CORPORATE GOVERNANCE. Definition: “The system by which companies are directed and controlled”. OR Corporate governance is a term that refers broadly to the rules, processes, or laws by which businesses are operated, regulated, and controlled.
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“The system by which companies are directed and controlled”.
Corporate governance is a term that refers broadly to the rules, processes, or laws by which businesses are operated, regulated, and controlled.
Over all Corporate Governance is combination of vision, mission, values, ethics & service standards,
Have a fiduciary responsibility to look out for shareholders’ interests.
Who is accountable to the board.
Relating amount of Assets
Competition among firms may be more effective by ensuring that resources are used efficiently. However, not every type of corporate governance mechanism can effectively promote competitiveness. (Berle and Means, 1932) argue that in practice the board would pursue/follow their own interest rather that interests of its shareholders, resulting in inefficiency and diminished competitiveness.
MAJOR SHARE HOLDERS
Outsider (shareholders) model
A priority to market regulation.
The owners of firms tend to have a transitory interest in the firm
The absence of close relationships between shareholders and management.
Insider (stakeholders) model
The priority to stakeholders control
The owners of firms tend to have an enduring interest in the company
The relationships between management and shareholders are close and stable
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According to Denis and McConnell Corporate Governance Mechanism are of either internal or external.
Operate through the Board
of Directors and ownership
Which refers to the external market for corporate control (the takeover market) and the legal system.
SHARE HOLDERS & STAKE HOLDERS
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, executives, employees, customers, creditors, suppliers, and the community at large.
STAKE HOLDERSAny constituencies in the organization’s environment that are affected by the organization’s decisions and action. For example Customers, Employees, unions, suppliers, Government etc.
Shareholders are the owner of an organization / company. In other words those persons who provide capital / investment to the company for running an organization’s operations.
The board is responsible for taking major policy and strategic decision. Directors should have a mix of skill and their performance should be assessed regularly. The appointment of directors have been made by formal nominations committee. Board have decision making power and control over the organization.
PARAMETERS FOLLOWED BY BOD
The first Board of Directors meeting should include:
The audit committee has four main functions:
Select the audit firm,
Provide guidance to auditors,
Review audit report,
Inform the company board of directors of the results of the audit.
A company created a secret reserve in the boom year under the head “Taxation Reserve” but these reserve were not shown on the face of balance sheet. Later on company sustained losses, which were converted into profits by utilizing of secret reserve. Thus the shareholders were kept in darkness and they were made to believe that the company was running profitably. It was held that the share holders should be informed about utilization of secret reserve and amount should also be disclose to them.
Finally the key lesson for us to learn are that Regulations and Policies are
only one part of improving governance.
Corporate governance is an inevitable phenomenon of corporate businesses. Whether it is good or bad is determined by the performance of the components. Good corporate governance is being promoted in almost all parts of the world.