by Corporate governance is a system by which corporates are directed and controlled. The Board of Directors have a fiduciary duty to the shareholders, and thereby are responsible for overseeing the operations and activities of the company. Corporate governance also provides the framework for the attainment of a company’s objectives. The main focus is to make the business function in a highly effective manner so as to achieve positive results and thereby maximise the returns of the stakeholders.
Principles of Corporate Governance
Transparency
The more informed you are, the more certain you are. This is the mantra that the stakeholders firmly believe in. Transparency, in the business world, also pays dividends. Companies that are upfront about the goings-on in the operations and with regard to their financials earn the public trust, something that is immeasurable.
Transparency is an essential component at all levels of operation in a business entity; especially at the top management level, where major decisions are made and where major plans are formulated. Keeping the investors and other stakeholders informed helps build a relationship of trust and solidarity those results in the rewards of a higher valuation and easy access to funding.
Accountability
Accountability, in essence, means willingness or an obligation to accept responsibility for one’s actions. Accountability is generally looked at from a negative viewpoint and misconstrued by many who think it is associated with the traditional “Blame Game”. In reality, accountability answers more questions than just the one regarding who the responsible person is. It has to be looked at from a positive standpoint as well because it recognises accomplishments too.
Accountability gives the shareholders confidence in the business that, in any case, that leads to an unfavourable situation in the company, the ones responsible are dealt with in an appropriate manner. Accountability establishes a system in place where everyone is held accountable for their respective work and associated duties. Accountability holds two main things firmly in place:-
- Ensures that the management is accountable to the Board.
- Ensures that the Board is accountable to the shareholders.
Independence
The ability to make decisions while being free from any sort of constraint or without any influence is what independence is. And this is something that has proven to be crucial to the smooth operation of businesses as well. Independence is:
- The ability to stand firm in the face of inappropriate influences.
- The ability to make unadulterated, firm decisions on any given issue
- The ability to adhere to professionalism and do right by the company
It allows the person to act with integrity and make decisions and form judgments bearing in mind the best interests of the stakeholders. This is the reason companies appoint independent directors, so as to ensure that there is no force of hand being used or that the director does not have any personal interests with the company thereby hampering his ability to make decisions freely.
Principles of Corporate Governance
Leadership: The board of directors and the CEO should be competent in decision-making.
Risk Management: There should be a robust risk management mechanism for handling uncertainties.
Responsibility: The board of directors is responsible for running the business on behalf of the shareholders.
Fairness: All the stakeholders should be treated equally.
Effectiveness and Efficiency: The policies and procedures should be clear and uniform. Moreover, it should be well-communicated.
Principles, OCED Principles of corporate governance:
In addition to shareholders, crucial information should also be communicated to vendors, customers, financers, and employees.
Promote ethical and responsible decision-making
The Board ensures that the Bank promotes ethical and responsible decision-making and complies with all relevant policy, laws, regulations and codes of best business practice using the Group’s ethics and operating principles. The ethics and operating principles address the following matters: conflicts of interest, corporate opportunities, confidentiality, fair dealing, protection of and use of the Group’s assets, compliance with laws and regulations and encouraging the reporting of unlawful/unethical behaviour.
Advantages of Corporate Governance
Good corporate governance can turn a good company into a great one. The leaders in any industry are at the helm of their respective industries, mainly because of outstanding corporate governance practices.
Lesser fines and penalties: Since the legal compliance aspect is taken care of credit to the corporate governance practices, companies are able to save a fortune on unnecessary fines and compliances and possibly redirect those funds towards business objectives to achieve greater heights.
Compliance with laws: With corporate governance in place, compliance with various laws is taken care of easily, as corporate governance includes the rules, regulations and policies that enable a business to stay compliant throughout and function without any hassle or legal inconveniences whatsoever.
Better management: Since there is a structure in place with regard to how the entity operates, its day-to-day functioning, managing the activities and achieving targets becomes a whole lot easier. The work atmosphere also takes care of itself under good principles of corporate governance fostering teamwork, unity, efficiency and a drive for success.
Lesser conflicts and frauds: The rules instilled in the workplace encourage the employees to be morally conscious in every situation that they encounter, thus eliminating the possibility of fraud and conflict between employees.
Reputation and relationships: Companies with good corporate governance are able to attract investors and external financiers with relative ease, going by their sterling reputation and brand image. One of the pillars of corporate governance is transparency, which is the practice of sharing key internal information with the stakeholders. This improves the relationship of the entity with its stakeholders and sows the seeds of trust between the company and society at large.
Disadvantages of Corporate Governance
When it comes to the matter of smaller corporations, there might be a bit of hassle where the shareholders may serve as the directors and managers, having no segregation as such. Bearing this in mind, it gives rise to:
Increased costs: Administrative costs for companies with corporate governance are pretty exorbitant, considering all the requirements to be met. Here are a few documents to be maintained:
Stock sales and purchases > Legal compliance records > Annual registration
The burden of staying legally compliant: Corporates generally have loads of compliance that have to be followed, attracting different laws based on their industry. Corporate governance ensures legal compliance, but it does come at a very hefty price.
The conflict between the principal and the agent: Large corporations have made it a common practice to appoint a well-known manager, one with a good track record to manage the day to day operations of the business. Unfortunately, this gives rises to a conflict between the shareholders and the managers as they both may have very different objectives and perspectives. This often leads to a clash between the two, thus affecting the overall ability of the business to run its operations in a smooth and efficient manner.
Maintenance of segregation: Irrespective of the size of the corporation, the adherence to all formalities and requirements must be met without any exceptions. Failure to comply with these rules leaves the company with huge exposure such as “piercing of the corporate veil”, where the separate legal entity status of the corporation is ignored in order to understand the goings-on behind the closed doors.
OECD Principles of Corporate Governance
The six OECD Principles are:
- Ensuring the basis of an effective corporate governance framework
- The rights and equitable treatment of shareholders and key ownership functions
- Institutional investors, stock markets, and other intermediaries
- The role of stakeholders in corporate governance
- Disclosure and transparency
- The responsibilities of the board
- Ensure the basis of an effective corporate governance framework
The corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities.
- The rights and equitable treatment of shareholders and key ownership function
‘The corporate governance framework should protect and facilitate the exercise of shareholders’ rights and ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.’
Basic shareholder rights should include the right to:
- Secure methods of ownership registration;
- Convey or transfer shares;
- Obtain relevant and material information on the corporation on a timely and regular basis;
- Participate and vote in general shareholder meetings;
- Elect and remove members of the board; and
- Share in the profits of the corporation.
- The Institutional investors, stock markets, and other intermediaries
‘The corporate governance framework should provide sound incentives throughout the investment chain and provide for stock markets to function in a way that contributes to good corporate governance.’
- All shareholders of the same series of a class should be treated equally
- Insider trading and abusive self-dealing should be prohibited
- Members of the board and key executives should be required to disclose to the board whether they, directly, indirectly or on behalf of third parties, have a material interest in any transaction or matter directly affecting the corporation.
- The role of stakeholders in corporate governance
The corporate governance framework should recognize the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.
- Disclosure and transparency
The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.
- The responsibilities of the board
The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.
