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What is Corporate Governance?

Corporate Governance refers to the way a corporation is governed. It is the technique by which companies are directed and managed. It means carrying the business as per the stakeholders desires. It is actually conducted by the board of Directors and the concerned committees for the companys stakeholders benefit. It is all about balancing individual and societal goals, as well as, economic and social goals. Corporate Governance is the interaction between various participants (shareholders, board of directors, and companys management) in shaping corporations performance and the way it is proceeding towards. The relationship between the owners and the managers in an organization must be healthy and there should be no conflict between the two. The owners must see that individuals actual performance is according to the standard performance. These dimensions of corporate governance should not be overlooked Corporate Governance deals with the manner the providers of finance guarantee themselves of getting a fair return on their investment. Corporate Governance clearly distinguishes between the owners and the managers. The managers are the deciding authority. In modern corporations, the functions/ tasks of owners and managers should be clearly defined, rather, harmonizing. Corporate Governance deals with determining ways to take effective strategic decisions. It gives ultimate authority and complete responsibility to the Board of Directors. In todays market- oriented economy, the need for corporate governance arises. Also, efficiency as well as globalization are significant factors urging corporate governance. Corporate Governance is essential to develop added value to the stakeholders. Corporate Governance ensures transparency which ensures strong and balanced economic development. This also ensures that the interests of all shareholders (majority as well as minority shareholders) are safeguarded. It ensures that all shareholders fully exercise their rights and that the organization fully recognizes their rights. Corporate Governance has a broad scope. It includes both social and institutional aspects. Corporate Governance encourages a trustworthy, moral, as well as ethical environment.

Benefits of Corporate Governance


1. 2. 3. 4. 5. 6. 7. 8. Good corporate governance ensures corporate success and economic growth. Strong corporate governance maintains investors confidence, as a result of which, company can raise capital efficiently and effectively. It lowers the capital cost. There is a positive impact on the share price. It provides proper inducement to the owners as well as managers to achieve objectives that are in interests of the shareholders and the organization. Good corporate governance also minimizes wastages, corruption, risks and mismanagement. It helps in brand formation and development. It ensures organization in managed in a manner that fits the best interests of all

What is a Corporation: Evolution, Features and Purpose


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The corporation has been defined in many ways as interpreted by individuals; however lawyers and economists call it a nexus of contracts. This means that a corporation is nothing but a sum of all the agreements which lead to its creation. Corporations are also defined as a device for obtaining individual profit without individual responsibility.

To define it more visually, a corporation is a structure established wherein different parties come together and each provides capita labor or expertise to maximize profits for all of them. A corporation has wide variety of constituents and it needs to relate to al them; like investors, shareholders, customers, employees, suppliers, creditors, government and finally the community .

Legally, a corporation is identified as a fictional person for some purposes however the corporation itself is separate from its owners employees. This means, what is owed to the corporation cannot be owed to the people who make the corporation. So is a corporat sued or gets bankrupt, the individual members of the corporation are not liable to pay the debts.

Let us explore the evolution of corporations into the form we know today. To begin with, in the earlier times, the educational and religious corporations were given considerable independence and perpetual existence to evade the all encompassing power of the king. Later, corporations were set to address states specific needs like establishing colonies during the colonial era. Initially, corporations were characterized by a few wealthy people who negotiated amongst themselves, invested capital and worked towards maximizing profits. However later in the nineteenth century; the rapid technological progress brought the idea of having larger firms employing hundreds and sometimes thousands of people. The other significant aspect was the need for the capital which was earlier provided by a few wealthy members but now proved inadequate to support the operations of such large firms. The ramification of these changes was the emerging acceptance of the concept of private property which was hitherto unknown as all properties were considered to be belonging to the state or the religious institutions like churches. There are certain critical features of the corporation which helped its popularity and laid the foundation for the modern day form as we know today.

The limited liability which means that the corporation is different from its owners and employees
provided the much desired flexibility to the business. This led to buying of stocks of large corporation by people which gave them the relief that if losses happen it would be restricted to the proportion of investment and not be unprecedented. Since, the investment and risks were low, the control of shareholders was also less unlike in the case of partnerships were each partner held a considerable share and could have taken decisions.

The second aspect was the transferability of holdings freely, a shareholder loosing on stocks
can sell it immediately and recover the investment however in case of partnerships the complexity of evaluating the value of the partnership and the non existence of a stock exchange to trade partnerships made transferability difficult.

Legal Personality provided by a corporation is also an interesting aspect, a partnership may end
with the death of a partner however a corporation can exist till the time it has capital. Also, certain acts result in legal actions against an individual under ordinary circumstances; but when these are committed by him/her as a part of a corporation, they cannot be held liable for them, legally. Lastly the society can regulate corporate actions through taxes and fines and direct them to pursue not just economic but social goals as well. Corporations have also gone through the Darwinian principle of natural selection and evolution. So the processes and systems keep changing with the time and context in which the corporations operate.

What is Good Corporate Governance ?


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Corporate Governance is the art of directing and controlling the organization by balancing the needs of the various stakeholders. Th often involves resolving conflicts of interest between the various stakeholders and ensuring that the organization is managed well meaning that the processes, procedures and policies are implemented according to the principles of transparency and accountabili

Whenever one speaks about corporate governance, it has to be borne in mind that the organizations have duties and responsibilitie towards their shareholders and stakeholders and hence they need to be governed in accordance with the law and keeping in mind interests of the stakeholders and shareholders. The next aspect of corporate governance is that the notion of economic efficiency must be followed when directing, managing and controlling organizations. For instance, it is truism that corporations exist to make profits and hence the profitability and revenue generation ought to be the aim for which the corporates must strive for. Of course, this does not mean that corporates can cut corners in their pursuit of profit and power and hence taken together with the principles in the previous paragraph, corporate governance means that a corporation must strive to generate revenues and make profits in a transparent and accountable manner. What this means is that the way in which corporations are managed and directed have to be done in accordance with standard norms and procedures that apply to ethical and normative conduct.

Corporate Governance has been in the news for the last decade or so following a spate of scandals that engulfed companies like Enron which led to their collapse because of mismanagement. This prompted regulators all over the world to implement various acts and rules to rein in irresponsible corporate behavior that would mar the prospects of the corporations and cause harm to their shareholders and stakeholders. Acts like the Sarbanes Oxley were passed to enforce greater oversight over corporations and ensure that they did not overreach themselves in their relentless pursuit of profits. Indeed, it can be said that the Enron debacle was a wakeup call for corporate America to set its house in order. It is unfortunate that some of the lessons learnt during the early years of the last decade were forgotten leading to gross abuse of corporate power in the run up to the global financial crisis. Broadly speaking, corporate governance can be said to encompass the tenets of rights and equitable treatment of the shareholders and the shareholders and following ethical business behavior along with practice of integrity. Further, good corporate governance means that the processes of disclosure and transparency are followed so as to provide regulators and shareholders as well as the general public with precise and accurate information about the financial, operational and other aspects of the company. As has been mentioned elsewhere in this article, corporate governance is a term that means many things and the bottom line for good corporate governance is the dual aim of pursuing profits and doing so in a transparent and accountable manner. The subsequent articles in this module introduce the readers to various aspects of corporate governance and include a discussion of why the ongoing global financial crisis represents a crisis of capitalism that is characterized by poor corporate governance.

The Role of the Government: Legislation and Regulation


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The often discussed and much criticized role of the government in regulating the corporate has gained all the more importance in th changing economic times. Its time that the governments took more active role in regularizing the corporate through necessary mea we have learnt the painful way that the corporate crimes or the white collar crimes as they are called not at all victimless. So, if an o employee losses all his pension and savings on account of a corporate fraud committed by his organizations, the ramifications are term. The mere wrist slapping exercise and sometimes even bail out that the government finances for erring corporate, surely does act as a deterrent for others.

The very complex nature of the government and corporate can be clearly studied in the ongoing crisis in the European Un where the question of whether to use tax payers money to bail out Greeces economy has become a political decisions rat than a business one. So what is the alternate path? Allowing self regulation by organization means making fox the shepherd, whil the other hand, going by the rule book approach of the US government has also been under much criticism, more so after the curre financial crisis begun. The other aspect of the scenario is the fact that fines are considered to be a part of doing business by the corporate, and the civic penalties that are occasionally levied against them is hardly enough to set example. The criminal sanctions against corporate are not a common phenomenon and the experts believe that can be more potent in deterring corporate misconduct. However, the other side of the coin is the fact that most of the regulating authorities like SEC etc have no authorities to impose criminal sanctions against corporate. Also, the penalties and fines bring no respite to the employees, shareholders and communities. [Recall the Bhopal Gas Tragedy]. Reasonably evaluated criminal and civic sanctions in a mix as appropriate can help address the issue. The choice of going after the corporation or people, who have been involved in the misconduct, is another important consideration. A rather fair and objective view of this issue is that if the organization has a proper system of safeguards and checks in systems and processes and if the misconduct profits just one person, in this case even the corporate becomes a victim. For such situations a single person can be accused of embezzlement and liable for prosecution however if the fraud is at a larger level involving more people, the situation becomes complex, whether to hold liable the board members and senior leaders for failing to ensure the prevention.

The recent legislative development has come up with a guideline for the corporate:

Code of Ethics Certification of financial information by the CEO and the CFO Provision and protection of whistleblowers of misconduct
The government should also ensure that there are not too many agencies to act as enforcement authorities as this may lead to conflict of interests.

The Morality and Accountability of Corporate Decisions


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In our previous discussion we have come across the fact that it is hard to establish the accountability and responsibility of corporate decisions but does this mean that a corporation can take infinite liberties with the flexible law structure and systems ? Is possible for corporate decisions to be moral with social goals met along with the business ones ? Before we dwell deeper into discu the aspects of corporate decision making, it would be appropriate to understand the expectations of the communities from the corpo

Community members want jobs which would give them descent income or wage as well as which challenges ingenuity and creativi they need goods and services which are of a descent quality and a safe and healthy work environment. Community members also their share of interest in the corporation either as an employee, shareholders, suppliers, creditors or just as neighbors. There is a ce level o trust and agreement whether written or otherwise which exists between the corporation and these constituents. These agreements are sometimes between the corporation and its employees, suppliers, creditors and while some other agreements are imposable by the legislature. The public law provides a platform on which the corporations can decide their transaction with these constituents while also providing them the flexibility to expand and contextualize them as per their needs. The legislature is to ensure that the objectives of the corporation are beneficial for the society as a whole and there is no conflict of interests. Another significant aspect of this discussion is that both the government and the business have always influenced each other liberally. So a senior corporate chief who makes political contribution with an open heart may have a strong impact on the laws created by the government regarding the competition. The ideal state or the corporate is the free market where there is minimum interference from the government. But, the recent economic crisis has brought the question of whether to have a free market or not, once again into the foray of discussions. However, the governments have always been rather proactive in making accommodation for the business where the long term societal needs and financial implications are overlooked. Above all, the biggest factor which influences, directs and redirects the decisions of the corporate is the market itself. With the corporations spreading across the globe, it is difficult to determine their domicile and therefore the need to have a more congruent corporate governance structure arises. It is also important that corporations base their decisions on long term strategic and financial planning rather than engaging in short term profits and gains. The impact of corporate decisions are huge not just on economies but on the lives of the common man as well. To go by the directions provided by the World Bank for the emerging economies, the three points have been identified:

Transparency Independent Oversight Accountability


In order to maintain its legitimacy and credibility the corporate would have to base their decisions keeping the above parameters in consideration. The self regulation by corporate remain a distant possibility in the

near future, especially in the wake of the current economic crisis, the role of legislature and government becomes paramount in ensuring that the larger interests are not compromised.

The Significance and Impact of Corporate Behavior


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The corporate behavior tends to have a direct or sometimes an indirect impact on the economic state of the countries and commun they operate in. The very recent examples was the economic crisis in US, Brazil and Asia in 1998 and hard to forget ever continuin financial meltdown of the current times. Any lack or deficiency in the corporate governance structures has a potential to thre stability of financial structures globally.

The most important objective of a corporation is to serve social and economic goals however simple it may sound, in practice its th economic goals that prevail. Can there be a process to make corporation accountable for its actions and decisions. For e.g. hundre people lost their livelihood after the Lehman Brothers debacle and the financial crisis that followed, but who was to be held account for it? A corporation also needs to act within the limit of the law, however it is interesting to observe the converse; that if there is no compliance and a corporation engages in criminal activities, there is no body to be prosecuted and punished. It is essential to understand that corporate tend to engage in criminal behavior because the benefits outweigh the risk and the resulting costs which are enormous are borne elsewhere. And its the shareholders who feel the brunt from all sides, as members of the community they pay the cost of the crime itself, as taxpayer they pay for the cost of prosecution and ultimately as a shareholder they pay the cost of defense and penalties. It is sad to note that the white collar crimes as these are not treated at par with criminal offences while the cost factor involved is much higher in the former category of offence. The corporate managers involved, rarely ever lose their jobs and the companies pay the hefty fines and legal fees. Also, since there is no clearly established system of accountability for corporate which can be acceptable by shareholders, employees, suppliers, government; the kind of punishment for corporate crimes remains a difficult area even for the legal experts. It seems that a certain level of corporate crime is just accepted as a way of doing business. During the recent times it has been observed that there is a direct impact of financial systems on growth and removing poverty. The development of banking systems and market finance drives economic growth as does the role of legal foundations for financial market development; external financing and the quality of investments which bear an impact on the growth of the economy. In such a scenario, the importance and relevance of having a good corporate governance structure in place goes a long way in ensuring a better lifestyle, economic growth and prosperity for the members of the community. To prevent the financial crisis of the current times and to make corporate behavior responsible and accountable, it is necessary that a thorough system of checks be established. The initiative is to be taken by the government, the corporate and the legal structure of the countries in which the corporate operate and the approach should be to create a standardized structure acceptable everywhere in the world.

Factors Directing Corporate Behavior


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The business landscape of the 21st century is littered with companies that have failed to keep abreast of the changing trends, ideas the pace of technological change. In this context it is important more than ever for corporates to practice good corporate governance since an approach that is fair and ethical as well as transparent is likely to lead to greater productivity than an approach that favors s term profits and encourages cutting corners. Hence, it is pertinent to look at some of the factors that drive corporate behavior from th perspective of good corporate governance. sole criterion by which corporates were judged and hence, corporations indulged in the pathological pursuit of profit and power at the expense of everything else.

To start with, the profit motive is the major or the chief factor that drives corporate behavior. For a long time, profits were th

In recent decades, the business paradigm has shifted somewhat with corporates now engaging in some measure of soci and environmentally responsible behavior to reflect the changing times. However, it is by no means certain that the corporations have abandoned their relentless search for profits as can be seen from the spate of corporate scandals involving unethical and illegal business practices.

The next factor that drives corporate behavior is the consumer preference or the way in which
consumers vote with their feet in buying products and availing of services. Indeed, the pursuit of profits and the consumer is king motto exist in a sort of creative tension since satisfying the consumer in all respects means that corporates have to forego some of their profits and when corporates cannot satisfy consumers, they flock to their competitors. Hence there is a contradiction of sorts which only the market based economies are able to find solutions since the markets correct these contradictions by virtue of their existence.

The third factor that drives corporate behavior is the presence of absence of regulations and
rules governing corporate conduct. In countries where regulators do not have much power, corporations tend to run amok in the market and make everybody dance to their tunes. On the other hand, in the developed countries and in countries where the regulators do their job properly, corporations cannot take the consumers and the regulators for granted. Of course, the ongoing global financial crisis has proved that even in the developed west, instances of corporates taking the consumers and the country for a ride have been surfacing regularly. What is clear from the preceding discussion is that among the various factors that direct corporate behavior, the one underlying or common theme is that the interaction of markets and market players often dictates the outcome more than anything else. The prevailing view that markets know best has somewhat been challenged in recent years. Hence, more than ever, there is a need for corporates to rise to the occasion and present solutions instead of finger pointing and indulging in blame games. Finally, corporates exist within the ecosystem of the market and hence what moves the market moves them as well. So, the factors that direct corporate behavior are often found in the market ecosystem that is prevalent in a particular country of region.

Corporate Governance and Financial Crisis


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The ongoing financial crisis has proved that Corporate America and the Corporates in other countries around the world have exhibi behavior that can be described as mismanagement and not keeping in tenets of good corporate governance. In this respect, some criticism that has been directed at corporate leaders and the bankers in particular appears to be justified given the excesses that ha been on display from them. For instance, excessive CEO compensation is a hot topic in the aftermath of the global financial crisis.

Studies have shown that the CEOs of some companies like Wal-Mart and GM along with Wall Street Banks take home pay that is to 150 times the average pay of the working class. This is indeed a fact that speaks volumes about the blatant disregard for fair compensation and reflects the skewed priorities of the corporate leaders. After all, what can possibly justify this huge imbalance eve after taking into consideration the fact that CEOs and Bankers are engaged in activities that are cerebral and visionary in nature? The answer from corporate chieftains is that while these levels of gap between the CEO pay and the average pay are indeed troubling, there is no need to panic since the trickle down economics that they rely on means that the wealth eventually finds its way to the bottom. It is another fact that this has not happened so far in practice and what we have instead is a rising inequality gap. The reason for pointing this aspect is to highlight the kind of corporate governance practices that have seeped into corporates around the world. The point here is that one reason why the global financial crisis happened was because of the failure of the very vision and direction as well as misplaced faith in markets for which these CEOs and Bankers were being paid such humungous amounts. Hence, the notion that this aspect reflects good corporate governance has fallen flat on the face. Another aspect of corporate governance that underlines the ongoing financial crisis is that there were serious issues of transparency and accountability concerning the behavior of the corporate leaders. When they overwhelmingly make the rules that benefit them at the expense of the shareholders and the stakeholders, then there is something wrong with the kind of corporate governance being

performed. The fact that the employees in these companies and banks along with the shareholders had to pay the price for the mismanagement of the corporate leaders indicates that there is an urgent need to clean up the stables of corporate governance before it is too late. Finally, the issues related to pursuit of profits at the expense of social and environmental concerns points to another malaise of the current systems of corporate governance. Hence, taken together these aspects reflect the fact that the current models of corporate governance need a rethink especially when one considers the fact that the global financial crisis was brought about due to excessive greed and reckless risk taking. The bottom line is that corporate leaders must be answerable to the regulators and the shareholders along with the stakeholders and only when there are effective checks and balances to keep the corporate governance on track can we avoid crises like the ongoing global financial crisis.

Introduction to the Concept of Board of Directors


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Any public limited or private company needs to have a board of directors constituted for the purpose of oversight and accountability the company. The concept of the board of directors is that it provides an umbrella for the company to operate in and ensures that th decisions and actions taken by its management are reviewed and held to the mirror. The reason for the existence of the board of directors is that there needs to be a body that is above the management and which can be accountable to the regulators and shareholders for the decisions taken by the management of the company. Hence, it is common to find many members of the management sitting on the board as executive directors. Again, it is for this very purpose that the regulators deem the company to h a certain percentage of directors in the non-executive capacity and those who are independent.

In recent years, the concept of the board has become crucial for corporate governance because of the incidence of severa corporate scandals involving unethical conduct by the management . In some of these cases like the Enron scandal and the Satyam scandal in India, the board was found to have played a major role in facilitating the scandal. This has led to the regulators asking for greater oversight from the board and to make the board accountable to its shareholders. Of course, there are many instances that prove the contrary where the board has stepped in to stem the rot that the management has through its actions engendered. Prominent among these are the actions of Reebok in recent months where the board asked the top leadership to resign in the wake of corporate scandals involving them. The concept of the board has been introduced explicitly to ensure that ethical and normative rules of conduct of corporate governance are followed. The point here is that since the buck stops with the board of directors, shareholders and regulators know who to turn to in case they have queries or doubts about the decisions taken by the company. In many cases, the board of directors acts as the ombudsman as well for shareholder complaints and grievance redressal. Further, the board of directors is comprised of individuals with exemplary records of managing companies and hence it is expected that the board of directors would provide technical and managerial guidance to the way in which the company is run. Finally, the concept of the board of directors is also important for the way in which it is deemed to play a pivotal role in providing good corporate governance. In most cases, the way in which the company is governed depends on the way in which the board directs the management in its operation of the company. This is relevant to the contemporary times where the managerial class has been found to enrich itself at the expense of the company and its shareholders. It is for this reason that the board of directors is expected to steer the company away from agency problems, conflicts of interest and asymmetries of information in the way shareholders are briefed about the decisions taken by the company.

The Role and Duties of the Board of Directors


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Any public limited or a private company needs to have a board of directors which would ratify the management decisions taken by t leadership. These decisions can be financial or operational that affects the day to day running of the company. Further, the board o

directors is expected to give a direction to the company in terms of strategic and visionary terms as to how the company expects to without having to abandon the ethical and normative rules of conduct. Note the emphasis on the term ethical and normative rules a board of directors is the final arbiter of decisions taken by the company and hence, they must only approve a certain decision only w they are convinced that it would be in the best interests of the company and its shareholders.

The board of directors is often held responsible for the decisions taken by the company and hence, it is answerable to the shareholders as well as the regulators. In this context, it becomes necessary for the board of directors to be composed of individ of exceptional abilities and leadership traits as well as being visionary. The role of the board of directors can be summed up in one single sentence: the buck stops with them and hence they are the final authority as far as the company is concerned. The duties of the board of directors are similarly to be the ones who would take the decisions that have the stamp of authority and hence become the yardstick by which the company is judged. Apart from these roles and duties, the board of directors is also answerable to the shareholders and the regulators. So, this means that the board of directors must take decisions that are in the larger interests of the shareholders and they must protect the interests of the shareholders at all costs. Further, whenever there is a scandal in the company, the regulators write to the board of directors so as to elicit information on what happened. For instance, when the Satyam scandal broke, the regulators and the press turned to the board of directors for guidance and information. It is another matter that in this particular case, the board was compromised as well. This brings us to the final aspect that the board of directors has to have a coherent approach towards managing the company and hence, must be consensual in its decision making. Unless the board of directors agrees on decisions either unanimously or through a majority vote, there cannot be movement for the company. Hence, it is clear that boardroom battles and directors with hidden agendas be avoided to the extent possible in the larger interests of good corporate governance. Since the board has the final say in matters concerning the company, the CEO and the leadership have to present the information truthfully and accurately. In the case of Satyam, there were allegations that the CEO and some of the compromised members of the board kept the other directors in the dark about some key decisions. This should not be allowed to happen.

The Relationship between the Board of Directors and the Management


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The relationship between the board of directors and the management cannot be described as just being that of a relationship betwe an employee and his or her manager. Though the board oversees the decisions taken by the management and ratifies them along acting as the final arbiters of the strategic direction and focus that the company is heading into, the relationship goes beyond that. F instance, the board of directors is responsible for the actions of the management and hence not only does the board need to monito management, the management needs to take the board into confidence about its decisions. Hence, the relationship can be describ being symbiotic with each with each serving in an ecosystem called the organization. The point here is that neither the managemen the board can exist without each other and hence both need each other to survive and flourish.

Another aspect to the relationship between the board and the management is that more often than not, there is a significant representation of the management in the board. This means that the other board members have to study the decisions taken by the members carefully so that there are no agency problems, conflicts of interest and asymmetries of information. Only when the board and the management coexist together in a harmonious manner can there be true progress for the organization. For this to happen, there must be a provision for having independent directors and those directors that are not affiliated to the management. The point here is that unless there is objectivity and separation of the directors belonging to the management and those from outside can there is a semblance of avoidance of conflict of interest. The third aspect of the relationship between the board and the management is the role played by institutional investors or directors from large equity houses and mutual fund companies. These directors

bring to the table rich and varied expertise and experience in running companies and hence their input is crucial to the working of the company. It is for this reason that many regulators insist on having a certain percentage of the board as independent directors and another percentage from institutional shareholders. The reason for this is the fact that unless there is a process of due diligence and oversight over the actions of the management, the management can take unilateral decisions that are not always in the best interests of the company. Finally, the relationship between the board and management is somewhat strained whenever the company is not doing well. This happens because the board has a top view of the organization and the management has a deeper insight. Hence, to be fair to the management, they are the ones who have to run the organization and so they cannot be constrained by what the board dictates sitting on its perch. This is the classic problem that many companies face especially when they are not doing well and the remedy for this is to take the board into confidence about the complexities of the day to day operations and apprise them of the nuances and subtleties of running the organization.