Page 15 - DMGT503_DMGT301_CORPORATE GOVERNANCE AND ETHICS

Corporate Governance and Ethics
Notes
8 LOVELY PROFESSIONAL UNIVERSITY
1.1.7 OECD Parameters and Principles
The Organisation for Economic Cooperation and Development (OECD) laid down some
principles of corporate governance. Principles are intended to assist OECD and non-OECD
governments in their efforts to evaluate and improve the legal, institutional and regulatory
framework for corporate governance in their countries and to provide guidance and suggestions
for stock exchanges, investors, corporations, and other parties that have a role in the process of
developing good corporate governance.
Corporate governance is only part of the larger economic context in which firms operate that
includes, for example, macroeconomic policies and the degree of competition in product and
factor markets. The corporate governance framework also depends on the legal, regulatory, and
institutional environment. In addition, factors such as business ethics and corporate awareness
of the environmental and societal interests of the communities in which a company operates can
also have an impact on its reputation and its long-term success. While a multiplicity of factors
affect the governance and decision-making processes of firms, and are important to their long-
term success, the Principles focus on governance problems that result from the separation of
ownership and control. However, this is not simply an issue of the relationship between
shareholders and management, although that is indeed the central element. In some jurisdictions,
governance issues also arise from the power of certain controlling shareholders over minority
shareholders. In other countries, employees have important legal rights irrespective of their
ownership rights. The Principles therefore have to be complementary to a broader approach to
the operation of checks and balances.
1.1.8 Issues involved in Corporate Governance
Corporate governance involves the following issues:
Internal Control
The Board of Directors should maintain a sound system of internal control to safeguard the
investment of shareholders and the assets of the company, the board should conduct a review of
the effectiveness of internal controls.
Correct Preparation of Financial Statements
The Board of Directors should present a balanced and understandable assessment of the company's
position and future prospects. There should be a statement by the auditors about their reporting
responsibilities.
Compensation of CEO and other Directors
There should be a formal and transparent procedure for developing policy on executive
remuneration for CEO and other directors. No director should be in a position of deciding his or
her own remuneration. The Board of Directors should establish a remuneration committee of at
least three. This committee should have delegated responsibility for setting remuneration for
all executive directors and the chairman, including pension rights and any other compensation.
Nomination of Members of the Board of Directors
Appointments to the Board of Directors should be made on merit. Adequate care should be
taken to ensure that all the directors have enough time available to devote to the job. This
criterion is more important in the case of chairman. The appointments to the board should be
made in such a way so as to maintain an appropriate balance of skills and experience. There
should be a nomination committee, which should process the appointments for the board and
make recommendations. A majority of members of this nomination committee should be