In this article, we are going to discuss corporate governance. What is corporate governance? Importance of corporate governance. Examples of corporate governance and the role of corporate governance and board of directors.
What Is Corporate Governance?
Corporate governance is a combination of rules, processes, and practices by which an organization is controlled and maintained. Corporate governance is a crucial component of an organization. It maintains the balance between the stakeholders. It also helps the organization attain its goals. It also helps organizations to make better decisions for the betterment of the organization as well as its stakeholders. Overall, we can say that corporate governance is very important from the point of view of the organization as well as its customers.
Why Have Corporate Governance?
Why should we have corporate governance or why should it exist. We can divide this into different factors:
- Better access to external finance- It would be easy to get external finance since you have established corporate governance. Since you have proved the transparency and genuineness of your business.
- Lower cost of capital interest rate on loans.
- Improved company performance.
- Higher firm valuation and share performance.
- Reduced risk of corporate crisis.
Importance Of Having Corporate Governance
Now let us understand the importance of having corporate governance in a firm.
- The widespread of shareholders- Shareholders is widespread throughout the nation or even outside the nation. Strong corporate governance is required for that and in return, it would result in the satisfaction.
- Resistance against corporate scams – There have been many scams in the corporate world that shook the public and as the result, it affected their confidence in the corporate world. So strong corporate governance is required to prove the firm’s transparency as well as its genuineness. It would reduce corruption and would create a strong sense of satisfaction among the stakeholders.
- Globalization- For a company to get listed on an international stock exchange it is important for them to have good corporate governance as it will boost its credibility and transparency. It would result in a good reputation in and outside their country.
- Customer and shareholder satisfaction- When there is good corporate governance is introduced within an organization. It would result in credibility and accountability. Everything would go in a disciplined manner. As discussed earlier there would be transparency in the organization’s work. This is required for the satisfaction of shareholders and customers. Bad corporate governance would create a bad image for the organization and it would result in a bad reputation among the customers and shareholders.
- It creates a secure and prosperous operational environment and it would improve the operations of the firms in India.
- Changing the ownership structure- Corporate governance helps in changing the ownership structure of the company and it would not affect the goodwill of the company.
Advantages/Benefits of Corporate Governance
- Transparent norms and controls are established by good corporate governance, and the interests of shareholders, directors, management, and staff are all aligned.
- Corporate governance may give stakeholders and investors a clear picture of a company’s direction and moral character
- It promotes trust among citizens, investors, and public servants.
- Long-term financial viability, opportunity, and rewards are encouraged.
- The likelihood of financial loss, waste, hazards, and corruption may be reduced.
- It is a strategy for resiliency and sustained achievement.
- It may make capital raising easier.
- A rise in share prices can be attributed to good corporate governance.
Principles of Corporate Governance
There are many principles involved in the implementation of corporate governance:
- Transparency: The board should notify shareholders and other stakeholders in a timely, accurate, and understandable manner on items like financial performance, conflicts of interest, and hazards.
- Risk Management: The board and management must decide how to appropriately handle risks of all types. To handle them, they must follow their advice. The presence and status of hazards must be communicated to all pertinent parties.
- Accountability: The objective of a company’s operations and the outcomes of its behavior must be disclosed by the board. It is responsible for evaluating a firm’s capability, potential, and performance along with the corporate leadership. It must let stockholders know about important matters.
- Fairness: The board of directors must treat all stakeholders fairly and equally, including shareholders, workers, suppliers, and communities.
- Responsibility: The board is in charge of regulating business affairs and managerial actions. It must be informed about and committed to the company’s successful, continuous performance. Its duty includes finding and appointing a CEO. It must operate in a company’s and its stockholders’ best interests.
Examples of Corporate Governance
There are good as well as bad examples of corporate governance in the corporate world. Let us discuss some of the examples of good as well as bad corporate governance in the corporate world.
- Satyam scam- In 1987 Ramalinga Raju established a company in Hyderabad named Satyam computers. It was an IT company. I was listed on the Bombay stock exchange during the year 1990-91.
It was a booming company in the IT sector at that time but its scams lead to its demise. this was an important cause of corporate governance. It was much highlighted in this case. corporate governance shapes many important roles in a firm like the creation and working of auditing committees, and duties of board members.
Now let us talk about the scam. Ramalinga Raju was interested in real estate dealing. That too was a booming sector at that time. To purchase more real estate property he needed more money for that he manipulated the financial statements of Satyam computers. He misleads his stakeholders by showing inflated reports of his companies.
This created a notion among his stakeholders that his company was growing at an excellent rate. This resulted in an increase in the share prices of the company. After this Raju and his brother started selling some of their shares and pledged some other shares to take loans from banks and bought many properties across India. He started buying properties by hook or crook. He even got to know many internal details of Hyderabad metro rails so he started purchasing land near the planned metro route so that he could sell that at a higher price.
He even started creating fake sales invoices for Satyam computers to manipulate the data. He even started creating fake bank statements to show his funds in the bank as bank reserves. By doing this he started attracting even more investors and hence the price of the stocks further increased.
Raju’s planning was shattered during the 2008 recessions due to the decrease in the rate of return of the real estate. He couldn’t fill the gap between the fake figures and the original figures of Satyam computers. In 2009 he confessed that Satyam computers have manipulated data to increase the stock price. The special court of CBI convicted Raju, his brother, and 7 other people and imposed fines on them.
This scam made a huge tension among other companies. The government of India and SEBI decided to do something about this. Companies decided to change their panel of auditors every 10 years then
- There are many instances of good corporate governance and many companies strictly follow it to maintain their relations with their stakeholders and instill confidence among them. many companies like Infosys, Mahindra and Mahindra, Bosch, and Deloitte follow such practices to gain good reputations. Often good corporate governance examples are not shown by the media.
Corporate Governance And Board Of Directors
The board of directors of the corporate can have a huge influence over the primary direct stakeholders. The stakeholders appoint or elect other board members. Shareholders of the company are represented by them. The board of directors makes very important decisions in the organization.
The board of directors makes sure that corporate governance is initiated properly in the organization. Proper initialization of corporate governance would improve the overall reputation as well as the status of the company. They are also responsible for other hiring in an organization. overall, we can say that decisions are taken by the board of directors matter really well in a long run.
The ideals that a corporation adopts to control all of its activities, from remuneration to risk assessment to staff treatment to identifying unfair practises to its effect on the environment, and more, are referred to as corporate governance.
A firm with good, fair corporate governance makes ethical changes that benefit all of its shareholders, enabling it to position itself as a desirable investment option if its financial statements are sound. Poor corporate governance causes a firm’s collapse, which often results in controversies and insolvency.
Corporate Governance is a combination of rules, processes, and practices by which an organization is controlled and maintained.
The widespread of shareholders, Resistance against corporate scams, Globalization, and Customer and shareholder satisfaction, create a secure and prosperous operational environment and would improve the operations of the firm, corporate governance helps in changing the ownership structure of the company and it would not affect the goodwill of the company.
- Sustainable development of all stakeholders
- Discharge of social responsibility
- Effective management and distribution of wealth
- Application of best management practices
- Compliance of law in letter and spirit.
The 4 Ps are Performance, Process, Purpose and People.