Corporate Governance (CG): Meaning, Definition, Principles, and Need

What does mean Corporate Governance (CG)? Corporate governance as a subject, along with its models, has been in existence since the time businesses came into being. It is a set of rules and regulations according to which the behavior of a company is affected. This explains the article of Corporate Governance (CG) and their concept, Meaning, Definition, Need, and Principles. By Wikipedia, Corporate governance is the collection of mechanisms, processes, and relations by which corporations control and operate. Often it views as a statutory requirement guided through the regulatory body that concern with company affairs.

Here are read and learn; Corporate Governance (CG): Meaning, Definition, Principles, and Need.

Corporate governance (CG) sees, until recently, as limited to listed companies that needed to comply with disclosure norms to protect investor rights, especially those of minority shareholders. As long as management and investors were balancing the affairs of the business in a congenial atmosphere, there was no special attention being diverted to this subject.

Another aspect of it is that it also concern with the relationships which exist among different stakeholders of the company and with the goals which the company has in view. Also, Shareholders, the board of directors, employees, customers, creditors, suppliers, and the community at large are the main stakeholders of a business.

Gabrielle O’Donovan defines corporate governance as an internal system encompassing policies, processes, and people, which serves the needs of shareholders and other stakeholders, by directing and controlling management activities with good business know-how, objectivity, accountability, and integrity. Sound CG is reliant on external marketplace commitment and legislation, plus a healthy board culture which safeguards policies and processes.

Definition of Corporate Governance (CG):

Corporate governance is a collective term encompassing various issues concerning top management, the board of directors, shareholders and the corporate stakeholders. The following definition of corporate governance below are;

“A system by which business corporations direct and control. Corporate governance structures specify the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company’s objectives are set and the means of attaining those objectives and monitoring performance.”

Report of SEBI committee (India) on Corporate Governance defines corporate governance as;

“The acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and their role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company.”

CG has several areas of discussion such as the effect of a system of corporate governance in economic efficiency whereby more emphasis has to be put on shareholder’s welfare.

Principles of Corporate Governance (CG):

Several principles underpin effective corporate governance. Honesty, trust and integrity, openness, performance orientation, responsibility and accountability, mutual respect, and commitment to the organization forms an essential part of CG. Also, the most important part of corporate governance is to see whether the management has been able to develop a model that is in line with the standards of the corporate participants.

In addition to this, they must evaluate this model from time to time to ensure that it is effective. Hence the management should do their work honestly and ethically, particularly concerning conflicts of interest and disclosure in financial reports.

Commonly accepted principles of corporate governance include:

1] Disclosure and transparency Principles:

Transparency means the quality of something which enables one to understand the truth easily. In the context of CG, it implies an accurate, adequate and timely disclosure of relevant information about the operating results, etc. of the corporate enterprise to the stakeholders. Also, Transparency is the foundation of corporate governance; which helps to develop a high level of public confidence in the corporate sector.

For ensuring transparency in corporate administration, a company should publish relevant information about corporate affairs in leading newspapers, e.g., on a quarterly or half-yearly or annual basis. As well as, Organizations should simplify and make publicly known the roles and responsibilities of board; and, management to provide shareholders with a level of accountability.

They should also implement measures to independently validate and safeguard the integrity of the company’s financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.

2] Accountability Principles:

Accountability is a liability to explain the results of one’s decisions taken in the interest of others. In the context of CG, accountability implies the responsibility of the Chairman, the Board of Directors and the chief executive for the use of the company’s resources (over which they have authority) in the best interest of the company and its stakeholders.

3] Independence Principles:

Good corporate governance requires independence on the part of the top management of the corporation i.e. the Board of Directors must be strong non-partisan body; so that it can take all corporate decisions based on business prudence. Without the top management of the company being independent; good CG is only a mere dream.

4] In other words:

The following are;

• Rights and equitable treatment of shareholders: the company should respect the rights of shareholders; and, help shareholders to implement those rights. They can help shareholders exercise their rights by effectively communicating understandable information; and, accessible and encouraging shareholders to participate in general meetings.
• Interests of other stakeholders: Organizations should be aware of the legal and other obligations that all legitimate stakeholders have.
• Integrity and ethical behavior: Ethical and responsible decision making is not only important for public relations; but, it is also a crucial part of risk management and avoiding lawsuits. businesses should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. It is important to understand, though, that reliance by a company on the integrity and ethics of individuals is bound to eventual failure. Because of this, many organizations establish Compliance and Ethics Programs to minimize the risk that the firm steps outside of ethical and legal boundaries.
• Role and responsibilities of the board: The board needs a variety of skills and understanding to be able to deal with various business issues and have the aptitude to review and challenge management performance. It needs to be of adequate size and have an apt level of commitment to fulfill its responsibilities and duties. There are issues about the appropriate mix of executive and non-executive directors.

Need for Corporate Governance (CG):

As a result of globalization and the increasing complexity of the business; there is a greater reliance on the private sector as the engine of growth in developed and developing countries. Organizations do not exist in a vacuum; they rather interrelate with several interest groups, known as stakeholders.

These stakeholders include shareholders, governments, regulatory bodies, creditors and the general public. Also, Stakeholders are impacted by the activities of companies. In this regard, and the context of this study, adequate and effective corporate governance disclosure becomes relevant to investors and other stakeholders from several standpoints.

The need for corporate governance highlight by the following factors:

1] Wide Spread of Shareholders:

Today a company has a very large number of shareholders spread all over the nation and even the world; and, a majority of shareholders being unorganized and having an indifferent attitude towards corporate affairs. The idea of shareholders’ democracy remains confined only to the law and the Articles of Association; which requires a practical implementation through a code of conduct of CG.

2] Changing Ownership Structure:

The pattern of corporate ownership has changed considerably, in the present-day-times; with institutional investors (foreign as well Indian) and mutual funds becoming the largest shareholders in large corporate private sectors. These investors have become the greatest challenge to corporate management; forcing the latter to abide by some established code of corporate governance to build up its image in society.

3] Corporate Scams or Scandals:

Corporate scams (or frauds) in the recent years of the past have shaken public confidence in corporate management. The event of the Satyam Scam or scandal, Harshad Mehta scandal; which is perhaps, one biggest scandal, is in the heart and mind of all, connected with corporate shareholding or otherwise being educated and socially conscious. The need for CG is, then, imperative for reviving investor’s confidence in the corporate sector towards the economic development of society.

4] Greater Expectations of Society of the Corporate Sector:

Society of today holds greater expectations of the corporate sector in terms of reasonable price, better quality, pollution control, the best utilization of resources, etc. To meet social expectations, there is a need for a code of CG; for the best management of the company in economic and social terms.

5] Hostile Take-Overs:

Hostile takeovers of corporations witnessed in several countries put a question mark on the efficiency of the management of take-over companies. These factors also point out the need for corporate governance, in the form of an efficient code of conduct for corporate management.

6] Huge Increase in Top Management Compensation:

It has been observed in both developing and developed economies that; there have been a great increase in the monetary payments (compensation) packages of top-level corporate executives. There is no justification for exorbitant payments to top-ranking managers, out of corporate funds; which are property of shareholders and society. This factor necessitates CG to contain the ill-practices of top management of companies.

7] Globalization:

The desire for more and more Indian companies to get listed on international stock exchanges also focuses on a need for CG. Also, CG has become a buzzword in the corporate sector. There is no doubt that the international capital market recognizes only companies well-managed according to standard codes of corporate governance.

So, this oversight and accountability combined with the efficient use of resources improved access to lower-cost capital; and, increased responsiveness to societal needs and expectations leads to improved corporate performance. As well as, Good corporate governance helps to bridge the gap between the interests of those that a company, by increasing investor confidence and lowering the cost of capital for the company.

Furthermore, it also helps in ensuring company honors, its legal commitments, and forms value-creating relations with stakeholders. Companies with better corporate governance enjoy a higher valuation. Good corporate governance, resulting in better decisions at all levels of the organization, not at top-management and board levels; but, also in the better performance of the organization.

Reference:

• en.wikipedia.org/wiki/Corporate_governance
• www.yourarticlelibrary.com/corporate-governance/what-is-corporate-governance/99690
• www.mbaknol.com/business-ethics/corporate-governance-concept-need-and-principles/
• www.yourarticlelibrary.com/business/corporate-governance-business/corporate-governance-in-india-concept-needs-and-principles/69978