Corporate Governance

March 11, 2012

Corporate governance as the name suggests is the mode by which companies or corporations are governed & operated. It outlines the rules which regulate the relation between executives, board members, shareholders, employees and stakeholders. From time to time in the history the working of companies, especially those traded in public, have come under scrutiny because of the frauds, failures and scandals at the management level. Enron and WorldCom are two famous examples of such failures.

In United States, efficient corporate governance practices are promoted by trade organizations, stock exchanges, regulatory bodies and government regulations i.e. SEC, NASDAQ. These groups lay out guidelines to protect the interest of investors and ensure transparency in the markets.

There are six principles of corporate governance that are defined by OECD (Organization for Economic Co-operation and Development) which will be elaborated further.

1. Ensuring the Basis for an Effective Corporate Governance Framework.

2. The Rights of Shareholders and Key Ownership Functions.

3. The Equitable Treatment of Shareholders.

4. The Role of Stakeholders in Corporate Governance.

5. Disclosure and Transparency.

6. The Responsibilities of the Board.

1) Ensuring the Basis for an Effective Corporate Governance Framework – Under this principle it is made sure that corporate governance rules will be made in accordance with the law, the policies would ensure the integrity and transparency in the market by keeping the competition fair. The organizations that will make and regulate these governance procedures would carry their task diligently and impartially in a timely manner.

2) The Rights of Shareholders and Key Ownership Functions – This principle clauseelaborates in detail the rights of shareholders and important functions related to their ownership. An interesting fact about this principle is that all shareholders should have equal rights despite the size of their ownerships.Companies would inform their shareholders about their working and financial standing on a regular basis. They should also give shareholders the chance to participate and vote in the general shareholders meeting, where shareholders can become part of the decision making process. Investors regardless of the size of their investment should be allowed to question board members and make suggestions. Shareholders should also be given the right to consult each other in order to decide the future of the company. Overall, this principle emphasizes the protection of shareholders interest and their democratic rights in the functioning of the company.

3) The Equitable Treatment of Shareholders – This code suggests that all shareholders should be treated justifiably. Rights of minority and foreign shareholders should be protected and their issues should be properly rectified. All investors should have access to the information regarding their rights before the investment. All hurdles to cross border shareholder voting should be removed. Moreover, insider trading and all other abusive practices should be discouraged at all levels. Board members should also give disclosures about their interest in the transactions.

4) The Role of Stakeholders in Corporate Governance – This norm describes the role the stakeholders can play in governing a corporation i.e. employee and unions. It is suggested that board members and management should respect the lawful rights of the stakeholders and ensure that they get chance to participate in the governing process. Stakeholders should be involved in the corporate loop and have access to the relevant information on a regular basis.A sustainable growth will be achieved where employees and management work together for achieving their goals in a cooperative manner. Creditor’s protection is also covered under this principle.

5) Disclosure and Transparency – These days corporations are required to disclose their financial reports, shareholders information, voting rights, management policy, goals, risks and stakeholders information to the government and the investors. This measure implemented with strictest accounting standards build confidence in the market and promote transparency. Auditing should be done by responsible and independent auditors.

6) The Responsibilities of the Board – This principle simply tells that the executives and board members should be fair, honest and just in all the aspects of company’s operations. They should work together with stakeholders and shareholders towards generating wealth, job and economic development.

Despite these principles, the executives figure out their own way of governing the corporations. Some companies are more democratic in nature while others are more dictatorial but the corporate governance framework provide an insightful and fruitful knowledge of managing a corporation which can be very helpful to the future executives and business leaders.

Siddharth Sehgal

References

1. "OECD Principles of Corporate Governance." OECD. Web. 8 Mar. 2012. <http://www.oecd.org/dataoecd/32/18/31557724.pdf>.

2. Colley, John L. What Is Corporate Governance? New York: McGraw-Hill, 2005. Print

3. Kim, Kenneth A., and John R. Nofsinger. Corporate Governance. Upper Saddle River, NJ: Pearson/Prentice Hall, 2007. Print.

4. Brancato, Carolyn Kay., and Christian A. Plath. Corporate Governance Best Practices: A Blueprint for the Post-Enron Era. New York, NY: Conference Board, 2003. Print.

5. Iskander, Magdi R., and Nadereh Chamlou. Corporate Governance : A Framework for Implementation. Washington, D.C.: World Bank, 2000. Print.

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2 Responses to “Corporate Governance”

  1. Cheryl Johnson said

    Nice article Sid. The statement about how corporation tend to govern themselves is unfortunately true. Corporations use these Corporate Governances as guidelines rather than rules of operation and tend to function by their internal rules and regulations; doing as little or as much of what they can get away with seems to be the standard of operations. It is also interesting that the guidelines outlined in this article tend to be for the protection of stockholders and executives then the company employees.

  2. Vishnu said

    Good post, I like the presentation and you references.

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