Page 11 - DMGT503_DMGT301_CORPORATE GOVERNANCE AND ETHICS

Corporate Governance and Ethics
Notes
4 LOVELY PROFESSIONAL UNIVERSITY
1.1.3 Scope of Corporate Governance
Corporate governance covers the following functional areas of governance:
1. Preparation of company’s financial statements: Financial disclosure is a very important
and critical component of corporate governance. The company should implement
procedures to independently verify and safeguard the integrity of the company’s financial
reporting. Disclosure of material matters concerning the organization should be timely
and balanced to ensure that all investors have access to clear, factual information.
2. Internal controls and the independence of entity’s auditors: Internal control is implemented
by the board of directors, audit committee, management, and other personnel to provide
assurance of the company achieving its objectives related to reliable financial reporting,
operating efficiency, and compliance with laws and regulations. Internal auditors, who
are given responsibility of testing the design and implementing the internal control
procedures and the reliability of its financial reporting, should be allowed to work in an
independent environment.
3. Review of compensation arrangements for chief executive officer and other senior executives:
Performance-based remuneration is designed to relate some proportion of salary to
individual performance. It may be in the form of cash or non-cash payments such as shares
and share options, superannuation or other benefits. Such incentive schemes, however,
are reactive in the sense that they provide no mechanism for preventing mistakes or
opportunistic behaviour, and can elicit myopic behaviour.
4. The way in which individuals are nominated for the positions on the board: The Board of
Directors have the power to hire, fire and compensate the top management. The owners of
a business who have decision-making authority, voting authority, and specific
responsibilities, which in each case is separate and distinct from the authority, and
responsibilities of owners and managers of the business entity.
5. The resources made available to directors in carrying out their duties: The duties of the
directors are the fiduciary duties similar to those of an agent or trustee. They are entrusted
with adequate power to control the activities of the company.
6. Oversight and management of risk: It is important for the company to be fully aware of
the risks facing the business and the shareholders should know that how the company is
going to tackle the risks. Similarly the company should also be aware about the
opportunities lying ahead.
Caselet Should Corporate Governance be Voluntary
or Mandatory
oday no one argues against the need for a system of good corporate governance to
attract capital to the corporate sector. Regulators, which have the responsibility to
Tprotect the interest of shareholders, continuously endeavour to improve the standard
of corporate governance. There is a trend towards the convergence of the Anglo-Saxon
corporate governance model. The corporate governance structure, which requires a
balanced board of directors with adequate number of independent directors, is widely
accepted. It is also widely accepted that the role of the board of directors is to protect the
Contd...