1. Definition of 'Corporate Governance'
The system of rules, practices and processes by which a company is directed and controlled.
Corporate governance essentially involves balancing the interests of the many stakeholders in a
company - these include its shareholders, management, customers, suppliers, financiers,
government and the community. Since corporate governance also provides the framework for
attaining a company's objectives, it encompasses practically every sphere of management, from
action plans and internal controls to performance measurement and corporate disclosure.
Investopedia explains 'Corporate Governance'
Corporate governance became a pressing issue following the 1992 introduction of the Sarbanes-
Oxley Act in the U.S., which was ushered in to restore public confidence in companies and
markets after accounting fraud bankrupted high-profile companies such as Enron and
WorldCom.
Most companies strive to have a high level of corporate governance. These days, it is not enough
for a company to merely be profitable; it also needs to demonstrate good corporate citizenship
through environmental awareness, ethical behavior and sound corporate governance practices.
modelled as a governance structure acting through the mechanisms of contract.[12][8]
Here
corporate governance may include its relation to corporate finance.[13]
What is corporate governance?
Lisa Mary Thomson, ET Bureau Jan 18, 2009, 12.19am IST
Corporate governance refers to the set of systems, principles and processes by which a company
is governed. They provide the guidelines as to how the company can be directed or controlled
such that it can fulfil its goals and objectives in a manner that adds to the value of the company
and is also beneficial for all stakeholders in the long term. Stakeholders in this case would
include everyone ranging from the board of directors, management, shareholders to customers,
employees and society. The management of the company hence assumes the role of a trustee for
all the others.
Seven Characteristics of Corporate Governance
Submitted by Kamal Wickramanayake on March 6, 2007 - 07:00
IT Architecture

2. Organizational Culture
Though the origin could not be located correctly, the characteristics below seem to have
appeared in CLSA Emerging Markets 2001 and gained more popularity after their appearance in
what is known as the King Report on Corporate Governance for South Africa 2002:
1. Discipline
Corporate discipline is a commitment by a company’s senior management to adhere to behavior
that is universally recognized and accepted to be correct and proper. This encompasses a
company’s awareness of, and commitment to, the underlying principles of good governance,
particularly at senior management level.
“All involved parties will have a commitment to adhere to procedures, processes, and
authority structures established by the organization.”
2. Transparency
Transparency is the ease with which an outsider is able to make meaningful analysis of a
company’s actions, its economic fundamentals and the non-financial aspects pertinent to that
business. This is a measure of how good management is at making necessary information
available in a candid, accurate and timely manner – not only the audit data but also general
reports and press releases. It reflects whether or not investors obtain a true picture of what is
happening inside the company.
“All actions implemented and their decision support will be available for inspection by authorized
organization and provider parties.”
3. Independence
Independence is the extent to which mechanisms have been put in place to minimize or avoid
potential conflicts of interest that may exist, such as dominance by a strong chief executive or
large share owner. These mechanisms range from the composition of the board, to
appointments to committees of the board, and external parties such as the auditors. The
decisions made, and internal processes established, should be objective and not allow for undue
influences.
“All processes, decision-making, and mechanisms used will be established so as to minimize or
avoid potential conflicts of interest.”
4. Accountability
Individuals or groups in a company, who make decisions and take actions on specific issues,
need to be accountable for their decisions and actions. Mechanisms must exist and be effective
to allow for accountability. These provide investors with the means to query and assess the
actions of the board and its committees.
“Identifiable groups within the organization - e.g., governance boards who take actions or make
decisions - are authorized and accountable for their actions.”
5. Responsibility
With regard to management, responsibility pertains to behavior that allows for corrective action
and for penalizing mismanagement. Responsible management would, when necessary, put in
place what it would take to set the company on the right path. While the board is accountable

3. 6. to the company, it must act responsively to and with responsibility towards all stakeholders of
the company.
“Each contracted party is required to act responsibly to the organization and its stakeholders.”
7. Fairness
The systems that exist within the company must be balanced in taking into account all those
that have an interest in the company and its future. The rights of various groups have to be
acknowledged and respected. For example, minority share owner interests must receive equal
consideration to those of the dominant share owner(s).
“All decisions taken, processes used, and their implementation will not be allowed to create
unfair advantage to any one particular party.”
8. Social responsibility
A well-managed company will be aware of, and respond to, social issues, placing a high priority
on ethical standards. A good corporate citizen is increasingly seen as one that is non-
discriminatory, non-exploitative, and responsible with regard to environmental and human
rights issues. A company is likely to experience indirect economic benefits such as improved
productivity and corporate reputation by taking those factors into consideration.
Understanding the Concept of Governance
The concept of "governance" is not new. However, it means different things to different people,
therefore we have to get our focus right. The actual meaning of the concept depends on the level
of governance we are talking about, the goals to be achieved and the approach being followed.
The concept has been around in both political and academic discourse for a long time, referring
in a generic sense to the task of running a government, or any other appropriate entity for that
matter. In this regard the general definition provided by Webster's Third New International
Dictionary (1986:982) is of some assistance, indicating only that governance is a synonym for
government, or "the act or process of governing, specifically authoritative direction and control".
This interpretation specifically focuses on the effectiveness of the executive branch of
government.
The working definition used by the British Council, however, emphasises that "governance" is a
broader notion than government (and for that matter also related concepts like the state, good
government and regime), and goes on to state: "Governance involves interaction between the
formal institutions and those in civil society. Governance refers to a process whereby elements in
society wield power, authority and influence and enact policies and decisions concerning public
life and social upliftment."
"Governance", therefore, not only encompasses but transcends the collective meaning of related
concepts like the state, government, regime and good government. Many of the elements and
principles underlying "good government" have become an integral part of the meaning of
"governance". John Healey and Mark Robinson1 define "good government" as follows: "It
implies a high level of organisational effectiveness in relation to policy-formulation and the
policies actually pursued, especially in the conduct of economic policy and its contribution to

4. growth, stability and popular welfare. Good government also implies accountability,
transparency, participation, openness and the rule of law. It does not necessarily presuppose a
value judgement, for example, a healthy respect for civil and political liberties, although good
government tends to be a prerequisite for political legitimacy".
We can apply our minds to the definition of governance provided by the World Bank in
Governance: The World Banks Experience, as it has special relevance for the developing world:
"Good governance is epitomized by predictable, open and enlightened policy-making, a
bureaucracy imbued with a professional ethos acting in furtherance of the public good, the rule
of law, transparent processes, and a strong civil society participating in public affairs. Poor
governance (on the other hand) is characterized by arbitrary policy making, unaccountable
bureaucracies, unenforced or unjust legal systems, the abuse of executive power, a civil society
unengaged in public life, and widespread corruption."
The World Bank's focus on governance reflects the worldwide thrust toward political and
economic liberalisation. Such a governance approach highlights issues of greater state
responsiveness and accountability, and the impact of these factors on political stability and
economic development. In its 1989 report, From Crisis to Sustainable Growth, the World Bank
expressed this notion as follows:
"Efforts to create an enabling environment and to build capacities will be wasted if the political
context is not favourable. Ultimately, better governance requires political renewal. This means a
concerted attack on corruption from the highest to lowest level. This can be done by setting a
good example, by strengthening accountability, by encouraging public debate, and by nurturing a
free press. It also means ... fostering grassroots and non-governmental organisations such as
farmers' associations, co-operatives, and women's groups".
Apart from the World Bank's emphasis on governance, it is also necessary to refer to academic
literature on governance, which mostly originates from scholars working with international
development and donor agencies. The majority of these scholars has concentrated almost
exclusively on the issue of political legitimacy, which is the dependent variable produced by
effective governance. Governance, as defined here, is "the conscious management of regime
structures, with a view to enhancing the public realm".
The contribution of Goran Hyden to bring greater clarity to the concept of governance needs
special attention. He elevates governance to an "umbrella concept to define an approach to
comparative politics", an approach that fills analytical gaps left by others. Using a governance
approach, he emphasises "the creative potential of politics, especially with the ability of leaders
to rise above the existing structure of the ordinary, to change the rules of the game and to inspire
others to partake in efforts to move society forward in new and productive directions".
His views boil down to the following:
Governance is a conceptual approach that, when fully elaborated, can frame a
comparative analysis of macro-politics.

5. Governance concerns "big" questions of a "constitutional" nature that establish
the rules of political conduct.
Governance involves creative intervention by political actors to change structures
that inhibit the expression of human potential.
Governance is a rational concept, emphasising the nature of interactions between
state and social actors, and among social actors themselves.
Governance refers to particular types of relationships among political actors: that
is, those which are socially sanctioned rather than arbitrary.
To conclude, it is clear that the concept of governance has over the years gained momentum and
a wider meaning. Apart from being an instrument of public affairs management, or a gauge of
political development, governance has become a useful mechanism to enhance the legitimacy of
the public realm. It has also become an analytical framework or approach to comparative
politics.
Importance of Corporate Governance
The need, significance or importance of corporate governance is listed below.

6. 1. Changing Ownership Structure : In recent years, the ownership structure of companies
has changed a lot. Public financial institutions, mutual funds, etc. are the single largest
shareholder in most of the large companies. So, they have effective control on the
management of the companies. They force the management to use corporate governance.
That is, they put pressure on the management to become more efficient, transparent,
accountable, etc. The also ask the management to make consumer-friendly policies, to
protect all social groups and to protect the environment. So, the changing ownership
structure has resulted in corporate governance.
2. Importance of Social Responsibility : Today, social responsibility is given a lot of
importance. The Board of Directors have to protect the rights of the customers,
employees, shareholders, suppliers, local communities, etc. This is possible only if they
use corporate governance.
3. Growing Number of Scams : In recent years, many scams, frauds and corrupt practices
have taken place. Misuse and misappropriation of public money are happening everyday
in India and worldwide. It is happening in the stock market, banks, financial institutions,
companies and government offices. In order to avoid these scams and financial
irregularities, many companies have started corporate governance.
4. Indifference on the part of Shareholders : In general, shareholders are inactive in the
management of their companies. They only attend the Annual general meeting. Postal
ballot is still absent in India. Proxies are not allowed to speak in the meetings.
Shareholders associations are not strong. Therefore, directors misuse their power for their
own benefits. So, there is a need for corporate governance to protect all the stakeholders
of the company.
5. Globalisation : Today most big companies are selling their goods in the global market.
So, they have to attract foreign investor and foreign customers. They also have to follow
foreign rules and regulations. All this requires corporate governance. Without Corporate
governance, it is impossible to enter, survive and succeed the global market.
6. Takeovers and Mergers : Today, there are many takeovers and mergers in the business
world. Corporate governance is required to protect the interest of all the parties during
takeovers and mergers.
7. SEBI : SEBI has made corporate governance compulsory for certain companies. This is
done to protect the interest of the investors and other stakeholders.
Seven Characteristics of Good Corporate Governance
Clear Strategy
Good corporate governance starts with a clear strategy for the organization. For example, a
furniture company’s management team might research the market to identify a profitable niche,
create a product line to meet the needs of that target market and then advertise its wares with a
marketing campaign that reaches those consumers directly. At each stage, knowing the overall
strategy helps the company’s workforce stay focused on the organizational mission: meeting the
needs of the consumers in that target market.

7. Effective Risk Management
Even if your company implements smart policies, competitors might steal your customers,
unexpected disasters might cripple your operations and economy fluctuations might erode the
buying capabilities of your target market. You can’t avoid risk, so it’s vital to implement
effective strategic risk management. For example, a company’s management might decide to
diversify operations so the business can count on revenue from several different markets, rather
than depend on just one.
Discipline
Corporate policies are only as effective as their implementation. A company’s management can
spend years developing a strategy to push into new markets, but if it can’t mobilize its workforce
to implement the strategy, the initiative will fail. Good corporate governance requires having the
discipline and commitment to implement policies, resolutions and strategies.
Fairness
Fairness must always be a high priority for management. For example, managers must push their
employees to be their best, but they should also recognize that a heavy workload can have
negative long-term effects, such as low morale and high turnover. Companies also must be fair to
their customers, both for ethical and public-relations reasons. Treating customers unfairly,
whatever the short-term benefits, always hurts a company’s long-term prospects.
Transparency
Managers sometimes keep their own counsel, limiting the information that filters down to
employees. But corporate transparency helps unify an organization: When employees understand
management’s strategies and are allowed to monitor the company’s financial performance, they
understand their roles within the company. Transparency is also important to the public, who
tend not to trust secretive corporations.
Social Responsibility
Social responsibility at the corporate level is increasingly a topic of concern. Consumers expect
companies to be good community members, for example, by initiating recycling efforts and
reducing waste and pollution. Good corporate governance identifies ways to improve company
practices and also promotes social good by reinvesting in the local community.
Self-Evaluation
Mistakes will be made, no matter how well you manage your company. The key is to perform
regular self-evaluations to identify and mitigate brewing problems. Employee and customer

8. surveys, for example, can supply vital feedback about the effectiveness of your current policies.
Hiring outside consultants to analyze your operations also can help identify ways to improve
your company’s efficiency and performance.
The Significance of Corporate Governance
Governance has proved an issue since people began to organise themselves for a common
purpose. How to ensure the power of organisation is harnessed for the agreed purpose, rather
than diverted to some other purpose, is a constant theme. The institutions of governance provide
a framework within which the social and economic life of countries is conducted. Corporate
governance concerns the exercise of power in corporate entities. The OECD provides the most
authoritative functional definition of corporate governance:
"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."
However corporate governance has wider implications and is critical to economic and social well
being, firstly in providing the incentives and performance measures to achieve business success,
and secondly in providing the accountability and transparency to ensure the equitable distribution
of the resulting wealth. The significance of corporate governance for the stability and equity of
society is captured in the broader definition of the concept offered by Sir Adrian Cadbury
(2002): "Corporate governance is concerned with holding the balance between economic and
social goals and between individual and communal goals. The governance framework is there to
encourage the efficient use of resources and equally to require accountability for the stewardship
of those resources. The aim is to align as nearly as possible the interests of individuals,
corporations and society."
The current wave of reform of corporate governance commenced with the Cadbury Code of
Practice published by the London Stock Exchange in 1992; proceeded with an OECD inquiry in
1997-99, and the publication of OECD guidelines on corporate governance which have been
adopted in national codes by all of the industrial countries, and with the assistance of the World
Bank and Asian development bank, by many developing countries. The urgency of this
endeavour was increased by the Asian financial crisis of 1997-98 that revealed the danger of
systemic corporate governance failure. These codes have been reinforced by the influence of the
market through investment institutions, and national regulators. Even with the efforts towards
comprehensive reform serious weaknesses in corporate governance still occur as with the HIH
Insurance and One-Tel collapse in Australia, and the failure of a series of major corporations in
the United States in 2001/2002 commencing with Enron and WorldCom. It is likely interest in
creating more robust institutions of corporate governance will remain an important social and
economic priority for some time to come.