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CORPOR

Corporate governance affairs with diligence, transp would maximize shareholder w processes, procedures, structu performance and stakeholder v

Good corporate governa policies which comprise perfo control by the board of dir qualified, non-executive and adequate timely disclosure o statutory duties.

Corporate governance is a multi-faceted subject. An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. A related but separate thread of discussions focuses on the impact of a corporate governance system in economic efficiency, with a strong emphasis on shareholders' welfare.

Definition Report of SEBI committee on Corporate Governance defines


corporate governance as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company. Corporate governance may be defined as 'an internal system encompassing policies, processes and people, which serves the needs of shareholders and other stakeholders, by directing and controlling management activities with good business savvy, objectivity, accountability and integrity. Sound corporate governance is reliant on external marketplace commitment and legislation, plus a healthy board culture which safeguards policies and processes'. Impact of Corporate Governance The positive effect of corporate governance on different stakeholders ultimately is a strengthened economy, and hence good corporate governance is a tool for socio-economic development.

Parties to corporate governance


Parties involved in corporate governance include the regulatory body (e.g. the Chief Executive Officer, the board of directors, management,shareholders and Auditors). Other stakeholders who take part include suppliers, employees, creditors, customers and the community at large. In corporations, the shareholder delegates decision rights to the manager to act in the principal's best interests. This separation of ownership

from control implies a loss of effective control by shareholders over managerial decisions. Partly as a result of this separation between the two parties, a system of corporate governance controls is implemented to assist in aligning the incentives of managers with those of shareholders. With the significant increase in equity holdings of investors, there has been an opportunity for a reversal of the separation of ownership and control problems because ownership is not so diffuse. A board of directors often plays a key role in corporate governance. It is their responsibility to endorse the organizations strategy, develop directional policy, appoint, supervise and remunerate senior executives and to ensure accountability of the organization to its owners and authorities. The All parties to corporate governance have an interest, whether direct or indirect, in the effective performance of the organization. Directors, workers and management receive salaries, benefits and reputation, while shareholders receive capital return. Customers receive goods and services; suppliers receive compensation for their goods or services.

SEBI Guidelines - Board of Directors


The Board of Directors constitute the top and strategic decision making body of a company. SEBI had constituted a committee for corporate governance under the charimanship of Sri. Kumar Mangalam Birla. The important recommendations of the committee are as follows:

1. The board of a company should have an optimum combination of executive and non-executive directors, with 50% of the board comprising the non-executive boards. 2. The board should clearly define the role of the management. 3. The board should set-up a remuneration committee to determine the policy specific remuneration packages for executive directors. 4. The qualified and independent audit committee should be set-up.

5. Shareholders to show greater degree of interest and involvement in the appointment of directors and the auditors. 6. The management must take disclosures to the board relating to all material, financial and commercial transactions. 7. Companies to provide consolidated statements in respect of all its subsidiaries in which they hold 51% or more of the share capital. 8. Board to set-p qualified and independent audit committee to enhance the credibility of financial disclosures and to promote transparency. Commonly accepted principles of corporate governance
include:

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 effectively communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings. Interests of other stakeholders: Organizations should recognize that they have legal and other obligations to all legitimate stakeholders. Role and responsibilities of the board: The board needs a range of skills and understanding to be able to deal with various business issues and have the ability to review and challenge management performance. Integrity and ethical behaviour: Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. Disclosure and transparency: Disclosure of matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.

Issues involving corporate governance principles include:


internal controls and internal auditors the independence of the entity's external auditors and the quality of their audits oversight and management of risk oversight of the preparation of the entity's financial statements review of the compensation arrangements for the chief executive officer and other senior executives the resources made available to directors in carrying out their duties the way in which individuals are nominated for positions on the board dividend policy

Internal corporate governance controls monitor activities and then take corrective action to accomplish organisational goals. Examples include:

Monitoring by the board of directors Internal control procedures and internal auditors Balance of power Remuneration

External corporate governance controls encompass the controls external stakeholders exercise over the organization. Examples include:

competition debt covenants demand for and assessment of performance information government regulations managerial labor market takeovers

Audit Committee: The appointment of the Audit committee is mandatory, and its a very powerful instrument of ensuring good governance in the financial matters. The Audit Committee should have independent directors as its members. The members should have experience in the areas of finance, taxation, company law etc., The functions of the Audit Committee inter alia include the following:

Overseeing the Companys financial reporting process and ensuring the correct, adequate and credible disclosure of financial statements. Reviewing with management, the annual financial statements before their submission to the Board with a special emphasis on accounting policies and practices, internal control requirements, compliance with the accounting standards and other legal requirements concerning financial statements. Recommending the appointment of statutory auditors. To review the observations of internal and statutory auditors about the findings during the audit of the company. Shareholders/Investors Grievance Committee As a part of corporate governance, companies should form a shareholders/Investors Grievance Committee under the Chairmanship of a non-executive independent director. The committee monitors investors grievances. The committee is responsible for attending to shareholders and investors grievances relating to transfer of shares and non-receipt of dividend. The company may appoint a Remuneration committee to decide the remuneration and other perks etc. of the CEO and other senior management officials as the Companies Act and other relevant provisions. Role of the accountant and Managers: Financial reporting is a crucial element necessary for the corporate governance system to function effectively. Accountants and auditors are the primary providers of information to capital market participants. The directors of the company should be entitled to expect that management prepare the financial information in compliance with statutory and ethical obligations, and rely on auditors' competence. Current accounting practice allows a degree of choice of method in determining the method of measurement, criteria for recognition, and even the definition of the accounting entity. The exercise of this choice to improve apparent performance (popularly known as creative accounting) imposes extra information costs on users. In the extreme, it can involve non-disclosure of information.

One area of concern is whether the accounting firm acts as both the independent auditor and management consultant to the firm they are auditing. This may result in a conflict of interest which places the integrity of financial reports in doubt due to client pressure to appease management. The power of the corporate client to initiate and terminate management consulting services and, more fundamentally, to select and dismiss accounting firms contradicts the concept of an independent auditor. Changes enacted in the United States in the form of the Sarbanes-Oxley Act (in response to the Enron situation as noted below) prohibit accounting firms from providing both auditing and management consulting services. Similar provisions are in place under clause 49 of SEBI Act in India. Moreover, good financial reporting is not a sufficient condition for the effectiveness of corporate governance if users don't process it, or if the informed user is unable to exercise a monitoring role due to high costs. (CSR), also known as corporate responsibility, corporate citizenship, responsible business, sustainable responsible business (SRB), or corporate social performance is a form of corporate self-regulation integrated into a business model. Ideally, CSR policy would function as a built-in, self-regulating mechanism whereby business would monitor and ensure its adherence to law, ethical standards, and international norms. Business would embrace responsibility for the impact of their activities on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere. Furthermore, business would proactively promote the public interest by encouraging community growth and development, and voluntarily eliminating practices that harm the public sphere, regardless of legality. Essentially, CSR is the deliberate inclusion of public interest into corporate decision-making, and the honoring of a triple bottom line: People, Planet, Profit.

Corporate social responsibility

The practice of CSR is subject to much debate and criticism. Proponents argue that there is a strong business case for CSR, in that corporations benefit in multiple ways by operating with a perspective broader and longer than their own immediate, short-term profits. Critics argue that CSR distracts from the fundamental economic role of businesses; others argue that it is nothing more than superficial window-dressing; others yet argue that it is an attempt to pre-empt the role of governments as a watchdog over powerful multinational corporations The concept social responsibility proposes that a private corporation has responsibilities to society that extend beyond making a profit. Strategic decisions often affect more than just the corporation. A decision to retrench by closing more plants and discontinuing product lines, for example, affects not only the firms workforce, but also the communities where the plants are located and the customers with no other sources of the discontinued products. Such situations raise questions of the appropriateness of certain missions, objectives and strategies of business corporations. Managers must be able to deal with these conflicting interests in an ethical manner to formulate a viable strategic plan. The major responsibilities of present day business are: Economic Responsibilities Legal Responsibilities Ethical Responsibilities Discretionary Responsibilities

1. Economic Responsibilities:

Economic responsibilities of a business organizations management are to produce goods and services of value to society so that the firm can repay its creditors and shareholders. 2. Legal Responsibilities: Legal responsibilities are defined by governments in laws that management is expected to obey. 3. Ethical Responsibilites: Ethical responsibilities of an organizations management are to follow the generally held beliefs about behavior in a society.

4. Discretionary responsibilities: Discretionary responsibilities are obligations a corporation assumes.

the

purely

voluntary

Corporate Ethics Corporate ethics specify how an organization expects its employees to behave while on the job. Developing codes of ethics can be a useful way to promote ethical behavior, especially for people who are operating conventional level of moral development. Ethics is defined as the consensually accepted standards of behavior for an occupation, a trade, or a profession. A starting point for such a code of ethics is to consider the three basic approaches to ethical behavior. 1. Utlilitarian Approach This approach proposes that actions and plans should be judged by their consequences. 2. Individual rights approach: This approach proposes that human beings have certain fundamental rights that should be respected in all decisions. 3. Justice approach: This approach proposes that decision makers be equitable, fair and impartial in the distribution of costs and benefits to individuals and groups. Conclusion:
Corporate governance is the system by which business corporations are directed and controlled. It is a process or a set of systems and processes to ensure that a company is managed to suit the best interests of all. The stakeholders may be internal stakeholders (Promoters, members, workmen and executives) and external stakeholders (shareholders, customers, lenders,

dealers, vendors, bankers, financial institutions, community, government and regulators). Corporate governance is concerned with the establishment of a system whereby the directors are entrusted with responsibilities and duties in relation too the direction of corporate affairs. It is concerned with the morals, ethics, values, parameters, conduct and behavior of the company and its management. Corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation and spells out the rules and procedures for making decisions on corporate affairs to achieve the company objectives and in monitoring its performance. --------

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