This article has been written by Mr. Bibhab Nayak, a 1st-year B.Sc.LLB student from National Forensic Sciences University, Gandhinagar, Gujarat.
Introduction:
This is an article on the topic of Corporate Governance. It starts by defining the term in layman’s language. It is derived from various online resources mentioned at the end of this article. It further deals with the detailed concepts of Corporate Governance such as the components, advantages, and examples (both good and bad corporate governance) of the same. The article concludes by summarizing the entire article in a single paragraph, along with the personal opinion of the author.
Detailed Concept:
To begin with, we have two words in the title of the article, one is ‘Corporate’ and another is ‘Governance’. Generally, Corporate means a group of individuals united for the same or similar purposes. Companies and Institutions, where a group of individuals works for the achievement of a common goal, can be some examples of corporate organizations. On the other hand, Governance means to rule or regulate something or somebody. Hence, combined, Corporate Governance means the modes and methods by which such companies and institutions are regulated by the regulatory body. In other words, Corporate Governance refers to the body which has the accountability and the decision-making power for a particular company. It also involves balancing interests among the stakeholders of the company such as shareholders, managing executives, customers, investors, etc.
Components of Corporate Governance:
Board of Directors: The board acts as the custodian of corporate governance and is responsible for setting strategic objectives, appointing executives, and monitoring their performance. It is the primary stakeholder of a company. Directors are generally elected by the shareholders or the other board members of the company. Independent directors bring diverse perspectives and safeguard against conflicts of interest.
Transparency and Disclosure: Companies should disclose relevant information in a timely and accurate manner, ensuring transparency about their financial performance, operations, and potential risks.
Accountability and Ethics: Corporate governance promotes ethical behaviour and accountability by establishing codes of conduct, fostering a culture of integrity, and ensuring proper risk management practices
Shareholder Rights: Respecting and protecting the rights of shareholders is a fundamental aspect of corporate governance. This includes fair treatment, access to information, and the ability to participate in decision-making processes.
Benefits of Corporate Governance:
Good Corporate governance establishes clear rules and regulations, provides leadership with direction, and aligns the interests of shareholders, directors, operations, and workers.
It contributes to the development of trust among investors, the community, and public officers. Commercial governance can help investors and others understand a company’s strategy and business integrity.
It fosters fiscal viability, occasion, and gains over the long term.
It can help fund caregiving. Share prices might rise as a result of good company governance.
It can reduce the liability of fiscal loss, waste, hazards, and corruption. It’s a strategy for long-term success and adaptability.
Principles of Good Corporate Governance:
Fairness: The board of directors must treat the employees, investors, shareholders, and customers with utmost decency and fairness. It is the responsibility of the Board of Directors to maintain fairness and avoid any kind of bias towards anyone and treat them with equal consideration.
Transparency: The Board of Directors must bring transparency to the system of governance. It should provide clear and accurate answers related to the issues like financial profits/losses, conflict of interest, debt recovery, and in terms of any legal matters as well. It should be unambiguously presented, in a timely manner, before the company’s shareholders, investors, vendors, and customers. It helps make the process transparent and also to gain and maintain the trust of the company’s shareholders, vendors, investors, and customers.
Risk Management: The Board of members must be aware of all probable market risks, whether commercial or legal. They must recognize the same in a timely manner and must work on the best possible solution to avoid it. They must consult the risk management team regarding the same and should work on the recommendations given by the team. It is also the responsibility of the Board of Members to intimate about all the risks to the shareholders, investors, and customers to maintain transparency.
Responsibility: The Board of Directors must acknowledge that they are responsible for the Company at every moment of time. Hence, they must be aware and keep track on the ongoing performance of the Company. It is their duty to strive continuously towards the growth of the company and make it more and more successful. It is also the responsibility of the board of Directors to hire the Chief Executive Officer (CEO) and the Managing Director (MD) for the company, keeping the best interest of the company and leaving their personal biases.
Accountability: The Board of Directors must put forward the purpose of the company’s activities and the result of the same before the World. It shows their accountability and loyalty towards the Company and the customers, shareholders, and investors, at the same time. They are responsible for the assessment of the capacity, performance, and potential of the company and hence must communicate the same to the outside world. It greatly helps in building the trust of the people in the company, also at the same time the trust of the company in its directors.
Examples of Corporate Governance:
Volkswagen AG:
Poor corporate governance can raise questions about a company’s dependability, integrity, or duty to its shareholders. All of these factors can have an impact on the firm’s financial health. Tolerance for or encouragement of illegal activity can lead to scandals such as the one that rocked Volkswagen AG in September 2015. The specifics of the “dieselgate” scandal revealed that the manufacturer had deliberately and systematically manipulated engine emission devices in its vehicles for years in order to influence pollution test results in America and Europe. In the days following the start of the scandal, Volkswagen’s stock lost over half of its value. Its global sales plummeted 4.5% in the first full month following the announcement. VW’s board structure backed the emigrations apparel and was one of the reasons it wasn’t discovered sooner. Unlike other pots, VW has a two-league board system comprised of an operation board and an administrative board. The administrative board was created to oversee the operation and authorize commercial conduct. still, it demanded the independence and authority to carry out these liabilities effectively.3 A high number of shareholders were represented on the administrative board. Members of the board possessed 90 shareholder voting rights. There was no true independent administrator. As a result, shareholders gained control, defeating the purpose of the administrative board, which was to oversee operations and staff and how they worked. This permitted the emissions to continue further.
PepsiCo:
One of the best examples of good Corporate Governance can be PepsiCo. One company that has constantly rehearsed good commercial governance and seeks to modernize it frequently is PepsiCo. In drafting its 2020 deputy statement, PepsiCo sought input from investors in six areas Board composition, diversity, and refreshment, plus leadership structure Long- term strategy, commercial purpose, and sustainability issues good governance practices and ethical commercial culture mortal capital operation Compensation discussion and analysis Shareholder and stakeholder engagement The company included in its makeshift statement a visual of its current leadership structure. It showed a combined president and CEO along with an independent presiding director and a link between the company’s” Winning with Purpose” vision and changes to the superintendent compensation program
Conclusion:
Corporate Governance is an important tool in any corporation or organization. It defines the rules and regulations about how a company should operate. Good corporate governance of a company always affects society in a positive manner. It retains the trust and faith of the customers and investors in the company and ultimately promotes ethical business practices, which helps to attract investors. This, as a result, leads to the growth of the company and contributes to the economy of the particular country.
References:
https://www.cgi.org.uk/about-us/policy/what-is-corporate-governance
https://www.investopedia.com/terms/c/corporategovernance.asp
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