Corporate Governance

Meaning and Definition of Corporate Governance

As per OECD(Organisation for economic cooperation and development) organisation

states that “Corporate governance is the system by which business corporations are directed

and controlled”

As per ‘world bank’ specifies that “a corporations that emphasise is put on the

relations between owners, management, board and other stake holders like consumers,

suppliers, investors and communities, etc”.

Need and importance of corporate governance

Corporate governance can also be used to help restore investor confidence in markets

that have experiences financial crisis. This has happen in the last few years in Japan,

Maleshiya and the Russian federation. For e.g. In these countries as in a number of other

countries that have similar been affected by a lack of investor’s confidence. New or improved

corporate governance has been introduced. Key features of these changes induce improving

transparency and accountability.

The OECD identifies the following key elements of corporate governance

1. Rights and obligations of shareholders.

a. A corporate governance framework should protect shareholder's rights.

It should ensure that management provides sufficient and relevant information, it

should encourage share holders to participate in annual general meeting and vote, minority

shareholders should be protected(Minimum 10 Shares).

b. Obligations (Use voting rights).

2. Equitable treatment of shareholders (Including minority and foreign shareholders).

3. The role of stakeholders in corporate governance.

a. The rights of stakeholders are protected by law and that these rights are respected.

b. It should provide effective redress (correct) for violation of law.

c. It should provide for disclose information to the interest of the stakeholders.

4. Transparency, disclose of information and audit.

a. A corporate governance framework should ensure the full, timely and detailed

disclose of information on all material matters including company financial situation

performance of ownership structure and governance.

b. It should include the establishment of internal audit committee.

c. Transparency or disclosers of information on:

Financial, ownership structure, members of board of directors and management,

governance structure and policy, corporate targets and prospects.

5. The Board of directors.

a. A corporate governance should ensure the strategic leadership of the corporation,

the effect monitoring of effects by board of directors.

b. Accountability of board to its corporation and shareholders.

c. Meeting.

6. Non executive members of the board.

a. These members should form independent judgment, especially with respect to the

corporation strategy, performance, asset management and management appointments.

b. Non executive member should be independent from executive members of the

board (i.e. Family members should not be admitted) and should not have business

relationship with the corporation.

c. Interlocking directorship should be avoided.

For e.g. One person have a directorship in one or more corporations.

7. Executive management, corporation and performance.

a. Management compensation should tied to the corporation general level of

profitability and overall performance.

b. Total compensation should be disclosed in financial statement.

c. A remuneration committee or review committee should be established.

Conclusion

The OECD in corporate governance improving competitiveness and access to the

capital in global Markets, highlights the importance of transparency and disclosed.

Separation of Ownership and Management

Chairman and CEO versus separation of the two positions

The track record of a chairman cum CEO has been excellent till such a time as the

size of the company’s in terms of variables like output, sales, paid up capital or number of

shareholders was small and manageable. But due to diverse between corporate ownership and

management and multinational nature of business. It has become quite difficulty, indeed,

impossible, to maintain efficiency coupled with transparency anymore particularly after

1990s.

When almost all the industrialised countries and even some less developed countries

had to face the unwanted shock and trauma(Mentally upset) of big corporate scandals. In this

phenomena largely due to unprecedented power enjoyed by the company chairman who is

generally the CEO of the company in the incidence of corporate scandals be controlled and

minimised by separating the job of chairman from the CEO.

Should the twin jobs of chairman and CEO be handle by one person?

One of the hottest issues in the area of corporate governance is whether it is better for

the corporate to split the jobs of chairman and CEO. Where the chairman would preside over

the board meetings draw the agenda for the meeting in consultation with the CEO and the

company’s board development, follow-up of progress made in the board meetings, set up the

corporate mission, long term and medium term goals for the company direct the CEO to put

up the annual business plan every year before the board for scrutiny or approval and review

of the progress of annual plans on quarterly or half yearly basis so that board may issue fresh

interactions or suggest alternative strategies for achieving the corporate annual goals year

after year so as to ensure that company altimetry achieves the ling term mission without fail.

Why should the chairman and CEO be one person?

The following arguments are added in favouring of combining the two jobs in one person.

1. As power and authority is vested in one individual it ensures better discipline and

quick decision making in the organisation.

2. Business growth and resultant financial results of the company are generally likely to

be far better than the organization with the split position.

3. Majority of the countries split positions are in vague in majority of the corporation.

Why should the two jobs of chairman and CEO be assigned two persons?

‘power corrupt and absolute power corrupt absolutely’ observed Lard Action (1834-

1902). Hence, combining two positions in one person is an open invitation to corrupt

and unethical practices sooner than later.

To earn higher increments year after year the chairman and CEO may in the face of

low productivity and profitability as mentioned at preceding points.

In the absence of rational system of reward and punishment as it is based on all:

powerful leader occupying both position of chairman and CEO an organization

degenerates overtime and ultimately collapse.

An executive with two positions of chairman and CEO can dole out selective and

suitable undue favours to playable board members with clear intention to win their

favour for getting is less creditable proposals approved by the board.

If the parent company has a sisters concerns subsidiaries he can force its board

members or their close relations by giving a precautionary assignments in these

groups unit with a view to win them over.

An all powerful chairman and CEO may even run the company as his personal

freedom thus preventing (act of stop or bad from happening) the actualization of a

firms potential to the determinants of owners, shareholders and society at large.

Stakeholders

Stakeholders as human beings in business.

The stakeholders are the principal players in inception, sustainability, development,

and growth of nay organisations. They are the shareholders, employees(Peon to CEO),

suppliers, customers, lenders, investors, banks, government and community at large.

All the means of production in an organisation are utilised to create wealth for the

community in general and stakeholders in particular. Everybody from supplier to customers,

from investor to lenders and from stockholders to stakeholders to the government is

important in an organisations. The 3 M’s (Manpower, Machinery and Money) may travel

from person to person, from place to place, but the care of all the activities remains people.

The inventors, the company, the employees, the producers, the lenders, the

management, the suppliers, the banks, the government everything holds on and plays with

central pull of people. Similarly we can say that people are the investors, people are the

producers and people are the consumers.

The system of the corporation which highlights that the whole system of made up of

people. The value addition process in the whole system would work absolutely and smoothly.

If the foundation of the system happens to be ethics and values. Transparency should

emphasise when the objectives in people oriented. Trust and goodwill built from it serves as

an asset to the company.

Expectations of stakeholders

Investor and shareholder: Expect high rate of return and dividend and capital appreciation.

Lender: Expect timely repayment of loans and interest.

Suppliers: Expect fair terms and timely payments.

Society: Expect company to use resources judicially so as to maintain ecological balances

and sustainable development and also partner in nation’s building.

Employees: Expect good working environment, fair remuneration and security.

Customers: Expect quality product and services at fair prices.

Government: Expects company to partner in nation building by paying taxes or directly

spending on social projects.

What every human beings needs in life?

Love: Relationship for communication of feelings and sharing resources.

Inspiration: Motivation to live long and do great things.

Fun: Feelings good all the time.

Essentials: Food, cloth, shelter and health care.

MODELS OF CORPORATE GOVERNANCE

Introduction

Many models of Corporate Governance try to involve various stake holders like share

holders, employees and financial institutions in the governance of the Company. In this

section will discuss the Anglo-American Model, German model, Japanese model and Indian

model.

Anglo-American Model

In this model corporate governance, share holders elect the Board of Directors, the take up

advisory to management control through the Board of Directors.

The Board of Directors performs three functions on behalf of the share holders-

represents directors and oversight, the Board appoints and supervision the officers

who take care of the daily activities of organizations.

The structure frame work of the Anglo American model has laid down by the legal

system, employees suppliers and creditors are stake holders in the corporation.

The creditors have lie on the assets of the corporation.

The Board of directors designs the policy of the corporation which is than

implemented by the management using a well design information system.

The Board monitoring the implications of the policy in the organization.

This model is most suitable for a production or manufacturing organization as it

facilitates effect monitoring of production, exchange and performance.

German model

In the German model corporate governance even though the stake holders own the

corporation, they do not directly control the governance mechanism.

Half of members on the supervisory board elected by the labour unions and while

remaining are elected by the share holders.

In this model the employees are not just like a stake holders but also have a say in the

governance inclenisim.

Thus employees became responsible for the policies that have to be implementation

by them for attaining the objectives of the organization.

The supervision board which is appointed jointly by through share holders and labour

unions (employees) appoints and monitor the management board. This management

board conduct the day to day operations of the organization independently but it has

to report to the supervisory board.

One of the unique features of this model is that the labour relation officer found a

place on the management board this ensures workers participations in the governance

mechanism.

Japanese model

In the Japanese model of corporate goverance financial institutions have a major role

in the governance mechanism.

The share holders along with the banks appoints the members of the board.

In this model the president is appointed on the basis of concerns between the share

holders and the banks the president consult the board and their relation structure in

nature.

Usually the board rectifies whatever the decisions the president takes, the finical

institutions that the finance the business and have crucial role in it.

Even though the share holders are the owners of the business.

In this model the board of directors carries but the management functions.

Sometimes the financial institutions monitor the management functions by

nominating the managerial personnel the banks even have power to monitor or

suspend the board in case of emergency.

Indian model

The Indian model of corporate governance of a mix of Anglo-American and

Germanises model. Corporations in India can be governed into three categories.

1. Private companies.

2. Public companies.

3. Banks aqnd other corporations.

Private companies: The founder is family and associate closely whole the private companies

and they exercise maximum control over the activities of the companies.

Eg: Tata, Birla, Reliace Gorup, etc.

Public companies. The central and state government choose the members of the board even

after dismiss of the public sector companies the government continues to have a considerable

hold over the activities of the company.

Here the interest of the stake holders are given low priority, large public sector

enterprises are run to serve the interest of the government rather determining for efficiency

and long term owners value.