Corporate Governance: Introduction and Impact

Kalpana Borjha| Kalinga University| 11th June 2020  

Introduction

There are sets of rules and regulations to maintain transparency in the working of a corporation so that the management does not take undue advantages and misuse their rights, abiding by such a set of rules is called Corporate Governance. In other words, a system for the good functioning of a company or corporation is known as Corporate Governance. It includes institutional as well as social aspects in the Corporation.

What is Corporate Governance?

Corporate governance is the way of administration and operation of corporate with the help of proper mechanisms (customs, policies, and laws) and processes. The structure of corporate governance lays out rules and regulations to identify the rights and duties of different participants and balance their role in the Corporation. Such participant includes the Chairpersons, the Board of Directors, CEOs, Auditors, Shareholders, Stakeholders, Creditor, Managers, etc.

The ICSI (Institute of Company Secretaries of India) defines Corporate Governance as “Corporate Governance is the application of best Management practices, compliances of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders.”

Components of Corporate Governance

Corporate Governance extends beyond the Corporate Laws. Major of Corporate Governance are:-

• Accountability: Accountability means liability or responsibility of the Chairman, the Board of Directors, and the Chief Executive for utilization of the Company’s resources in the interest of the Company and its members.
• Transparency: Transparency means timely disclosure of adequate and accurate information to the stakeholders and shareholders which are necessary and relevant to the operations of the Corporation. The Companies Act has a provision regarding the transparency of the corporations, which states that a company needs to disclose the corporate affairs, day to day operations, and other relevant information on a quarterly, half-yearly, or annual basis in the form of a report.
• Independence: The decisions taken by the Chairman, Board of Directors, CEOs, etc, must be free from the influence of others and non-partial to take prudent business decisions in the interest of the Corporation.
• Fairness: Fairness means uniform and equal treatment to all the employees, stakeholders, and shareholders and not based on their percentage of shares in the company.

Impact of Corporate Governance

Corporate government impacts not only the business but the whole financial market. Following are some major impacts of Corporate Governance:–

• Economic Impact: Poor governance in corporations may lead to bad business decisions, which have a direct impact on the economic stability of the business and the company cannot meet its financial obligations.
• Growth and development of business: Capital generation is easier when the value of corporate increases. Good corporate governance impacts the growth and development of business in a positive manner and with the growth of the business, people believe to invest and extend money on companies with secured infrastructure and financially stable.
• Public Perception: A company with effective corporate governance generates a good and responsible work environment whereas companies with no concern of governance may lead to public distrust as a result of an unhealthy work environment.
• Shareholder’s Confidence: Strong governance strategies cause the security of investment, increasing the shareholders’ confidence to invest large amounts of assets in the company, which means an increase in the stock value and when the stock value increases the overall value of the company increases.
• Preventing Corruption: Corporate governance results in full disclosure of required information and transparent working of the company which is efficient to compete with other companies and prevent scams and other such corrupt practices within the organization.
• Access to Global Market: Global investors are attracted to companies with a good governance structure to invest.  This leads to efficiency in the financial sector of the company.
• Companies with bad governance practices sometimes may not select a good auditor or do not cooperate with the auditors which may lead to balky financial reports.

Conclusion

Corporate governance strategies are one of the most essential features of a successful business. It directly impacts the reputation of the company and its growth. Good governance leads to the development of the company whereas bad governance may lead the company to obscure with time.