Page 171 - DMGT401Business Environment

Business Environment

Notes

Notes Corporate Governance Performance of the Firm

In its 'Global Investor Opinion Survey' of over 200 institutional investors first undertaken
in 2000 and updated in 2002, McKinsey & Co. found that 80% of the respondents would pay
a premium for well-governed companies. They defined a well-governed company as one
that had mostly external directors with no management ties, undertook formal evaluation
of its directors, and was responsive to investors' requests for information on governance
issues. The size of the premium varied by market, from 11% for Canadian companies, to
around 40% for companies where the regulatory backdrop was least certain. The Basel
Committee has issued several papers on corporate governance, in which the importance
of corporate governance is emphasised. These papers suggested the following practices to
avoid governance problems in banking organizations, and are applicable to all
organizations:

1. Establishing strategic objectives, setting up corporate values, and communicating
them across the banking organization.
2. Setting up and enforcing a clear line of authority and responsibility.
3. Ensuring that the board members are well qualified and not subject to pressure.

4. Ensuring that the board has a clear understanding of their role in corporate
governance.
5. Ensuring that there is appropriate overseeing by the senior management.

6. Effectively utilising the work done by internal and external auditors, in recognition
of the important control function they provide.
7. Ensuring that the compensation approaches are consistent with the organization's
ethical values, objectives, strategy, and control environment.

7.6.4 Corporate Governance in India

In India, corporate governance has matured well and today we have the privilege of the New
York Stock Exchange citing Infosys Technologies, an Indian company, as a role model regarding
disclosure of information to shareholders. Good corporate governance is good business because
it inspires investors confidence, which is essential in attracting capital. In India corporate
governance is not a new concept. The roots of Indian working ethos lie in values. India has never
judged an individual's esteem according to his wealth and power, but has always valued his
virtue, learning and character. Even Kautilya's Arthashashtra holds opinion on corporate
governance, wherein he states:

"Only if a king himself is energetically active, do his officers follow him energetically. If he is
sluggish, they too remain sluggish. And besides, they eat up his works. His enemies thereby
easily overpower him. Therefore, he should dedicate himself energetically to activity. The vow
of the king is energetic activity, his sacrifice is constituted of the discharge of his own
administrative duties; his sacrificial fee (to the officiating priest) is his impartiality of attitude
towards all; his sacrificial consecration is his anointment as king". (Arthshastra 8.2)
It is thus put forth quite obvious that Indians used to believe in high moral and social standards.
In modern times Mahatma Gandhi gave the principle of "Trusteeship" which can be an ideal of
corporate governance. Gandhi said that an entrepreneur is a trustee of the organization and of
its employees and he should look after the organization and employees as their trustees.

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