Need of Corporate Governance

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
company’s stakeholder’s 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 company’s management) in shaping corporation’s 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 individual’s
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 today’s 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.
NEED OF CORPORATE GOVERNANCE

Corporate Governance is needed to create a corporate culture of transparency, accountability and
disclosure.
Corporate Performance: Improved governance structures and processes ensure quality decision-
making, encourage effective succession planning for senior management and enhance the long-term
prosperity of companies, independent of the type of company and its sources of finance. This can be
linked with improved corporate performance- either in terms of share price or profitability.
Enhanced Investor Trust: Investors consider corporate governance as important as financial

performance when evaluating companies for investment. Investors who are provided with high levels
of disclosure and transparency are likely to invest openly in those companies. The consulting firm
McKinsey surveyed and determined that global institutional investors are prepared to pay a premium
of up to 40 percent for shares in companies with superior corporate governance practices.Better
Access to Global Market: Good corporate governance systems attract investment from global
investors, which subsequently leads to greater efficiencies in the financial sector.
Combating Corruption: Companies that are transparent, and have sound system that provide full
disclosure of accounting and auditing procedures, allow transparency in all business transactions,
provide environment where corruption would certainly fade out. Corporate Governance enables a
corporation to compete more efficiently and prevent fraud and malpractices within the organization.
Easy Finance from Institutions: Several structural changes like increased role of financial
intermediaries and institutional investors, size of the enterprises, investment choices available to
investors, increased competition, and increased risk exposure have made monitoring the use of
capital more complex thereby increasing the need of Good Corporate Governance. Evidences
indicate that well-governed companies receive higher market valuations. The credit worthiness of a
company can be trusted on the basis of corporate governance practiced in the company.
Enhancing Enterprise Valuation: Improved management accountability and operational

transparency fulfill investors expectations and confidence on management and corporations, and in
return, increase the value of corporations.
Reduced Risk of Corporate Crisis and Scandals: Effective Corporate Governance ensures efficient
risk mitigation system in place. A transparent and accountable system makes the Board of a company
aware of the majority of the mask risks involved in a particular strategy, thereby, placing various
control systems in place to facilitate the monitoring of the related issues.
Accountability: Investor relations are essential part of good corporate governance. Investors directly/
indirectly entrust management of the company to create enhanced value for their investment. The
company is hence obliged to make timely disclosures on regular basis to all its shareholders in
Corporate Governance is integral to the existence of the company.
CORPORATE GOVERNANCE PRINCIPLES

Corporate governance refers to all laws, regulations, codes and practices, which defines how
institution is administrated and inspected, determines rights and responsibilities of different partners,
attracts human and financial capital, makes institution work efficiently, provides economic value to
stack holders in the long turn while respecting the values of the community it belong. For corporate
governance, the management approach should be in accordance with the following principles.
Principal 1 : Governance structure:

All Organizations should be headed by an effective Board. responsibilities and accountabilities within
the organization should be clearly identified.
Principal2 : The structure of the board and its committees :

The board should comprise independent minded directors. It should include an appropriate
combination of executive directors, independent directors and non-independent non-executive
directors to prevent one individual or a small group of individuals from dominating the board’s decision
taking. The board should be of a size and level of diversity commensurate with the sophistication and
scale of the organization. Appropriate board committees may be formed to assist the board in the
effective performance of its duties.
Principal 3 : Director appointment procedure:

There should be a formal, rigorous and transparent process for the appointment, election, induction
and re-election of directors. The search for board candidates should be conducted, and appointments
made, on merit, against objective criteria (to include skills, knowledge, experience, and independence
and with due regard for the benefits of diversity on the board, including gender). The board should
ensure that a formal, rigorous and transparent procedure be in place for planning the succession of all
key officeholders.
Principal 4 : Directors duties, remuneration and performance:

Directors should be aware of their legal duties. Directors should observe and foster high ethical
standards and a strong ethical culture in their organization. Each director must be able to allocate
sufficient time to discharge his or her duties effectively. Conflicts of interest should be disclosed and
managed. The board is responsible for the governance of the organization’s information, information
technology and information security. The board, committees and individual directors should be
supplied with information in a timely manner and in an appropriate form and quality in order to perform
to required standards. The board, committees and individual directors should have their performance
evaluated and be held accountable to appropriate stakeholders. The board should be transparent, fair
and consistent in determining the remuneration policy for directors and senior executives.
Principal5 : Risk governance and internal control:

The board should be responsible for risk governance and should ensure that the organization
develops and executes a comprehensive and robust system of risk management. The board should
ensure the maintenance of a sound internal control system
Principal6 : Reporting and integrity:

The board should present a fair, balanced and understandable assessment of the organization’s
financial, environmental, social and governance position, performance and outlook in its annual report
and on its website.
Principal 7 : Audit:
Organizations should consider having an effective and independent internal audit function that has the
respect, confidence and cooperation of both the board and the management. The board should
establish formal and transparent arrangements to appoint and maintain an appropriate relationship
with the organization’s auditors.
Principal8 : Relations with share holders and other key shareholder:

The board should be responsible for ensuring that an appropriate dialogue takes place among the
organization, its shareholders and other key stakeholders. The board should respect the interests of
its shareholders and other key stakeholders within the context of its fundamental purpose.
Benefits of Corporate Governance

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

Need of Corporate Governance

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CORPORATE GOVERNANCE

Corporate Governance is the interaction between various participants (shareholders, board of

NEED OF CORPORATE GOVERNANCE

Enhanced Investor Trust: Investors consider corporate governance as important as financial

Enhancing Enterprise Valuation: Improved management accountability and operational

CORPORATE GOVERNANCE PRINCIPLES

Principal 1 : Governance structure:

Principal2 : The structure of the board and its committees :

Principal 3 : Director appointment procedure:

Principal 4 : Directors duties, remuneration and performance:

Principal5 : Risk governance and internal control:

Principal6 : Reporting and integrity:

Principal8 : Relations with share holders and other key shareholder:

Benefits of Corporate Governance

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