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Corporate Governance - The ABC of it - Global
Norms Promoted by World Bank

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Corporate Governance
World Bank Report

Corporate Governance - The ABC of it - Global
Norms Promoted by World Bank

Basic Facts About Corporate Governance

Corporate Governance is a voluntary ethical code of business of companies. According to Cadbury Committee on financial aspects of Corporate Governance: it is a system by which companies are directed and controlled. The board of directors is responsible for the governance of their companies. The shareholders role in the governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place.

Governance in relation to business organization concerns with the intrinsic nature, purpose, integrity and identity of the organization and focuses primarily on the relevance, continuity and fiduciary aspects of the organization. It involves monitoring and overseeing strategic direction, socio-economic and cultural context, externalities and constituencies of the organization. Hence corporate governance may be called as an umbrella term encompassing specific issues arising from interactions among senior management personnel, shareholders, board of directors, other constituencies and the society at large. It deals with the exercise of power over the directions of enterprise, the supervision of executive actions, acceptance of a duty to be accountable and regulation of the affairs of the corporation.

Corporate Governance & its Mission

Corporate Governance is a process or set of systems and processes to ensure that the company is managed to suit the best interests of all. The systems which can ensure this may include structural and organizational matters. The stakeholders may be internal stakeholders (promoters, members, workmen and executives) and external stakeholders (shareholders, customers, lenders, dealers, vendors, bankers community and regulators). Corporate Governance is concerned with the establishment of a system, whereby the directors are entrusted with responsibilities and duties in relation to the direction of corporate affairs. It is concerned with the accountability of persons who are managing it towards the stakeholders. It is concerned with the morals, ethics, values, parameters, conduct and behaviour of the company and its management.

Emphasis on Transparency, Integrity and
Accountability of the Management

It is a system of making management accountable to the shareholders for effective management of the companies, in the interest of the company and also with adequate concern for ethics and values. Corporate governance recognizes issues like maintaining continuity of succession planning, identifying opportunities, facing challenges and managing changes with the business and allocation of resources towards the right priority.

Corporate Governance mainly consists of two elements, namel

  1. A long-term relationship, which has to deal with checks and balances, incentives of managers and communication between management and investors.

  2. The second element is transactional relationship involving matters relating to disclosures and authority.

Corporate Governance deals with laws, procedures, practices and implicit rules that determine a company's stability to take managerial decision vis--vis its elements, particularly its shareholders, creditors, state and employees. Corporate governance refers to an economic, legal and institutional effort that allows companies to diversify, grow, restructure and exit and do everything necessary to maximise long-term shareholders value.

With increasing awareness, investors will no longer depend on regulators to protect them. They will on their own shifty allegiance and do so overnight to companies which maximise shareholder value. The key differentiation, with everything being common, will be the ability to create self-driven, self-assessed, self-regulated organization with a conscience. That ultimate of what corporate governance in India has to be all about.

Corporate Governance and Corporate Management

The difference between Corporate Governance and Corporate Management is clearly activity oriented. Governance with an external focus and open system is strategy oriented, while management being task oriented is a closed system with internal focus. Thus Corporate Governance is a process, structure and relationship through which a board of directors oversee what its executives do, whereas the Corporate Management concerns with what the executives do to define and achieve the objectives set out by the top management. Corporate Governance and Corporate Management is an integrate system and professionalisation may act a vehicle for better Corporate Governance and ultimately better management.

Corporate governance is a wider term than the corporate management and cannot be seen as synonymous with the latter. Apart from the core promoters and directors, there are some other persons acting in their independent capacities such as auditors, secretaries, advisors etc, who also ought to be held responsible for greater transparency in the corporate affairs

Role of Shareholders under Corporate Governance

Maximizing shareholders' wealth is the corner stone of corporate governance. The large and professional investors like institutional investors, mutual funds and pension funds have analytical skill and business acumen and can play a vital role in corporate governance, because such investors and shareholders would have the same objective of maximizing the shareholders wealth.

World Bank Report on Corporate Governance

The report (of World Bank) recognizes the complexity of the very concept of corporate governance and therefore focuses on the principles on which it is based. These principles such as transparency, accountability, fairness and responsibility are universal in their application. The way they are put into practice has to be determined by those with the responsibility for implementing them. What is needed is a combination of statutory and self-regulation, the mix will vary around the world, but nowhere can statutory regulation alone promote effective governance. The stronger the partnership between the public and private sectors, the more soundly based will be their governance structures. Equally, as the report emphasises, governance initiatives win most support when driven from the bottom up rather than from the top down.

It could be argued that international investors and capital markets are bringing about a degree of convergence over governance practices worldwide. But the standards which they are setting apply primarily to those corporations in which they invest or to which they lend. These standards set the target but it is one which, at present, is out of reach for the majority of enterprises across the world. In the past these standards might have become diffused by a gradual process of economic osmosis. However, the pace of change today is such that to leave the raising of governance standards to natural forces might put areas of the world, where funds could be put to best use, at a competitive disadvantage in attracting them. Adoption of the report's proposals offers enterprises everywhere the chance to gain their share of the potentially available funds for investment.

Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society. The incentive to corporations and to those who own and manage them to adopt internationally accepted governance standards is that they will help them to achieve their corporate aims and to attract investment. The incentive for their adoption by states is that they will strengthen their economics and discourage fraud and mismanagement.

The foundation of any structure of corporate governance is disclosure. Openness is the basis of public confidence in the corporate system and funds will flow to those centres of economic activity which inspire trust. This report points the way to the establishment of trust and the encouragement of enterprise. It marks an important milestone in the development of corporate governance and I cannot commend it too highly.

Standards of Corporate Ethics and Corporate Governance recommended by World Bank are discussed in the next Page

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