corporate governance and role in strategic management
AND ROLE IN STRATEGIC
What is Corporate Governance?
Corporate governance is the system of rules, practices and
processes by which a company is directed and controlled.
Corporate governance essentially involves balancing the
interests of a company's many stakeholders, such as
shareholders, management, customers, suppliers, financiers,
government and the community.
Since corporate governance also provides the framework for
attaining a company's objectives, it encompasses practically
every sphere of management, from action plans and internal
controls to performance measurement and corporate disclosure.
Conduct of business in accordance with
shareholders desires (maximizing wealth) while
confirming to the basic rules of the society
embodied in the Law and Local Customs.
Corporate Governance has a broad scope. It
includes both social and institutional aspects.
Corporate Governance encourages a trustworthy,
moral, as well as ethical environment.
Principles of Corporate Governance
Sustainable development of all stake holders- to
ensure growth of all individuals associated with or
effected by the enterprise on sustainable basis.
Effective management and distribution of wealth
– to ensue that enterprise creates maximum wealth
and judiciously uses the wealth so created for
providing maximum benefits to all stake holders and
enhancing its wealth creation capabilities to
Discharge of social responsibility- to ensure
that enterprise is acceptable to the society in
which it is functioning.
Application of best management practices-
to ensure excellence in functioning of
enterprise and optimum creation of wealth on
Compliance of law in letter & spirit- to
ensure value enhancement for all
stakeholders guaranteed by the law for
maintaining socio-economic balance.
Adherence to ethical standards- to ensure
integrity, transparency, independence and
accountability in dealings with all
Pillars of Corporate Governance
The four pillars of corporate governance are:
Ensure that management is accountable to
Ensure that the Board is accountable to
Protect Shareholders rights
Treat all shareholders including minorities,
Provide effective redress for violations
Ensure timely, accurate disclosure on all
material matters, including the financial
situation, performance, ownership and
Procedures and structures are in place so as
to minimize, or avoid completely conflicts
Independent Directors and Advisers i.e. free
from the influence of others.
Benefits of Corporate
Good corporate governance ensures corporate
success and economic growth.
Strong corporate governance maintains investors’
confidence, as a result of which, company can raise
capital efficiently and effectively.
It lowers the capital cost.
There is a positive impact on the share price.
It provides proper inducement to the owners as well
as managers to achieve objectives that are in
interests of the shareholders and the organization.
Good corporate governance also minimizes
wastages, corruption, risks and
It helps in brand formation and
It ensures organization in managed in a
manner that fits the best interests of all.
Good and Bad Governance
Good corporate governance creates a transparent set
of rules and controls in which shareholders,
directors and officers have aligned incentives. Most
companies strive to have a high level of corporate
governance. For many shareholders, it is not enough
for a company to merely be profitable; it also needs
to demonstrate good corporate citizenship through
environmental awareness, ethical behavior and
sound corporate governance practices.
Bad corporate governance can cast doubt on a
company's reliability, integrity or obligation to
shareholders. Companies that do not cooperate
sufficiently with auditors or do not select
auditors with the appropriate scale can publish
spurious or noncompliant financial results. Bad
executive compensation packages fail to create
optimal incentive for corporate officers. Poorly
structured boards make it too difficult for
shareholders to oust ineffective incumbents.
NEED FOR CORPORATE
Corporate governance is an important part of
strategic management that can improve firm
Good governance practices entail active
participation of shareholders in the direct and
indirect management of corporation through the
Board of Directors and an arrangement of
productive checks and balances among
shareholders, board of directors and management
Corporate governance is of interest to us as
it determines the strategy of the
organization and how it is to be
implemented. It is also important to us
because the Corporate Governance,
framework determines who the organization
is there to serve and how the priorities and
purposes of the organization are
Corporate governance, in strategic
management, refers to the set of internal
rules and policies that determine how a
company is directed. Corporate governance
decides, for example, which strategic
decisions can be decided by managers and
which decisions must be decided by the
board of directors or shareholders.
Corporate Governance is highly essential
from the point of view of the shareholders,
customers, employees and company and
society at large for the survival and
sustainable growth of the company.
Strategy integrates internal environment
including corporate governance and
The corporate governance meets the interests all
the stakeholders including the long-run interest of
the company itself in a more balanced way, by
regulating and controlling the misleading, immoral
and unethical ideas and acts of CEO, Board of
Directors and other strategists. Thus strategic
management should be under the preview, control
of and the provisions of corporate governance
provisions and practices of a company.
Corporate Governance deals with the manner the
providers of finance guarantee themselves of
getting a fair return on their investment. Corporate
Governance clearly distinguishes between the
owners and the managers. The managers are the
deciding authority. In modern corporations, the
functions/ tasks of owners and managers should be
clearly defined, rather, harmonizing.
Corporate Governance deals with determining
ways to take effective strategic decisions. It gives
ultimate authority and complete responsibility to
the Board of Directors. In today’s market- oriented
economy, the need for corporate governance
arises. Also, efficiency as well as globalization are
significant factors urging corporate governance.
Corporate Governance is essential to develop
added value to the stakeholders.
RESPONSIBILITIES OF BOARD OF
The Board of Directors is responsible for
supervising the successful management of
the organization’s business. It has the
authority and obligation to protect and
enhance the assets of the corporation in the
interests of all shareholders and the
company’s public mission.
The Board of Directors responsibilities
Oversight and approval on an ongoing
basis of the corporation’s corporate and
business strategies and monitoring their
Oversee the establishment and
implementation of effective corporate
Establish standards for management and
monitor performance; and
Approve procedures for strategy
implementation, for identifying and
managing risks and for insuring the
integrity of internal control and
management information systems.
The Quality of Board is a deciding factor for good
corporate governance. The compositing and
number are the determinants of quality. Even in a
small concern the efficiency of the Board of
Directors is a crucial factor for the survival in a
competitive environment. Board of Directors in
different companies contributes differently to the
corporate governance due to variations in goals
and duties, structure, composition, size of the
board, board leadership and board committees.
Corporate governance has wide ramifications and
extends beyond good corporate performance and
financial propriety. The complexity of corporate
governance arises from two main reasons. First in
most countries there is no separation between
ownership and management control of
organization. The second is the increasing
tendency to make organization more visibly
accountable not only to owners(shareholders) but
also to other stakeholders groups.
In the case of the first issue, it is imperative to
distinguish the nature of the two basic components
of governance in terms of, (a) Policy making and
overnight responsibilities of the board of directors
and (b) the executive and implementation
responsibilities of corporate management.
The second issue is to make organizations more
visibly accountable and the demand for more
transparency and accountability on the part of