes a code of conduct that ensures the agent acts in good faith and according to the principal's wishes.

Shareholder Theory:

this theory considers the corporation as a whole, the property of the shareholders. the shareholders in turn have invested into this corporation to get a good return on their investment. So, the shareholders might dispose of their investment as and however they perceive best. the management must adhere to shareholder's road-map and must act with due diligence to fulfill their responsibilities.

 Stakeholder Theory:

this theory takes into consideration, various inputs and outputs in the business and strives to satisfy most, if not all of them. corporate governance aims to give the best results to all the stakeholders involved and not just to the stockholders.

Stewardship Theory:

a steward is a person who acts as a guardian and/or a trustee to an estate. this theory negates the above three theories and shapes the management & employees into a steward. this theory changes the mindset of management and hopes for them to act for the corporation as if, it was their own and not of a principal. they are deemed as  caretakers in this theory and are supposed to act as such.

• MANAGEMENT V/S OWNERSHIP: both occupy a different and unique position and are supposed to facilitate each other in the ease of doing business.
• MAJORITY RULE V/S MINORITY INTEREST: prima facie, the majority is expected to make decisions and control the affairs of the organisation but it should do so whilst considering the minority interest as well.
• ROOTS OF CORPORATE GOVERNANCE:
• Ramayana
• Bhagwad Gita
• Mahabharata
• Arthashastra

Corporate governance can be traced back centuries but it has also been constantly evolving to keep up with our present-day world and helps the company to reach it's potential for growth and development.

Recent Developments in corporate Governance around the Globe

1. 2020 UK Stewardship Code
2. Sarbanes-Oxley act of 2002
3. corporate governance principles and recommendation, Australia - 2019
4. Code of corporate governance, Singapore - 2018
5. King IV report on corporate governance, South Africa - 2016
6. OECD principles of corporate governance
7. Finnish corporate governance code, 2020
8. Italian corporate governance code
9. Japan's Stewardship code