Change is the order of the day. Advancement in science and technology has changed the way we live. Globalisation and liberalization has changed the way we do our business. There is change in environment, change in culture and change in ethos. This change has brought some negative impacts along with the positive ones. There is decline in ethics and values that ought to be followed by everyone including states and corporates. This means that there is loose governance by these entities. When this happens the objectives set for the entity cannot be achieved. In this unit we shall focus on the meaning, objective and nuances of corporate governance.
Before we understand the term Corporate Governance (CG), let us first understand the term governance. The concept of governance has been known in both political and academic circles for a long time, referring generally to the task of running a government, or any other appropriate entity for that matter. According to the World Bank, “ Good governance is epitomized by predictable, open and enlightened policy making, a bureaucracy imbued with a professional ethos acting in furtherance of the public good, the rule of law, transparent processes, and a strong civil society participating in public affairs.”
On the other hand, Organisation for Economic Cooperation and Development (OECD) defines governance as the use of political authority and exercise of control in a society in relation to the management of its resources of social and economic development. This broad definition encompasses the role of public authorities in establishing the environment in which economic operators function and helps in determining the distribution of benefits, as well as the nature of the relation between the ruler and the ruled. Good governance encompasses all actions aimed at providing its citizens, a good quality of life.
With the rapid change in the business environment and emergence of new regulations by world bodies like EEC, WTO, OECD, World Bank etc. the concept of CG is gaining momentum. Corporate governance is a concept rather than an instrument. It focuses on appropriate management and control structure of a company. Also included in the concept are power relations between owners, the board of directors, management and the stakeholder. Most definitions relate to control of a company or managerial conduct. The Cadbury Report (U.K.) states; “Corporate governance is the system by which businesses are directed and controlled”.
OECD definition says, “ Corporate governance provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performances are determined.”
The following definition helps us in understanding the concept even better: “ Corporate governance is not just corporate management, it is something much broader to include a fair, efficient and transparent administration to meet some well defined objectives. It is a system of structuring, operating and controlling a company with a view to achieve long term strategic goals to satisfy shareholders, creditors, employees, customers and suppliers, and complying with the legal and regulatory requirements, apart from meeting environmental and local community needs. When it is practiced under a well-laid out system, it leads to the building of a legal, commercial and institutional framework and demarcates the boundaries with in which these functions are performed.”
To state in simple terms, corporate governance relates to a code of conduct, the management of a company observes while exercising its powers. Quality corporate governance not only serves the desired corporate interest, but is also a key requirement in the best interests of the corporates themselves.