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Incorporating Corporate Governance

February 7, 2010

Society bestows upon businesses the right to own and use land, labour and natural resources. In return, society has the right to expect these organisations to honour existing rights, limit their activities within boundaries of justice and bring about overall development of the society.

Business ethics is that set of reasons which govern the conduct of a business. Being ethical requires acting with an awareness of how products or services of an organisation can affect the society as a whole.

 

Globalization of economies has brought corporates to the centre stage of social development. In the process of decision making, managers contribute to the shaping of society. Therefore it is not a choice between profits and ethics, but profits in an ethical manner. This is Corporate Governance. 

 

Corporate governance is about promoting corporate fairness, transparency and accountability.

A SEBI report defines corporate governance as “The acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own 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.”

Corporate governance measures include placing constraints on management power and ownership concentration, appointing non-executive directors as well as proper disclosure of financial information and ownership concentration. Many companies have established ethics committees to review strategic decisions and how they affect the society.

 

So why such a sudden interest in corporate governance?

Corporate governance is an old and established concept. However it gained popularity after a major corporate scandal surfaced called Enron. Several other large companies like Maxwell Corporation, WorldCom, HealthSouth and Peregrine Systems were also convicted of financial frauds.

These scandals led to numerous corporate governance reforms. The most renowned is the Sarbanes-Oxley Act or SOX, which sets new standards for all American public company boards, management and public accounting firms. Among their many provisions, the new law requires that the board of a publicly traded company be composed of a majority of independent directors and that the board’s audit committee consist entirely of independent directors and have at least one member with financial expertise. They also impose restrictions on the types of services that outside auditors can provide to their audit clients.

 

In India, we witnessed the Satyam scam, which made our policy makers sit up and take notice. It wont be long before we have a SOX-equivalent legislation.

 

But is that enough? In spite of all these regulations, do you think corporations are going to be transparent and honest?

Rules and laws have not deterred people from being dishonest. Internal and external auditing functions were already mandatory. Does this mean that these acts and audit practices are nowhere helping to control and detect frauds?

What do you think can really help to achieve the objectives of corporate governance and enable us, the stakeholders, who form the society, to entrust companies’ with our resources?

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5 Comments leave one →
  1. February 7, 2010 6:09 PM

    More aware stakeholders can really serve a deterrent among those who follow unethical practice.

    A more careful watch by SEBI and other regulatory bodies should help too.

  2. February 8, 2010 7:37 PM

    What is corporate Governance is still matter of academic research and debate. The reason being since company is a artificial legal entity its duties and responsibilities are still under judicial scrutiny.

    Now Enron was not only the fall, there had being many, only thing that the stakeholders have became aware of the rights is what is leading to this movement.

    However the question you raise of SOX like legislation in India…even SOX cannot prevent the massive banking led recession in 2008-2009 show nothing in indefatigable. Not even SOX.

    The New Companies Bill (Companies Bill 2009) which is under consideration of parliament has some stringent provisions. Similarly Clause 49 (revised) of Listing Agreement have the provisions of having independent Director in the Board.

    But even with that process is not smooth, the reason is, these independent directors at most of the times are not aware of the business of the company and applicable laws and rules on it.

    Corporate Governance can be put to governing the corporate personality, and now how we govern that artificial legal personality is our choice. Hence making it business ethics.

  3. November 22, 2011 11:09 AM

    Hi,
    this is abhirup here. I came across your blog and loved your writing. I run a popular business blog http://www.ideasmakemarket.com . I would like to post articles from you which if approved will be posted with full credit. Let me know what you think about it. If you like the idea mail me back at ideasmakemarket@gmail.com
    regards,
    Abhirup

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