Page 9 - DMGT503_DMGT301_CORPORATE GOVERNANCE AND ETHICS

Corporate Governance and Ethics
Notes
2 LOVELY PROFESSIONAL UNIVERSITY
"Capitalism with integrity outside the government is the only way forward to create jobs and
solve the problem of poverty. We, the business leaders are the evangelists of capitalism with
integrity. If the masses have to accept this we have to become credible and trustworthy. Thus we
have to embrace the finest principles of corporate governance and walk and the talk." (Narayan
Murthy)
Corporate governance has in recent years succeeded in attracting a good deal of public interest
because of its apparent importance for the economic health of corporations and society in
general. However, the concept of corporate governance is poorly defined because it potentially
covers a large number of distinct economic phenomena. As a result, different individuals have
come up with different definitions that basically reflect their special interest in the field. It is
hard to see that this 'disorder' will be any different in the future so the best way to define the
concept is perhaps to list a few of the different definitions.
1.1 Corporate Governance: An Overview
1.1.1 Definition of Corporate Governance
Corporate governance comprehends the framework of rules, relationships, systems and
processes within and by which fiduciary authority is exercised and controlled in corporations.
Relevant rules include applicable laws of the land as well as internal rules of a corporation.
Relationships include those between all related parties, the most important of which are the
owners, managers, directors of the board (when such entity exists), regulatory authorities and to
a lesser extent, employees and the community at large. Systems and processes deal with matters
such as delegation of authority, performance measures, assurance mechanisms, reporting
requirements and accountabilities.
Standard and Poors defined corporate governance as “the way in which a company organizes
and manages itself to ensure that all financial stakeholders receive their fair share of a company’s
earnings and assets” is increasingly a major factor in the investment decision-making process.
Poor corporate governance is often cited as one of the main reasons why investors are reluctant,
or unwilling, to invest in companies in certain markets.
Corporate Governance concerns with the exercise of power in corporate entities. The OECD
provides a functional definition of corporate governance as:
“Corporate Governance is the system by which business corporations are directed and controlled. The
corporate governance structure specifies the distribution of rights and responsibilities among different
participants in the corporation, such as the board, managers, shareholders and other stakeholders, and spells
out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the
structure through which the company objectives are set, and the means of attaining those objectives and
monitoring performance.”
The report of SEBI Committee on Corporate Governance gives the following definition of
corporate governance.
“Corporate governance is the acceptance by management, of the inalienable rights of shareholders as the
true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about
commitment to values, about ethical business conduct and about making a distinction between personal and
corporate funds in the management of a company”.
The simplest definitions, is given by a Cadbury Report (UK). ‘Corporate Governance is the
system by which businesses are directed and controlled’.