CONTENTS CONTENTS• What is Corporate governance ?• Concept and objectives of Corporate governance• Advantages and Disadvantages of Corporate governance• Principles of Corporate governance• Factors affecting Corporate governance
CORPORATE GOVERNANCE Corporate Governance may be defined “as aset of systems, processes and principles whichensure that a company is governed in the bestinterest of all stakeholders”. It is the system by which companies are directed and controlled. It is about promoting corporate fairness, transparency and accountability.
CONCEPT• It involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders;• It deals with prevention or mitigation of the conflict of interests of stakeholders.Ways of mitigating or preventing these conflicts of interests include the processes, customs, policies, laws, and institutions which have impact on the way a company is controlled.• An important theme of corporate governance is the nature and extent of accountability of people in the business, and mechanisms that try to decrease the principal–agent problem.
OBJECTIVES• A properly structured board capable of taking independent and objective decisions is in place at the helm of affairs;• The board is balance as regards the representation of adequate number of non- executive and independent directors who will take care of their interests and well-being of all the stakeholders;• The board adopts transparent procedures and practices and arrives at decisions on the strength of adequate information;
OBJECTIVES• The board has an effective machinery to subserve the concerns of stakeholders.• The board keeps the shareholders informed of relevant developments impacting the company;• The board effectively and regularly monitors the functioning of the management team;• The board remains in effective control of the affairs of the company at all times.
ADVANTAGES OF CORPORATE GOVERNANCE• Enhanced Performance- helps a company improve overall performance. Without corporate governance, a company tends to be weak and sluggish.• Access to Capital- The better corporate governance a company has, the more easily it can access outside capital that the business can use to fund its projects. Since corporate governance includes major shareholders, it connects investors with the business itself, and these investors use their resources and contacts to support the company monetarily.
• Better Standards- Corporate governance makes many decisions about business operations, but one of the most important decisions involves corporate standards. Standards affect the quality of products and the goals that the business has in technology, customer service, and marketing.• Better Talent Utilization- With a strong corporate governance structure, people can find positions that utilize their talents more effectively, and the board of directors and top leaders of the business are always looking to add more talented people to their numbers.
DISADVANTAGES OF CORPORATE GOVERNANCE• Easily Corruptible-Corporate governance needs a certain level of government oversight to avoid increasing levels of corruption. The lack of governmental oversight in corporate governance lead to a misallocation of credit that actually worked against competition.• Family-Owned Companies- Corporate governance works at its best when shareholders and board members are able to make objective decisions that are in the best interest of the company. According to Ibis Associates, a business planning firm, family-run corporations (founding family members own controlling share of the company), such as Ford and Wal Mart, lose objectivity in business making decisions due to the familys financial investment in the business performance and the emotional ties associated with building a worldwide corporation from the ground up.• Costs of Monitoring- To effectively govern a publicly traded corporation, shareholders must speak with one voice and have enough votes to allow that voice to have any real weight. This requires individuals that have a collective vision for the company to pour more money into that company to gain a controlling share.
PRINCIPLES OF CORPORATE GOVERNANCE• Rights and equitable treatment of shareholders-- Organizations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by openly and effectively communicating information and by encouraging shareholders to participate in general meetings.• Interests of other stakeholders:- Organizations should recognize that they have legal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers.
• Role and responsibilities of the board:-- The board needs sufficient relevant skills and understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment• Integrity and ethical behavior:- Integrity should be a fundamental requirement in choosing corporate officers and board members. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making.• Disclosure and transparency:- Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the companys financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.
REGULATION AND THERE ENFORCEMENT :-• Since corporate governance failures have proved to be harmful not just for the organizations but also for the economy and the general public at large as well, there have been public pressures on the government and regulatory authorities to reform business practices and increase transparency.• Consequently, it has become a part of the government’s duty to ensure accountability and responsibility in corporate behavior.• Effective disposal of this responsibility basically revolves around two things:• First, the designing of regulatory commands i.e. the regulations and laws to ensure good corporate governance; and• Second is the enforcement of regulations.
RISK MANAGEMENT AND EFFECTIVE GOVERNANCE:-• In today’s world, frauds are an undeniable fact of business life.• Affecting all types of businesses. New technologies such as the Internet, and the development of fully automated accounting systems, have increased the opportunities for fraud to be committed.• Once suspected or discovered, investigating fraud is a specialist task• requiring experience and technical skill and can be very costly. Thus, there is no doubt• that fraud is best prevented, rather than dealt with after the fact. The most effective and appropriate response to the problem of fraud involves a combination of risk management techniques. These techniques include:• Setting up inherent control based upon soft controls that occur continuously and• consistently throughout the organization. Such controls should be embedded in• normal business practice and be designed in such a way that they are to a large• extent self sustaining; and• Setting up formal control processes of monitoring, reviewing and reporting
WHY CORPORATE GOVERNANCE?:-AT NATIONAL LEVEL :-•As barriers to the free flow of capital fall, it becomes imperative to recognize that thequality of corporate governance is relevant to capital formation and that soundcorporate governance principles is the foundation upon which the trust of investors isbuilt.•Corporate governance represents the ethical the moral framework under whichbusiness decisions are taken. Thus, any investor, when making investments across theborders or even otherwise, wants to be sure that not only are the capital markets orenterprises with which they are investing are being run competently but they alsohave good corporate governance.•Consequently, lack of sound corporate governance practices in any countrycan badly affect the confidence of foreign investors, in turn causing damage to theamount of foreign investments flowing in.
At the company and individual level:-•It is self evident that sound corporate governance is essential to the well being of anindividual company and its stakeholders, particularly its shareholders and creditors.•We need only remind ourselves of the many companies, across the world, whosefinancial difficulties and,•ultimate demise have been substantially attributable to weak corporategovernance.•On the other hand, there are several areas of self-interest that should drivecompanies to embrace more effective governance. These areas are:1. Effective governance helps to minimize reputational risks and thus, protecting thebrand;2. It helps to instill trust in customers and vendors;3. It also helps to assure effectiveness and integrity of a company’s businessprocesses.4. Further, in many cases, the punishment, in terms of penalties or imprisonment, forwhite-collar crimes are now in excess for such criminal acts such as armedrobbery, assault, and negligent murder. Even to escape such punishments,ensuring corporate governance compliance is a must.
•Most of the regulations made, such as SOX in US and Clause 49 of Listing Agreementin India, are applicable only to publicly-registered or listed companies and privatecompanies are out of the ambit of these regulations.• However, today we see that private companies are also becoming big in size andimpact.•Very near examples would include joint ventures being organized as privatecompanies within the insurance industry in India.•Thus, failure of corporate governance within these private companies as well canvery badly harm the general public at large. And also since new standards ofcorporate governance, while only required by law at public companies, are forforming “best practices” in many will governed private companies, we strongly feelthat the applicability of such regulations, after suitable modifications, be extendedto private companies as well.•Apart from the necessity as above, it is also in the self-interest of private companiesto ensure good corporate governance. This is primarily because:-
1. Usually, in most private companies, controls are informal or even ifthere are formal controls, they tend to be detective rather thanpreventive. This makes private companies unprotected againstrisks, which needs to be mitigated.2. Good corporate governance increases creditworthiness of thecompany and thus, enables it to raise funds at cheaper cost. Goodcorporate governance is also a must for companies that are planningto seek stock exchange listing and raise money from markets byconverting them into public company.3. Finally, if the owners of a private company are considering the saleof all or part of the entity, or are seeking private equityfinancing, effective controls can increase prospective buyers’willingness to pay a premium for the acquisition.Controls enhancements can also help attract new business partners.
Public sector corporate governance:-• Altough the private sector model view shareholders as main stakeholders.• In public sector specific users group those directly responsible for funding and the community at large assume great importance as stakeholders.• Stewardship and accountibility of use of funds and assets is particularly important in public sector.• It is becoming more important to focus on corporate governance in public sector to maintain faith in system and promote better service to the public sector to maintain faith in the system and promote better service to the public.
•Good institutional governance should beinstilled by the development of governancesystems in ministries and authorities, withthe aim of focusing on enhancing the qualityof public services consistent with citizenexpectations, promoting compliance andconformance, with appropriate transparencyand flexibility.
CASE STUDY :GLAXOSMITHKLINE Do more, feel better, live longer
GLAXOSMITHKLINEType Public limited companyTraded as LSE: GSK NYSE: GSKIndustry Pharmaceutical, biotechnologyPredecessor(s) Glaxo Wellcome SmithKline BeechamFounded 2000 (London)Headquarters London, United KingdomKey people Chris Gent (Chairman) Andrew Witty (Chief Executive)Products Pharmaceuticals, vaccines, oral healthcare products, nutritional products, over-the-counter medicinesRevenue £27.387 billion (2011)Operating £8.397 billion (2011)IncomeNet Income £5.458 billion (2011)Employees 96,500 (2010)Website www.gsk.com
GLAXOSMITHKLINEThey believe that it is in the vital financial interest of the firm to conduct their business with honesty and integrity complying all legal and regulatory requirements. The code applies to all their employees worldwide. Their code of conduct is as follows: All employees must conduct business with honesty and integrity in a professional manner for the firm’s good reputation. Employees must build relationships on the basis of trust and treat all with respect and dignity. Their stakeholders like customers, suppliers, employees must know the legal requirements of business and company rules, policy and procedures. Avoid any activity which could lead to unlawful practice and harm the firm’s image. Avoid conflicts of interest within the firm in all transactions. Give accurate and reliable information in records submitted while safeguarding the firm’s confidential information.
Employees are responsible for the following: All employees must uphold standards in the conduct of the firm’s business. When in doubt the must ask the firm’s legal department. Senior Management should be the role model for others. Failure of the employees regarding compliance to the code would lead to disciplinary action right up to severance from employment of the firm. When in doubt the firm wants the employees to ask questions for them. GlaxoSmithKline recognizes that commercial pressures and complex regulatory environments can present employees with difficult ethical situations.GSK provide guidance and support for the backed by rigorous auditing and action if misconduct is identified. GSK has audit systems to help identify and deal with cases of non- compliance. Those who violate company standards are subjected to disciplinary action including dismissal in serious cases. Serious violations and remedial actions are reported to the audit committee of the board. Doing the right thing can, at times appear to sacrifice some immediate advantage. However, GSK’s commitment to integrity and high standards of business ethics benefit their customers, communities, shareholders, employees and the business
The company’s Code Of Conduct – An Introduction to Corporate Ethics and Compliance promotes honest and ethical conduct by setting out standards to be followed by GSK’s employees in their everyday work for the company A separate publication, the Employee Guide to Business Conduct, helps employees understand what the Code means in practice and what is acceptable and unacceptable behavior. The Code is available on the company intranet. Employees have access to corporate compliance officers and are encouraged to seek guidance or raise concerns with the officers directly. Their contact details are in the Code Of Conduct brochure the Employee Guide and on the company intranet. A secure off-site PO Box address is available for confidential written communication, and toll-free telephone ‘GlaxoSmithKline Integrity Help lines are available in the US and the UK.
Type Public NASDAQ: GOOGTraded as NASDAQ-100 Component S&P 500 ComponentIndustry Internet, Computer software Menlo Park, California, U.S.Founded (September 4, 1998 (1998-09-04))Founder(s) Sergey Brin, Larry PageHeadquarters Mountain View, California, United StatesArea served Worldwide Larry Page (Co-Founder & CEO)Key people Eric Schmidt (Executive Chairman)Revenue US$ 37.905 billion (2011)Operating income US$ 11.632 billion (2011)Profit US$ 09.737 billion (2011)Total assets US$ 72.574 billion (2011)Total equity US$ 58.145 billion (2011)Employees 33,077 (2012) AdMob, DoubleClick, On2 Technologies,Subsidiaries
Corporate Governance Guidelines Google’s motto is ‘do not be evil’. They believe these words relate to the way they serve their users. Their code message is that Google strives towards the highest possible standards of ethical behaviour. Following are the seven principles they look at in arriving at their goal:
SERVING THEIR USERSThey have flourished by serving the interests of their users. Their goal is to buildproducts that organize the world’s information and make it available to their users.Usefulness: products and services to be user friendly and useful to their customers.Honesty: they want clear and truthful communication with their customers.Responsiveness: they want to be responsive to the user feedback about their and services. Action oriented: they want their product and services to their customers to be useful and in case they are not then, they take appropriate action to make it useful
RESPECT FOR EACH OTHER AMONGEMPLOYEES They create an ambience in which employee can reach to his full, potential as follows: Employment provides equal opportunity to all employees, without any discrimination. Harassment and discrimination is totally absent from the firm. Drugs and alcohol use is not accepted in the firm at all. Carrying of weapons and any type of violence by the employees is strictly not accepted.
AVOIDANCE OF CONFLICTOF INTEREST Avoidance of conflict of interest is achieved by the following methods: Openness and transparency is important to work ethics. Personnel investment in the firm’s equity is done only after the approval of the board of directors. Gifts and entertainments are allowed to be accepted as long as these are of low value and do not impact on the firm’s decisions with regard to those offerings these gifts or entertainment.
PRESERVINGCONFIDENTIALITYThe confidential information could be any of the following: Financial information, product information and user information, the information can be given in select cases on a need to know basis only. Trademarks, logos and copyrights. The name of Google products and services and the logos connected to these are the firm’s intellectual property and unauthorized use could damage their image. Google partners should not give or receive any confidential information unless they have cleared with the firm’s legal department. Google wants to give the same respect to competitive information as they expect their competitors would give theirs Google does not want its employees to even discuss confidential information on the net or anywhere else, unless the person has been specially authorize to do
BOOKS AND RECORD-KEEPING Google believes in accuracy in reporting the financial analysis of the firm. Every member of the Google team has the responsibility of seeing that the books are maintained accurately. No one should ever try to influence the auditing of Google’s financial accounts. The employees are supposed to co operate with accounting and financial teams; auditors to ensure that the book are accurately maintained. The employees must report any irregularities if they observe them, even the small problems when they are not as per the firm’s reporting of Financial and Accounting Concerns Policy.GOOGLE ASSETS It is expected that the employees will take care to conserve the firm’s assets and equipment. They are provided with all the required tools for the job they perform. The firm’s computers, telephones and other communication equipments are crucial aspects of the firm’s property and these must be looked after well. While buying from third parties the employees are to get the best bargains of the firm. All contracts must be vetted by the firm’s legal department and signed by only the authorized signatories.
LAWS The firm takes the responsibility of complying with the laws of the land and when in doubt about the interpretation of any law the employees are to get in touch with the firm’s legal department. The firm wants from its employee’s full compliance with the Foreign Corrupt Practices Act, export control regulations, antitrust laws and other trade regulation statutes. In case of accepting gifts, any item of value would be considered as taking a bribe. Any violation of antitrust law by the employees would not be accepted.CODE OF CONDUCT The firm believes that it is not possible to be fully comprehensive with regard to the code of conduct: they want the employees to refer to the legal department in case of any doubts in any matter of ethics.
CONCLUSION At last, it would be appropriate to say that firstly, there is no unique structure of “corporate governance and secondly, corporate governance goes far beyond regulation. The quantity,quality and frequency of financial and managerial disclosure, the extent to which the board of directors exercise their fiduciary responsibilities towards shareholders, the quality of information that management share with their boards and the commitment to run transparent companies cannot be legislated at any level of detail. Instead, these evolve due to the catalytic role played by the more progressive elements within the corporate sector and, thus, enhance corporate transparency and responsibility.The adoption of governance best practices increases the likelihood that leadership will provide the desired corporate performance while confidently trackingS