Page 10 - DMGT503_DMGT301_CORPORATE GOVERNANCE AND ETHICS

Unit 1: Understanding Corporate Governance

The Cadbury Committee said, “The primary level is the company’s responsibility to meet its Notes
material obligations to shareholders, employees, customer, suppliers, creditors, to pay its taxes
and to meet its statutory duties. The next level of responsibility is the direct result of actions of
companies in carrying out their primary task including making the most of the community’s
human resources and avoiding damage to the environment. Beyond these two levels, there is a
much less well-defined area of responsibility, which involves in the interaction between business
and society in a wider sense.”
The ongoing nature of corporate governance indicates by the definition of the Commission on
Global Governance (1995), ‘A continuing process through which conflicting or diverse interests
may be accommodated and co-operative action may be taken’.

1.1.2 Need of Corporate Governance

A corporation is a congregation of various stakeholders, namely customers, employees,
investors, vendor partners, government and society. A corporation should be fair and transparent
to its stakeholders in all its transactions. This has become imperative in today’s globalized
business world where corporations need to access global pools of capital, need to attract and
retain the best human capital from various parts of the world, need to partner with vendors on
mega collaborations and need to live in harmony with the community. Unless a corporation
embraces and demonstrates ethical conduct, it will not be able to succeed. Corporate governance
is about ethical conduct in business. Ethics is concerned with the code of values and principles
that enable a person to choose between right and wrong and, therefore, select from alternative
courses of action. Further, ethical dilemmas arise from conflicting interests of the parties involved.
In this regard, managers make decisions based on a set of principles influenced by the values,
context and culture of the organization. Ethical leadership is good for business as the organization
is seen to conduct its business in line with the expectations of all stakeholders.
Corporate governance is beyond the realm of law. It stems from the culture and mindset of
management and cannot be regulated by legislation alone. Corporate governance deals with
conducting the affairs of a company such that there is fairness to all stakeholders and that its
actions benefit the greatest number of stakeholders. It is about openness, integrity and
accountability. What legislation can and should do is to lay down a common framework – the
“form” to ensure standards. The “substance” will ultimately determine the credibility and
integrity of the process. Substance is inexorably linked to the mindset and ethical standards of
management. Corporations need to recognize that their growth requires the cooperation of all
the stakeholders; and such cooperation is enhanced by the corporation adhering to the best
corporate governance practices. In this regard, the management needs to act as trustees of the
shareholders at large and prevent asymmetry of benefits between various sections of
shareholders, especially between the owner-managers and the rest of the shareholders.

Notes Corporate governance is a key element in improving the economic efficiency of a
firm. Good corporate governance also helps ensure that corporations take into account the
interests of a wide range of constituencies, as well as of the communities within which
they operate. Further, it ensures that their boards are accountable to the shareholders.
This, in turn, helps assure that corporations operate for the benefit of society as a whole.
While large profits can be made taking advantage of the asymmetry between stakeholders
in the short-run, balancing the interests of all stakeholders alone will ensure survival and
growth in the long-run. This includes, for instance, taking into account societal concerns
about labor and the environment.

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