Corporate governance has been an important issue in the management and operation of corporate organizations these days. Corporate governance is a set of processes, customs, policies, and laws that affect the way a company is directed, administered, and controlled. In finance, we focus on maximizing the value of the corporation and shareholder wealth. Further, we should take into account the welfare of the corporate stakeholders in general while emphasizing on value maximization goal. All corporate organizations have multiple stakeholders whose needs must be considered to achieve sustainable success. Corporate governance thus involves balancing the interests of the many stakeholders in a corporation including its shareholders, management, customers, suppliers, financiers, government, and the community as a whole.
The board of directors and the concerned committees must follow the principles of corporate governance for the benefit of corporate stakeholders. Good corporate governance balances individual and societal goals as well as economic and social goals. Since it provides the framework for attaining a company’s objectives, and it encompasses practically every sphere of management— from action plans and internal controls to performance measurement and corporate disclosure.
Corporate governance became a pressing issue following the introducåon of the Sarbanes-Oxley Act, 2002 in the U.S.A. which took effect in November 2004. This act was brought into effect in response to the financial scandals involving companies such as Enron, World comes, Tycom, and Adelphia to restore public confidence in companies. Today, most corporations strive to have a high level of corporate governance. It is not enough for a corporation to merely be profitable; it also needs to demonstrate good corporate citizenship through environmental awareness, ethical behavior, and sound corporate governance practices.
There are three generally accepted fundamental values of good governance— accountability, openness, and probity. In the context of corporate governance, these values call for accountability to shareholders, honest dealing within and outside the board, and transparency of risk assessment and decision-making process to the shareholders. The board of directors is elected by shareholders and thus is responsiblé to enhance the shareholders’ interest. The directors have to frame appropriate policies and monitor the performance of management in implementing the policies and are accountable to shareholders.
One basic issue concerning corporate governance is the board structure. It is related to have or not having independent directors on the board. It is generally believed that sufficient independent directors in the board ensure a strong internal control system. For this, the independent directors must have adequate information to make good decisions, the ability to put key issues on the agenda, and adequate time to deal with the central issues they confront.
The issue of honest dealing within the board is concerned with mutual confidence among directors in the board. There should be a clear understanding among the directors that nobody shall act for personal gain. The board should have a strict code of conduct communicated to and understood by all. Similarly, the issue of honest dealing outside the board is concerned with obeying rules and regulations that make the board transparent to outside stakeholders.
There should be adequate transparency to shareholders regarding risk assessment and the decision-making process. While making decisions, the board requires having adequate information, idea generation, and assessment of risks including strategic thinking, critical questioning, and review. It also requires a value test to ensure whether the decisions will be in accordance with the value systems adopted by a corporation. Management should be personally responsible for the accuracy of financial statements and unethical acts that harm the interest of the stakeholders.