Page 13 - DMGT503_DMGT301_CORPORATE GOVERNANCE AND ETHICS

Corporate Governance and Ethics
Notes
6 LOVELY PROFESSIONAL UNIVERSITY
1.1.4 Participants to Corporate Governance
Corporate governance is concerned with the governing or regulatory body (e.g. the SEBI), the
CEO, the board of directors and management. Other stakeholders who take part include suppliers,
employees, creditors, customers, and the community at large.
Shareholders delegate decision rights to the managers. Managers are expected to act in the
interest of shareholders. This results in the loss of effective control by shareholders over
managerial decisions. Thus, a system of corporate governance controls is implemented to assist
in aligning the incentives of the managers with those of the shareholders in order to limit self-
satisfying opportunities for managers.
The board of directors plays a key role in corporate governance. It is their responsibility to
endorse the organisation’s strategy, develop directional policy, appoint, supervise and
remunerate senior executives and to ensure accountability of the organisation to its owners and
authorities.
A key factor in an individual’s decision to participate in an organisation (e.g. through providing
financial capital or expertise or labour) is trust that they will receive a fair share of the
organisational returns. If somebody receives more than their fair return (e.g. exorbitant executive
remuneration), then the participants may choose not to continue participating, potentially leading
to an organisational collapse (e.g. shareholders withdrawing their capital). Corporate governance
is the key mechanism through which this trust is maintained across all stakeholders.
Task Pick a few companies and find out the relationship between profit and
corporate governance.
1.1.5 Importance and Benefits of Corporate Governance
Policy makers, practitioners and theorists have adopted the general stance that corporate
governance reform is worth pursuing, supporting such initiatives as splitting the role of chairman/
chief executive, introducing non-executive directors to boards, curbing excessive executive
performance-related remuneration, improving institutional investor relations, increasing the
quality and quantity of corporate disclosure, inter alia. However, is there really evidence to
support these initiatives? Do they really improve the effectiveness of corporations and their
accountability? There are certainly those who are opposed to the ongoing process of corporate
governance reform. Many company directors oppose the loss of individual decision-making
power, which comes from the presence of non-executive directors and independent directors on
their boards. They refute the growing pressure to communicate their strategies and policies to
their primary institutional investors. They consider that the many initiatives aimed at ‘improving’
corporate governance in UK have simply slowed down decision-making and added an
unnecessary level of the bureaucracy and red tape The Cadbury Report emphasized the
importance of avoiding excessive control and recognized that no system of control can completely
eliminate the risk of fraud (as in the case of Maxwell) without hindering companies’ ability to
compete in a free market. This is an important point, because human nature cannot be altered
through regulation, checks and balances. Nevertheless, there is growing perception in the
financial markets that good corporate governance is associated with prosperous companies.
Institutional investment community considered both company directors and institutional
investors welcomed corporate governance reform, viewing the reform process as a ‘help rather
than a hindrance’. Specifically, towards corporate governance reform.