AN INTRODUCTION OF CORPORATE GOVERNANCE

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AN INTRODUCTION OF CORPORATE GOVERNANCE # Satya Narayan Kalika Definition of Concept The term Corporate is connected with and derived from North American term 'Corporation' which means 'a joint-stock

1 AN INTRODUCTION OF CORPORATE GOVERNANCE # Satya Narayan Kalika Definition of Concept The term Corporate is connected with and derived from North American term 'Corporation' which means 'a joint-stock company' and, 'Governance' means 'the way of governing /controlling a company'. Oxford Advanced Learner's Dictionary defines, 'Corporate Governance is the way in which a Corporation or institution is controlled and run'. The Wikipedia Free Encyclopedia gives simple meaning, 'corporate governance is the set of processes, by which companies are directed and controlled and it studies the issues arising from the separation of ownership and control of the company. Business Dictionary defines the Corporate Governance is the duties and responsibilities of a company's Board of Directors in managing a company and their relationship with the shareholders of the company and the stakeholders (Pass, 2006). The Corporate Governance in narrower sense as defined by Milton Friedman is 'the conduct of business in accordance with shareholder's desires, which generally, is to make as much profit as possible '. In the wider sense, 'the Corporate Governance is the efficient supervision that encourages doing everything better and protects the interests of the company as per the established business ethics and enforced laws. Essentially, the Corporate Governance is both about doing things right and doing the right things at a time, when required and appropriate for all the stakeholders of a business organization (Sithapathy and Iyer, 2006). The president of World Bank Mr. James D. Walfensohn defines - 'The Corporate Governance is about promoting corporate fairness, transparency and accountability. Mr. Walfensohn, further expresses on its importance that, proper governance of companies is becoming as crucial to the world economy as proper governance of the modern countries. (Sithapathy and Iyer, 2006). That is why, the Corporate Governance in a corporate organization is principally rule based, simple, moral, accountable, responsible and transparent, and has to be focused on the protection of interest of investors, company itself and the public at large. It is the duty of the board of directors of a company. Thus, the Corporate Governance--- - Checks direct extraction from the company of excessive benefits by management, e.g. drawing large salaries, pension, share options, use of company assets (vehicles, apartments), etc.

2 - Checks the manipulation of the share price by misrepresenting the company's profitability, usually so that shares in the company can be sold or options 'cashed in'. - Minimizes the contingent risk of the company, controls unfair conduct of the officials and maintains sustainability of the business. Developmental History For the purpose of regulating conflicts of interests and formulating a statement of duties of directors of a company, the following reports have been published in English law as background history of corporate governance (Hicks and Goo, 1999). Cadbury Report (1992): The 'Cadbury Code of Best Practices relating to appointment and responsibilities of directors (executive/non-executives) on the Financial Aspects of Corporate Governance' was published firstly in Greenbury Report (1995): The Granbury report was published on Identifying Good Practices in Determining Director s Remuneration and Preparing Code of such Practices for use by Companies". Hample Report (1998): The Hampel report was on the Role of Executive and Non-Executive Directors. The final report produced a set of principles and code embracing cadbury and greenbury report. The Stock Exchange Combined Code: Following the publication of the Hampel report, 'Consolidated Code for the Corporate Governance' was adopted by the stock exchange is centered upon the control and functions of boards and the role of auditors. Turnbull(1999) and Smith(2003) Reports: The two reports were published with the proposal of 'Financial Control and Auditing Practices.' Similar types of stringent rules relating to financial supervision came into force in the USA in 2002 called the Sarbanes- Oxley Act after the Enron scandals. Higgs Report: In English Law, the Higgs Report, 2003, refers the role of 'non- executive directors' as prominent position holder and even as chairman of the corporation. Organizational Efforts: Efforts have been made by organizational sectors in international standard. The first such effort is made by the Organization for Economic Cooperation and Development (OECD), an international agency with 29 member countries, starting from the US to South Korea has made principles in International Corporate Governance Network (ICCN) is another association of investors which has made a forceful code in July, Its intention was to encourage international dialogues. Basel-II Principles: Basel principles are also the internationally recognized benchmarks for banks, accepted by the Nepal Rastra Bank in the course of supervision and regulation of the banks/financial institutions. It has focused on financial transparency and effective corporate governance, effective supervision of financial sector, etc. Causes Behind Development of the Concept The Corporate Governance is about ensuring that companies are run well in the best interest of the Corporation itself, the shareholders, their stakeholders and the wider community. The causal incidents behind the rise of principles of the Corporate Governance can be summarized below (Athavale, 2006). The need to insure Corporate Governance in the UK felt in 1980s following the collapse of high profile companies like Maxwell, Polly Peck, BCCI, etc. 2

3 The Poor standard of Corporate Governance led to insufficient control in the companies preventing from wrongdoing. The lesson taken by the collapses of Enron, and WorldCom incidents. The Collapse of economy in India in the 1992 brought new experiences that, financial indiscipline and negligence of a single person may ruin a company having hundred years of reputation in a contingent small jolt. International efforts have been made for a number of years for strengthening in standards of Corporate Governance by OECD, ICGN and Basel-II. The published scandals of well established companies are the example of abuse of the trust makes aware the democratic governments and their regulatory agency. Models of Corporate Governance The Corporate Governance may be of two models from the point of view of beneficiary- (i) liberal and (ii) coordinated. The liberal model of the Corporate Governance gives emphasis to the interest of the shareholders. It is found in the Anglo-American countries that prefer capitalism model of economy. The coordinated model of Corporate Governance recognizes the larger interest of the workers, managers, suppliers, customers and the general community (Prasad, 2006). However, the both have distinct competitive advantage performed in the different ways. Nepalese legislations such as, Company Act, Bank and Financial Institution Act of 2063 and, Nepal Rastra Bank Act are influenced by the liberal model of corporate governance. Actors of Corporate Governance The Corporate Governance refers to the balanced relationship that exists between the different participants, defining the direction and the performance of a corporate organization. The main tripod actors are the Chief Executive Officer, the Board of Directors (BOD) and the Shareholders of the corporation who play a vital role in farming and applying the policies formally. The auxiliary actors who are influencing the governance in the organization are the staffs, suppliers, consumers, creditors, regulatory bodies and the community (Davies, 2000). The need of which is fulfilled by the natural person as the agent of the company to perform the corporate activities. The natural persons are appointed as the directors and the senior managers therefore; their moral, ethical and value framing works are expected to take the decisions on behalf of the company/corporation. Basic Principles and Objectives of Corporate Governance The basic principles: People are more important than the process There must be an appropriate regulatory regime to back these obligations Shareholder accountability External audit must be independent and penetrating Disclosure and transparency are crucial to market integrity The BOD is responsible as the agent of the corporation Main Objectives: To promote a healthy environment of investment To create a trust in a corporate and in its abilities 3

4 To promote business sustainability and risk minimization To improve the efficiency of the capital market To enhance effectiveness in the service of real economy The Key to Good Corporate Governance The key to good and effective Corporate Governance is to ensure the individuals are rewarded at appropriate levels for their effort and skills whilst ensuring that they act in the best interest of the company and its stakeholders. 1. Responsibility 2. Accountability 3. Transparency 4. Rule based system 5. Protection of rights of minority shareholders 6. Protection of rights of depositors in bank and financial institutions. OECD Principles on Corporate Governance The principles developed by the OECD is internationally recognizes. On May 1999, twenty nine member countries meeting constituted the Organization for Economic Cooperation and Development (OECD) and uniformly voted in favors of OECD principles developed on Corporate Governance. The principle has been baked by the G7 leaders at the Cologne summit in June1999 as well as ICGN key players known as, key pillars and architects of global economy. The OECD principles are declared as the basic minimum standard to be observed by the international business organization for the common good of wider interest, culture and practices. The ICGN views on the OECD principles in the form of working kit criteria for Corporate Governance as: Corporate purpose, communication and reporting, strategic focus, corporate citizenship, corporate boards, voting rights, optimize performance, return to shareholders and the remuneration policy and the corporate governance by the government and the regulatory bodies (Prasad, 2006). Purpose of OECD Principles The Codes of best practice of Good Corporate Governance is the outcome of the companies who are well run but faced the scandals. Actually, this is the development of pressure extended by stock exchanges on the companies whose shares are openly traded. Therefore, the principles constituted in 1999 were revised in 2004by the OECD. The Purpose of OEDC Principle is-- to assist the governments and regulatory authority in their efforts to evaluate and improve the legal, institutional and regulatory frameworks. to provide guidance and suggestions for stock exchange, investors, corporations, regulatory authority and other parties that have a role in the process of developing good corporate governance. to apply six principles that are backed by a number of sub-principles of business laws. E.g. BOD, corporate social responsibility, shareholders, auditors and stakeholders. 4

5 to promote sustainability of the corporations in their fair, transparent and accountable manner. Six Principles of OECD on the Corporate Governance Six Principles of Good Corporate Governance developed by the OECD focuses on- Ensuring the basis for effective Corporate Governance The rights of shareholders and key ownership functions The equitable treatment of shareholders/ owners The Role of Stakeholders in Corporate Governance Disclosure and Transparency of transaction The Responsibilities of the Board of Directors Nepalese Context In the support of World Bank, the Financial Sector Reformation Project is started in Then, Nepal Rastra Bank Act-2058, Bank and Financial Institutions Act-2063 and Company Act-2063 are enforced. That has fully empowered Nepal Rastra Bank with the power relating to licensing, supervising and regulating Nepal s all Bank and Financial Institutions, except cooperative organizations, Employee Provident Fund and Citizens Investment Fund. The Nepal Rastra Bank Act-2058 has, in this regard, laid down the basic legal and operational propositions by which it can be run as an independent and autonomous central banking organization. This aspect can be visualized in the legal provisions relating to the formation of the board and areas of responsibilities. The Nepal Rastra Bank Act has made stringent provisions regarding the appointment of professional and experienced members of BOD. The specific educational qualification, experience, renownedness, area division for appointment and conflict of interest have guaranteed that, the bank and financial institutions can be run with good corporate manner with trust. The Bank and Financial Institutions Act has made the Nepal Rastra Bank more powerful. It has repealed five statutory laws and the powers are lain down in the single Umbrella Act for the purpose of improving the Nepal Rastra Bank as a central bank of Nepal. The Company Act-2063 has emphasized on Good Corporate Governance among its major Characteristics. It has focused on protection of interest of shareholders, company itself, the influencing stakeholders and the larger society. It has separated administrative and judicial functions respectively to the company registrars' office and the court. Besides, the Company Act- 2063, Competition Act, Security Exchange Act also has focused on the concepts, such as accountability, responsibility and financial transparency in the Companies. In this context, the Security Exchange Board, Management Association of Nepal, Federation of Nepalese Chambers of Commerce and other NGO s, INGO s have conducted study project for the purpose of promoting good corporate governance in Nepal. Conclusion Company/ corporation is a legal person who has no minds and hands, therefore; are run by natural persons, as agents on behalf of the company. Generally, the salaried professional managers/directors acquire substantial powers in respect of the affairs of the company. However, directors have not always had the best interest of shareholders in mind when performing their 5

6 managerial functions. The Corporate Governance is an attempt to make directors more accountable for their policies and actions towards the shareholders. The concept of Corporate Governance refers to an economic, legal and institutional environment that allows companies to diversify, grow, restructure, and do everything necessary to maximize corporation's value and sustainability. Though, corporate governance is not a new notion for economically developed countries of the west but it is the buzz word in the Nepalese corporate jargon in these days. The pressure of globalization, open market policy and Nepal s WTO membership made it indispensable for the development of Nepalese economy. References Athavale, Mahesh, A. (ed.by) Corporate Governance: Modules of Best Practices (4 th ed.) ICSI, New Delhi (2006) Davies, Paul L, (ed. by) Gower's Principle of Modern Company Law, (6 th ed.) (2 nd impression in 2000) Hicks, Andrew and Goo, S.H., Cases and Materials On Company Law (3 rd ed.) Blackstone Press Ltd. London (1999) Pass, Chritopher et. al. Collin's Dictionary of Business (3rd ed.), Harper Collins Publisher, Glasgow, UK. (2006) Prasad, Kesho, Corporate Governance, Prentice Hall of India (P) LTD, New Delhi (2006). Sithapathy, V. and Iyer, Ramadevi R., Corpora e Governance Practice & Procedure, Taxman Allied Services (p) Ltd. New Delhi, (2006) # Advocate, LL.M. in Business and International Trade Laws. (snkalika@hotmail.com). 6

CORPORATE GOVERNANCE IN INDIA: AN ANALYSIS

81 CORPORATE GOVERNANCE IN INDIA: AN ANALYSIS Meghna Thapar Hidayatullah National Law University, Raipur, Chhattisgarh, India meghathapar6@gmail.com Arjun Sharma Hidayatullah National Law University, Raipur,