Corporate Governance is a continuous process of applying the best management practices,

ensuring the law is followed the way intended, and adhering to ethical standards by a firm for
effective management, meeting stakeholder responsibilities, and complying with corporate
social responsibilities.
It contains policies and rules to maintain a strong relationship between the owners of the
company (shareholders), the Board of Directors, management, and various stakeholders like
employees, customers, Government, suppliers, and the general public. It applies to all kinds of
organizations-profit or not-for-profit.

Important features of corporate governance are as follows:

Feature # 1. Transparency:
A key element of good corporate governance is transparency, projected through a code of good
governance, which incorporates a system of checks and balances between key players –
boards, management, auditors and shareholders. Transparency in company’s action may be
ensured through making non-partisan disclosures and timely dissemination of information
complete in all respect equally to all shareholders about results; Annual General Meetings
(AGMs); quarterly updates on company’s performance, risks, outlook, opportunities and threats
etc.
Feature # 2. Accountability:
“Corporate Governance is a way of life and not a set of rules. It is a way of life that necessitates
taking into account the shareholders interests in every business decision. This has brought into
focus the accountability of the Board of Directors of a company and their constituent
responsibilities.”
(a) Towards Shareholders:
It occurs when the company adopts an equitable and fair approach towards its shareholders,
resorts to timely resolution of shareholder’s complaints and grievances, rewards the
shareholders on regular basis and constitutes dedicated cells in the organization to address
shareholders grievances.
(b) Towards Society:
Following are some of the ways by which a company can discharge its obligations towards the
society:
(i) Providing assistance to victims during times of natural calamities;
(ii) Enlistment and education of the underprivileged and deprived;
(iii) Promotion of education and training in general;
(iv) Contributions, charity, donations for socially relevant causes;
(v) Steps for promoting welfare of mentally, physically or visually disabled;
(vi) Establishment of schools, hospitals, parks etc.
Feature # 3. Trusteeship:
“The doctrine of trusteeship is based on the Bhagavad Gita. The twin principles of ‘aparigraha’
(non-possession) and ‘Sambhawa’ (equalism) are the main principles of Bhagavad Gita.
Corporates are the trustee of the shareholders and their money; they should use their wealth for
the welfare of the society and the community at large.” Trusteeship involves a strong code of
discipline and ethical behaviour as well as equally strong principle of accountability.
Feature # 4. Employees’ Welfare:
Good corporate governance is essentially concerned with company’s human resource.
The Annual Report could set out the initiatives taken by the company for employees’ welfare in
the following areas in particular:
(i) Training programmes organized for upgrading employees’ skills;
(ii) Identification and rewarding of performance;
(iii) Focus on multi-skill programme where key executives are rotated to various functions to
develop skills across different functions;
(iv) Housing schemes launched for employees;
(v) Launching of benevolent fund for employees;
(vi) Scholarships and/or educational facilities for children of the company’s staff.
Feature # 5. Environment Protection:
Irrespective of whether a company is polluting or non-polluting, protection of environment should
be concern of every socially responsible organization. Each company must take steps to make
sustainable use of resources, establish a healthy and safe working environment, maintain
ecological balance, take proactive steps to minimize waste generation and preserve the
environment. The securing of ISO Certification for environmental protection could be highlighted
in the Annual Report.
Feature # 6. Meeting Social Obligations:
There is a growing expectations that the business enterprise to be much more than a mere
economic unit and be a good corporate citizen vigorously contributing to social issues and
charity.
It seeks to achieve the following objectives:
(a) A properly structured board capable of taking independent and objective decisions is in
place at the helm of affairs;
(b) The board is balanced as regards the representation of adequate number of nonexecutive
and independent directors who will take care of the interests and well- being of all the
stakeholders;
(c) The board adopts transparent procedures and practices and arrives at decisions on the
strength of adequate information;
(d) The board has an effective machinery to sub-serve the concerns of stakeholders;
(e) The board keeps the shareholders informed of relevant developments impacting the
company;
(f) The board effectively and regularly monitors the functioning of the management team; and
(g) The board remains in effective control of the affairs of the company at all times.
The overall endeavour of the board should be to take the organization forward, to maximize
long-term value and shareholders’ wealth.

Objective of corporate governance:

The fundamental objective of corporate governance is to boost and maximize shareholder value
and protect the interest of other stake holders. World Bank described Corporate Governance as
blend of law, regulation and appropriate voluntary private sector practices which enables the
firm to attract financial and human capital to perform efficiently, prepare itself by generating long
term economic value for its shareholders, while respecting the interests of stakeholders and
society as a whole. Corporate governance has various objectives to strengthen investor's
confidence and intern leads to fast growth and profits of companies. These are mentioned
below:
1. A properly structured Board proficient of taking independent and objective decisions is in
place at the helm of affairs.
2. The Board is balanced as regards the representation of suitable number of non-executive and
independent directors who will take care of the interests and well-being of all the stakeholders.
3. The Board accepts transparent procedures and practices and arrives at decisions on the
strength of adequate information.
4. The Board has an effective mechanism to understand the concerns of stakeholders.
5. The Board keeps the shareholders informed of relevant developments impacting the
company.
6. The Board effectively and regularly monitors the functioning of the management team.
7. The Board remains in effective control of the affairs of the company at all times.

Elements of good Corporate Governance:

It has been established in various management reports that aspects of good corporate
governance comprise of transparency of corporate structures and operations, the accountability
of managers and the boards to shareholders, and corporate responsibility towards stakeholders.
While corporate governance basically lays down the framework for creating long-term
confidence between companies and the external providers of capital.
There are numerous elements of corporate governance which are mentioned below:
1. Transparency in Board's processes and independence in the functioning of Boards. The
Board should provide effective leadership to the company and management to realize sustained
prosperity for all stakeholders. It should provide independent judgment for achieving company's
objectives.
2. Accountability to stakeholders with a view to serve the stakeholders and account to them at
regular intervals for actions taken, through strong and sustained communication processes.
3. Impartiality to all stakeholders.
4. Social, regulatory and environmental concerns.
5. Clear and explicit legislation and regulations are fundamentals to effective corporate
governance.
6. Good management environment that includes setting up of clear objectives and suitable
ethical framework, establishing due processes, clear enunciation of responsibility and
accountability, sound business planning, establishing clear boundaries for acceptable behaviour,
establishing performance evaluation measures.
7. Explicitly approved norms of ethical practices and code of conduct are communicated to all
the stakeholders, which should be clearly understood and followed by each member of the
organization.
8. The objectives of the corporation must be clearly recognized in a long-term corporate strategy
including an annual business plan along with achievable and measurable performance targets
and milestones.
9. A well composed Audit Committee to work as liaison with the management, internal and
statutory auditors, reviewing the adequacy of internal control and compliance with significant
policies and procedures, reporting to the Board on the key issues.
10. Risk is an important component of corporate functioning and governance, which should be
clearly acknowledged, analysed for taking appropriate corrective measures. In order to deal with
such situation, Board should formulate a mechanism for periodic reviews of internal and
external risks.
11. A clear Whistle Blower Policy whereby the employees may without fear report to the
management about unprincipled behaviour, actual or suspected frauds or violation of company's
code of conduct. There should be some mechanism for adequate safeguard to personnel
against victimization that serves as whistle-blowers.

Principles of Corporate Governance

The principles of Corporate Governance are:
Accountability
Accountability means to be answerable and be obligated to take responsibility for one’s actions.
By doing so, two things can be ensured-
1. That the management is accountable to the Board of Directors.
2. That the Board of Directors is accountable to the shareholders of the company.
This principle gives confidence to shareholders in the business of the company that in case of
any unfavourable situation, the persons responsible will be held in charge.
Fairness
Fairness gives shareholders an opportunity to voice their grievances and address any issues
relating to the violation of shareholder’s rights. This principle deals with the protection of
shareholders’ rights, treating all shareholders equally without any personal favouritism, and
granting redressal for any violations of rights.
Transparency
Providing clear information about a company’s policies and practices and the decisions that
affect the rights of the shareholders represents transparency. This helps to build trust and a
sense of togetherness between the top management and the stakeholders. It ensures accurate
and full disclosure timely on material matters like financial condition, performance, ownership.
Independence
Independence means the ability to make decisions freely without being unduly influenced.
Decisions should be made freely without having any personal interest in the company. It
ensures the reduction in conflict of interest. Corporate governance suggests the appointment of
independent directors and advisors so that decisions are taken responsibly without influence.
Social Responsibility
Apart from the 4 main principles, there is an additional principle of corporate governance.
Company social responsibility obligates the company to be aware of social issues and take
action to address them. In this way, the company creates a positive image in the industry. The
first step towards Corporate Social Responsibility is to practice good Corporate Governance.
Corporate Governance – Top 3
Theories: The Agency Theory, The Stewardship Theory and The Stakeholder Theory
Various theories of corporate governance are described below:
1. The Agency Theory:
According to this theory there exists agency relationship between the shareholders and
management of a company. Under a contract of agency, one party (the principal) appoints
another party (the agent) to perform some functions on its behalf. Shareholders of a corporation
delegate the decision making authority to the board of directors. As an agent, the board of
directors is expected to exercise its authority on behalf of and in the best interests of the
shareholders (the principal).
In reality, however, board of directors and chief executives may promote their own interests
rather than the interests of shareholders. In other words, there can be a divergence of interests
between shareholders and managers. Effective governance system is needed, therefore, to
safeguard the interests of shareholders.
Agency theory presents a narrow view of corporate governance as it suggests that a company
is responsible only to its shareholders. It does not consider the interests and rights of other
stakeholders like employees, customers, suppliers, creditors, distributors, government, media,
and the community.
2. The Stewardship Theory:
This theory is based on the assumption that the top managers of a company will act on their
own as responsible stewards of the assets under their control. They work diligently to achieve
high levels of profits which yield good returns to shareholders.
The interests of the company and its owners are aligned with those of managers when they
work towards collective goals. The interests of shareholders are automatically served when the
company’s performance is maximised. Therefore, board of directors, and chief executives
should be given adequate authority, and discretion to act as good stewards. A proper
governance structure is required for this purpose.
Stewardship theory is based on the assumption that board of directors will always work for
corporate performance and will use such performance in the interests of shareholders. This may
not always hold true. Moreover, the theory overlooks the interests of stakeholders other than
shareholders.
3. The Stakeholder Theory:
This theory suggest that a company must be run in the interests of all the stakeholders. The
interests of stakeholders are numerous and may often be contradictory. Therefore, a harmony or
compromise is required between them. A board of directors consisting of the representatives of
various Stakeholder groups could be entrusted with this task.
The stewardship theory recognises the rights of shareholders as well as other stakeholders. But
in practice, board of directors may not always be able to maintain equity. It is likely to overstress
the interests of some stakeholders and underemphasize those of other stakeholders. It is a very
difficult tight rope walk and a very effective system of governance is needed for this challenge.
Corporate Governance – Two Important Types of Mechanisms: Internal Mechanism and
External Mechanism
There are two types of mechanism generally used in corporate governance- Internal mechanism
and external mechanism.
These mechanisms are as follows:
A. Internal Mechanism:
(i) Ownership Structure:
Agency theory says that separation of ownership and control incur some costs. Hence, owners
need to find out various mechanisms to minimize these costs. That means owners can align the
interests of managers and owners by adopting different mechanism. Based on this, it can be
assumed that if owners are the managers then there will be no cost. But in the days of
widespread ownership it is not that easy.
As majority of owners are with smaller holdings with which they cannot discipline managers.
Hence, the structure of ownership is important in disciplining the managers. Owners, by virtue of
the size of their equity positions, effectively have some control over the firms they own. Thus,
ownership structure is a potentially important element of corporate governance.
(ii) Board of Directors:
The board of directors is a mechanism through which shareholders can exert considerable
influence on the behaviour of managers in order to ensure that the company is running in their
interest. Corporation in most countries of the world have board of directors. The board exists
primarily to hire, fire, monitor, and compensate management, all with an eye towards
maximizing shareholders value.
Major responsibilities of board of directors include determine the organizations mission and
purpose, select the executives, support the executives and review the performance, ensure
effective organizational planning, ensure adequate resources, manage resources effectively,
determine and monitor the organisations programmes and services, enhance the organisations
public, image, etc.
(iii) Executive Compensation:
The third mechanism that ensures that managers pursue the interest of shareholders is
executive compensation. If structured appropriately, it discourages the managers, who have
control over the firm without investing in it, from acting against the interest of shareholders. The
measures used to evaluate managers include both stock valuation and accounting based
performance measures. However, Studies suggest that there is a positive relationship between
executive pay and performance.
(iv) Disclosure:
In the absence of day-to-day control of operations of shareholder, disclosures by the
management about company information has become very crucial for good governance. Honest
managers will attempt to provide sufficient, accurate and timely information regarding the firms,
operations, financial status, and external environment.
Information about operational efficiency risks involved compliance to legal and regulatory
matters, adherence to codes of conduct, environmental laws etc. are mostly internal information
to the company. The management needs to disclose the information to the concerned parties.
B. External Mechanism:
These mechanisms help in improving the governance of a corporation.
External mechanisms are as follows:
(i) The Market for Corporate Control:
The existence of an active market for corporate control is essential for efficient allocation of
resources. When internal control mechanism fail to bridge the gap between the actual value of a
firm and its potential value, will create incentive for outside parties to seek control of the firm.
Changes in the control of firms virtually always occur at a premium, thereby creating value for
the target firm’s shareholders.
Furthermore, the mere threat of a change in control can provide management with incentives to
keep firm value high, so that the value gap is not large enough to warrant an attack from the
outside. Thus, the takeover market has been an important governance mechanism.
(ii) Legal/Regulatory Framework:
Legal environment play very crucial role in the standard of corporate governance of a country.
Country’s laws protect investors rights. Legal framework prevalent in a country helps disciplining
managers and controlling shareholders’ opportunistic behaviours. Extensive studies done
suggest that in countries with common law tradition, governance standards are generally higher
and minority shareholders are relatively better protected.
In contrast, countries pursuing continental law systems normally have poor minority
shareholders protection and practice lower governance standards. Interestingly, they that
cross-country differences in equity valuation, cost of capital and magnitude of external financing.
It could be explained by a complained by a country’s legal origin. Obviously, legal framework is
an effective external mechanism that assures investors to get a fair return on their investment.
(iii) Competition:
It is another powerful mechanism for solving a variety of agency problem is competition in
product markets. If the managers of a firm waste resources, the firm will eventually fail in
product markets. Hence, increased competition reduces managerial slack and may be helpful in
limiting efficiency losses. The same logic implies that product competition helps curtail the
“tunnelling” activities of the controlling shareholders.
Thus good corporate governance helps protect investors and ensures that investors get a fair
return on their investment. An effective combination of the above internal and external
mechanism influences the standards of good corporate governance.

Corporate Governance – Importance

Corporate governance is important for the following reasons:
1. It shapes growth and future of capital markets of the economy.
2. It helps in raising adequate funds from capital markets.
3. It links company’s management system with its financial reporting system.
4. It enables management to take innovative decisions for effective functioning of an enterprise
within the legal framework of accountability.
5. It supports investors by making corporate accounting practices transparent. Corporate
enterprises have to disclose financial reporting structures.
6. It provides adequate and timely disclosure, reporting requirements, code of conduct etc.
Companies present material price sensitive information to outsiders and ensure that till the time
this information is made public, insiders abstain from dealing in corporate securities. It, thus,
avoids insider trading.
7. It improves efficiency and effectiveness of an enterprise and adds to material wealth of the
economy.
8. It improves international image of the corporate sector and enables home companies to raise
global capital.

Corporate Governance – Problems and Challenges in Corporate Governance at Individual and

Group Level
There are certain problems and challenges as arising within the purview of corporate
governance. In any organisation, the challenging aspects may be setup into two parts i.e., at
individual level and at group.
Showing the Problems and Challenges as Arising in Corporate Governance:
The problem and challenges at individual and group level within corporate governance are
briefly stated here:
1. At Individual Level:
i. Individual Interest
ii. Individual Differences
iii. Lack of Accountabilities
iv. Indifferent Attitudes
v. Lack of Initiatives
vi. Communication Barriers
vii. Differences in Motives and Perception
viii. Undesirable Behaviour
2. At Group Level:
i. Lack of the Code of Conduct
ii. Lack of Coordination
iii. Lack of Education and Training
iv. Resistance to Change
v. Lack of Team Spirit
vi. Lack of Adequate Resources
vii. Lack of rationality in Decision Making
viii. Not Formulating the Professional Codes

Corporate Governance in India

1. The Ministry of Corporate Affairs (MCA) and Securities and Exchange Board of India ( SEBI )
is responsible for corporate governance initiatives in India. The corporate sector of India faced
major changes in the 1990s after liberalization.
2. In the 1900s, SEBI regulated corporate governance in India through various laws like the
Security Contracts (Regulation) Act, 1956; Securities and Exchange Board of India Act, 1992;
and the Depositories Act of 1996.
3. In February 2000, SEBI established the first formal regulatory framework for corporate
governance in India owing to the recommendations of the Kumar Mangalam Birla Committee. It
was undertaken to improve the standards of corporate governance in India. This came to be
known as clause 49 of the Listing Agreement.
4. A major corporate governance initiative was undertaken in 2002 when the Naresh Chandra
Committee on Corporate Audit and Governance furthered their recommendations addressing
multiple governance issues.
5. MCA and the Government of India have set up multiple organisations and charters like the
Confederation of Indian Industry (CII), National Foundation for Corporate Governance (NFCG),
Institute of Chartered Accountants of India (ICAI