Recent corporate failures and scandals involving mis-governance and unethical behaviour on the part of corporates rocked the corporate sector all over the world, shook the investor confidence in stock markets, and caused regulators and others to question the assumption that most companies do the right thing most of the time. These incidences diminished reputation and goodwill of even those corporates who enjoy the trust and confidence of public at large.
These factors highlight the importance of good corporate governance. On the other hand, corporate governance is important because corporate decisions impinge on its shareholders, customer, creditors, the state and employees. Globally the objective of corporate governance is to maximize long-term shareholder value. With the assumption that capital and financial markets are working properly, anything that maximizes shareholder value will necessarily maximize corporate prosperity.
For sound governance, managers need to act as trustee of shareholders, prevent asymmetry of benefits between sections of shareholders, especially between owner-managers and the rest of shareholders. They also need to be a part of societal concerns about labour and environment. In fact stock market analysts see these days a greater correlation between governance and returns. Investment analysts recommend a company based on strength or weakness of a company’s governance infrastructure.
Confidence of investors, both domestic and foreign, is the need of the hour. This is to attract ‘patient’ long –term capital that will reduce their cost of capital. Thus, there is a need for intellectual honesty, integrity and transparency, which form the basis for good corporate governance.
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