CORPORATE GOVERNANCE

GAYATRI IYER

MBA

CORPORATE GOVERNANCE

Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. In simpler terms it means the extent to which companies are run in an open & honest manner.

ISSUES OF CORPORATE GOVERNANCE

Internal controls and internal auditors The independence of the entity's

external auditors and the quality of their audits

Oversight of the preparation of the entity's financial statements

Review of the compensation arrangements for the chief executive officer and other senior executives

SCOPE OF CORPORATE GOVERNANCE

Accountability of Board of Directors & their constituent responsibilities to the ultimate owners- the shareholders.

Transparency, i.e. right to information, timeliness & integrity of the information produced.

Clarity in responsibilities to enhance accountability.

Quality & competence of Directors and their track record.

Checks & balances in the process of governance.

Adherence to the rules, laws & spirit of codes.

IMPORTANCE OF CORPORATE GOVERNANCE

Corporate governance ensures that a properly structured Board, capable of taking independent & objective decisions is at the helm of affairs of the company. This lays down the framework for creating long-term trust between the company & external providers of capital.

It improves strategic thinking at the top by inducting independent directors who bring a wealth of experience & a host of new ideas.

It rationalizes the management & monitoring of risk that a corporation faces globally.

Corporate governance emphasizes the adoption of transparent procedures & practices by the Board, thereby ensuring integrity in financial reports.

CONTD… It inspires & strengthens investors’ confidence

by ensuring that there are adequate number of non-executive & independent directors on the Board, to look after the interests & well-being of all the stakeholders.

Corporate governance helps provide a degree of confidence that is necessary for the proper functioning of a market economy, as it contemplates adherence to ethical business standards.

Finally, globalization of the market place has ushered in an era wherein the quality of corporate governance has become a crucial determinant of survival of corporate.

CODES OF CORPORATE GOVERNANCE

Codes of corporate governance have existed for more than two decades and have been developed in many jurisdictions worldwide.

“Codes of corporate governance are defined as a set of ‘best practice’ recommendations with regard to the behavior and structure of the board of directors of a firm.” In recent years, some codes have gone beyond those boundaries to embrace the governance characteristics and behavior of institutional investors and intermediaries as well.

NEED OF CORPORATE GOVERNANCE CODE

Generally, originators of codes of corporate governance did not intend them to be some kind of gentler version of one-size fits- all, rigid, and binding regulation. Rather, they conceived of a code as an over-arching, flexible, and principles-based framework that provides for companies adopting guidelines to either comply with provisions, or to explain why they are not in compliance. This is often described as a ‘soft standards’ approach based on a ‘comply or explain’ regime rather than hard rules policed by law and regulation. In most instances, codes are developed to be flexible enough to encompass the views of many actors within a single market: multiple company types, many industries, and many stakeholder groups.

Codes aim to help guide the actions of the board or other market participants, and to provide benchmarks that can be used by others to evaluate their performance in light of those standards.

SOCIAL RESPONSIBILITY OF CORPORATES

Corporate social responsibility may be referred to as "corporate citizenship" and can involve incurring short-term costs that do not provide an immediate financial benefit to the company, but instead promote positive social and environmental change.

Companies have a lot of power in the community and in the national economy. They control a lot of assets, and may have billions in cash at their disposal for socially conscious investments and programs. Some companies may engage in “green washing” in corporate responsibility, but many large corporations are devoting real time and money to environmental sustainability programs, alternative energy and various social welfare initiatives to benefit employees, customers, and the community at large. 

BENEFITS OF CSR Win new business Increase customer retention Develop and enhance relationships with

customers, suppliers and networks Attract, retain and maintain a happy

workforce and be an Employer of Choice Save money on energy and operating costs

and manage risk Differentiate yourself from your

competitors Generate innovation and learning

and enhance your influence

CORPORATE SOCIAL REPORTING

Corporate social reporting is referred as the process of communicating the social and environmental effects of economic organizations. The reporting is also a form of corporate self-regulation integrated into a business model. Its policy functions as a self regulating mechanism whereby business monitors and ensures its active compliance with the spirit of the law ethical standards and international norms.

ROLE OF BOARD Select individuals for Board membership and

evaluate the performance of the Board, Board committees and individual directors.

Select, monitor, evaluate and compensate senior management.

Assure that management succession planning is adequate.

Review and approve significant corporate actions. Review and monitor implementation of

management’s strategic plans. Review and approve the Company’s annual

operating plans and budgets.

Contd… Monitor corporate performance and evaluate results

compared to the strategic plans and other long-range goals.

Review the Company’s financial controls and reporting systems.

Review and approve the Company’s financial statements and financial reporting.

Review the Company’s ethical standards and legal compliance programs and procedures.

Oversee the Company’s management of enterprise risk.

Monitor relations with shareholders, employees, and the communities in which the Company operates.

DISCLOSURESA. Basis of related party transactions:

A statement in summary form of transactions with related parties shall be placed periodically before the audit committee. Details of material individual transactions with related parties which are not in the normal course of business shall be placed before the audit committee.

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.

 

Contd…

C. Board Disclosure- Risk Management: the company shall lay down procedures to inform Board members about the risk assessment and minimization procedures.

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 and annual basis.

 

Contd…

E. Remuneration of Directors :

All pecuniary relationship or transactions of the non- executive directors vis-à-vis the company shall be disclosed in the Annual Report.

Further, certain prescribed disclosures on the remuneration of directors shall be made in the section on the corporation governance of the Annual Report;

The company shall disclose the number of shares and convertible instruments held by non-executive directors in the annual report.

INVESTOR PROTECTIONWhen investors finance firms, they typically obtain certain rights or powers that are generally protected through the enforcement of regulations and laws.

Some of these rights include disclosure and accounting rules, which provide investors with the information they need to exercise other rights. Protected shareholder rights include those to receive dividends on pro-rata terms, to vote for directors, to participate in shareholders' meetings, to subscribe to new issues of securities on the same terms as the insiders, to sue directors or the majority for suspected expropriation, to call extraordinary shareholders' meetings, etc. Laws protecting creditors largely deal with bankruptcy and reorganization procedures, and include measures that enable creditors to repossess collateral, to protect their seniority, and to make it harder for firms to seek court protection in reorganization.

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