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A note on corporate governance

What is corporate governance?

Corporate governance is the set of processes, customs, policies, laws, and institutions
affecting the way a corporation (or company) is directed, administered or controlled.
Corporate governance also includes the relationships among the many stakeholders
involved and the goals for which the corporation is governed. The principal stakeholders
are the shareholders, the board of directors, employees, customers, creditors, suppliers,
and the community at large. Today corporate governance has become a buzzword in the
business environment. A company today not only has to increase the wealth of the
shareholders but also think of the society at large. Today the stakeholders of the
companies are very conscious about how the management is running the organization and
whether their interest is protected or not. The management of the company is responsible
towards the stakeholders and is answerable to them if they feel their wealth is not being
properly managed or there is something wrongdoing in the organization.

Parties responsible for corporate governance:


The people responsible for ensuring good corporate governance in the companies are the
CEO of the organization, the board of directors, the auditors and other top level
executives of the company

Principals to the corporate governance:

• Enhancing the wealth of the shareholders


• Should recognize the obligation to other stakeholders
• Proper financial reporting
• To conduct business in ethical and fair manner
• To obey the rules and regulations set by the regulatory bodies
• Promoting cleaner and healthier environment
• To discharge the duties and responsibilities properly towards stakeholders

Benefits of good corporate governance

An organisation having good corporate governance will benefit in the long term. The
investors will be willing to invest in the organisation which have a good reputation and
are properly and well managed which in return will enhance the value of the organisation.
Also a organisation having good corporate governance will get recognition and awards
for having good corporate governance. No organisation can run for a longer time if the
organisation is not properly managed as stakeholders are going to lose faith in such a
organization.
Corporate governance quotient

A metric developed by Institutional Shareholder Services (ISS) that rates publicly traded
companies in terms of the quality of their corporate governance. Each public company
covered by the metric is assigned a rating based on a number of factors that are
considered by the ISS model. Factors used in the CGQ formula include board structure
and composition, the executive and director compensation charter, and bylaw provisions.

Market-Based Corporate Governance System

Corporate governance systems have developed differently throughout the world. The
market-based corporate governance system is based on Anglo-American law. Since
the markets are the primary source of capital, investors are given the most power in
determining corporate policies. Therefore, the system relies on the capital markets to
exert control over the corporation's management

Corporate governance in India

In India the corporate governance policies are regulated by SEBI. SEBI has laid down
certain principals of corporate governance which have to be followed by the companies.
There are many examples of companies in India which have good governance policies.
Many organizations in India such as Tatas, Infosys, Wipro, Mahindra etc have become
world class organizations due to their good corporate governance. The investors have
faith in these large companies due their policies and the returns they have given to their
shareholders.

The case of Satyam and Enron are the classic examples which have failed due to poor
corporate governance policies.