Management Notes – Corporate Governance – For W.B.C.S. Examination.

ম্যানেজমেন্ট নোট – কর্পোরেট গভর্নেন্স – WBCS পরীক্ষা।

Corporate governance is the structure and the associations which govern corporate direction and performance. The board of directors have dominant role in corporate governance. Its relationship to the other primary participants, typically shareholders and management, is critical. Other members include employees, customers, suppliers, and creditors. The corporate governance framework also depends on the legal, regulatory, institutional and ethical environment of the community. Usually, corporate governance is described as the host of legal and non-legal principles and practices affecting control of publicly held business firms. Broadly speaking, corporate governance affects not only who controls publicly traded corporations but also the allocation of risks and returns from the firm’s activities among the various contributors in the firm, including stockholders and managers as well as creditors, employees, customers, and even societies.Continue Reading Management Notes – Corporate Governance – For W.B.C.S. Examination.

Concept of governance:

Many management scholars have recognized that strong corporate governance is vital to resilient and vibrant capital markets and is an important tool of investor protection. According to The Institute of Company Secretaries of India, “Corporate Governance is the application of best management practices, compliance or jaw in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders”. Cadbury Committee (U.K.), 1992 has defined corporate governance as “Corporate governance is the system by which companies are directed and controlled. It encompasses the entire mechanics of the functioning of a company and attempts to put in place a system of checks and balances between the shareholders, directors, employees, auditor and the management.” Other group of scholars explained the term corporate governance as “process 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 account the interests of other stakeholders”.
Firms at global level recognising that better corporate governance adds substantial value to their operational performance in the following ways:

1. It improves strategic thinking at the top by inducting independent directors who bring a wealth of experience, and a host of new ideas.
2. It justifies the management and monitoring of risk that a firm faces globally.
3. It limits the responsibility of senior management and directors, by carefully articulating the decision making process
4. It assures the integrity of financial reports.
5. It has long term reputational effects among main stakeholders, both internally and externally.

Objective of corporate governance:

The fundamental objective of corporate governance is to boost and maximize shareholder value and protect the interest of other stake holders. World Bank described Corporate Governance as blend of law, regulation and appropriate voluntary private sector practices which enables the firm to attract financial and human capital to perform efficiently, prepare itself by generating long term economic value for its shareholders, while respecting the interests of stakeholders and society as a whole. Corporate governance has various objectives to strengthen investor’s confidence and intern leads to fast growth and profits of companies. These are mentioned below:

1. A properly structured Board proficient of taking independent and objective decisions is in place at the helm of affairs.
2. The Board is balanced as regards the representation of suitable number of non-executive and independent directors who will take care of the interests and well-being of all the stakeholders.
3. The Board accepts transparent procedures and practices and arrives at decisions on the strength of adequate information.
4. The Board has an effective mechanism to understand the concerns of stakeholders.
5. The Board keeps the shareholders informed of relevant developments impacting the company.
6. The Board effectively and regularly monitors the functioning of the management team.
7. The Board remains in effective control of the affairs of the company at all times.

Elements of good Corporate Governance:

It has been established in various management reports that aspects of good corporate governance comprise of transparency of corporate structures and operations, the accountability of managers and the boards to shareholders, and corporate responsibility towards stakeholders. While corporate governance basically lays down the framework for creating long-term confidence between companies and the external providers of capital.
There are numerous elements of corporate governance which are mentioned below:

1. Transparency in Board’s processes and independence in the functioning of Boards. The Board should provide effective leadership to the company and management to realize sustained prosperity for all stakeholders. It should provide independent judgment for achieving company’s objectives.
2. Accountability to stakeholders with a view to serve the stakeholders and account to them at regular intervals for actions taken, through strong and sustained communication processes.
3. Impartiality to all stakeholders.
4. Social, regulatory and environmental concerns.
5. Clear and explicit legislation and regulations are fundamentals to effective corporate governance.
6. Good management environment that includes setting up of clear objectives and suitable ethical framework, establishing due processes, clear enunciation of responsibility and accountability, sound business planning, establishing clear boundaries for acceptable behaviour, establishing performance evaluation measures.
7. Explicitly approved norms of ethical practices and code of conduct are communicated to all the stakeholders, which should be clearly understood and followed by each member of the organization.
8. The objectives of the corporation must be clearly recognized in a long-term corporate strategy including an annual business plan along with achievable and measurable performance targets and milestones.
9. A well composed Audit Committee to work as liaison with the management, internal and statutory auditors, reviewing the adequacy of internal control and compliance with significant policies and procedures, reporting to the Board on the key issues.
10. Risk is an important component of corporate functioning and governance, which should be clearly acknowledged, analysed for taking appropriate corrective measures. In order to deal with such situation, Board should formulate a mechanism for periodic reviews of internal and external risks.
11. A clear Whistle Blower Policy whereby the employees may without fear report to the management about unprincipled behaviour, actual or suspected frauds or violation of company’s code of conduct. There should be some mechanism for adequate safeguard to personnel against victimization that serves as whistle-blowers.

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