Corporate Governance – An Overview

Corporate Governance as a practice has been gaining importance ever since the economic turmoil caused by the bursting of the dot com bubble in 2002. Corporate Governance is basically a detailed disclosure of information and an account of an organization’s financial situation, performance, ownership and governance, relationship with shareholders and commitment to business ethics and values.

The relevance of corporate governance has increased several times since the concept was introduced. With the introduction of globalization and competition, managing shareholder expectations is no longer the mantra for success. The current economic crisis is often blamed at poor regulatory and check mechanisms for the business, which has led to ramifications which are far reaching both geographically and socially.

A corporation is created to address objectives which are much more than creating products and services, it has to serve the larger purpose of satisfying multilevel needs of the society. Healthy corporate governance practices are no longer the need of the law but have become essential for the very survival of the organizations, the current economic crisis has proven that beyond doubts.

The corporations have always faced the tug of war of protecting the interests of the shareholders (the legal owners) or the stakeholders which includes suppliers, creditors, government and communities.

It would be interesting to note that the definition of corporate governance changes in different cultural contexts, for e.g. let us study a definition provided by the Center of European Policy Studies or CEPS as it is called.

CEPS defines corporate governance as the whole system of rights, processes and controls established internally and externally over the management of the business entity with the objective of protecting the interests of the stakeholders. Contrasting to this, the Anglo American defines it with an emphasis on creating the shareholder value.

Let us also look at the definition provided by OECD or Organization for Economic Corporation and Development, which brings together different democratic governments which are committed to sustainable growth and improving the living standards of the communities.

OECD defines corporate governance as Corporate Governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants of the corporation such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance.

The biggest incident which shook the world and questioned the existing corporate governance practices was the Enron debacle in the USA. The doctored accounts which flouted all the established norms of the accountancy practices, false financial statements and the executives who pocketed millions of dollars by selling their share of stocks while laying-off the 20% of the organization’s workforce, painted a grim picture for the investors all across the world.

The fundamental question posed by the Enron crisis was the morality of corporate decisions, embezzlement of funds and the larger interest of all the stakeholders right from employees to society in general.

The disturbing aspect was the inability of the external agencies like auditors, credit rating agencies and security analysts to see the real picture. A more recent example is the involvement of Satyam Computers Services Ltd, a reputed software firm of India in multimillion dollar accounting fraud which ultimately led to a huge face loss for the entire Indian IT industry.

The involvement of the reputed external agency like PricewaterCoopers (PWC) in the scandal made the entire episode a nightmare for the regulatory bodies, the government and the employees of the organization.

The objective of the corporate governance is hence the prevention of such scams in the business which have a huge bearing not only on the immediate shareholders but also on the morale of the larger stakeholder groups.