Page 181 - DCOM106_COMPANY_LAW

Company Law

Notes includes the relationships among the many players involved (the stakeholders) and the corporate
goals. The principal players include the shareholders, management, and the board of directors.
Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators,
the environment and the community at large.
‘Corporate governance’ is a term that refers to the set of processes, customs, policies, laws and
institutions affecting the way a corporation is directed, administered or controlled. The term
may also describe the company’s compliance with applicable codes (corporate governance
guidelines), its investment technique based on active ownership (as in corporate governance
funds) or a field in economics, which studies the many issues arising from the separation of
ownership and control.
Corporate governance is also inclusive of the relationships of the stakeholders, and the goals for
which the corporation is governed. Corporate governance is an international business issue.
In the US, corporate governance became a high profile issue as a result of corporate scandals and
business failures, such as Enron and WorldCom. However, internationally, similar scandals
have made corporate governance an issue that all organizations have made a business priority.
A key component of corporate governance is accountability, to shareholders, customers,
employees and others. Corporations must not only comply with federal regulations and exercise
fiscal responsibility but governance must extend to ethical responsibilities as well. In its simplest
view, corporations should seek to comply with codes to the overall good of all constituents.
Corporate governance is used to monitor whether outcomes are in accordance with plans; and
to motivate the organization to be more fully informed in order to maintain or alter
organizational activity. Primarily though, corporate governance is the mechanism by which
individuals are motivated to align their actual behaviors with the overall corporate good (i.e.
maximum aggregate value generated by the organization and shared fairly amongst all
participants).
Corporate governance in the broadest sense, defines the operating rules of a company. Those
rules will encompass the laws of the land, fiduciary or economic responsibility, ethical behavior,
fraud prevention, risk mitigation and in general good corporate citizenry. Everyone in a
corporation from the boardroom to the front line has a role in corporate governance.

11.1.1 Need of Corporate Governance

The success of modern enterprises depends on the adoption and implementation of good
management practices to protect the interests of stakeholders. Sound corporate governance
practices help companies to improve their performance and attract investment while enabling
them to realize their corporate objectives, protect shareholder rights, meet legal requirements,
and demonstrate to a wider public how they are conducting their business. These practices have
become critical to worldwide efforts to stabilize and strengthen global capital markets and
protect investors.

Good corporate governance helps an organisation to achieve its outcomes and obligations
through sound planning and risk management. It provides a means to assist in decision making
and to improve accountability. It also helps to provide a framework for establishing responsibility
to the organisation’s members, the people served by the organisation and other stakeholders.

11.1.2 Features of Good Corporate Governance

There are some key features of good governance that you need to consider when assessing the
governance of your organisation. These features should be central to an organisation’s corporate
governance framework and should be included in governance related documentation which

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