 No political exploitation

 No false marketing of goods and services

 No exploitation of employees
 Environmental responsibilities

Corporate governance is the set of processes, customs, policies, laws, and institutions
affecting the way a corporation (or company) is directed, administered or controlled.
Corporate governance also includes the relationships among the many stakeholders
involved and the goals for which the corporation is governed. The principal stakeholders
are the shareholders/members, management, and the board of directors. Other
stakeholders include labor (employees), customers, creditors (e.g., banks, bond holders),
suppliers, regulators, and the community at large. For Not-For-Profit Corporations or
other membership Organizations the "shareholders" means "members" in the text below
(if applicable).

Corporate governance is a multi-faceted subject.[1] An important theme of corporate

governance is to ensure the accountability of certain individuals in an organization
through mechanisms that try to reduce or eliminate the principal-agent problem. A related
but separate thread of discussions focuses on the impact of a corporate governance
system in economic efficiency, with a strong emphasis shareholders' welfare. There are
yet other aspects to the corporate governance subject, such as the stakeholder view and
the corporate governance models around the world (see section 9 below).

There has been renewed interest in the corporate governance practices of modern
corporations since 2001, particularly due to the high-profile collapses of a number of
large U.S. firms such as Enron Corporation and MCI Inc. (formerly WorldCom). In 2002,
the U.S. federal government passed the Sarbanes-Oxley Act, intending to restore public
confidence in corporate governance.

Definition
In A Board Culture of Corporate Governance, business author Gabrielle O'Donovan
defines corporate governance as 'an internal system encompassing policies, processes and
people, which serves the needs of shareholders and other stakeholders, by directing and
controlling management activities with good business savvy, objectivity, accountability
and integrity. Sound corporate governance is reliant on external marketplace commitment
and legislation, plus a healthy board culture which safeguards policies and processes'.

O'Donovan goes on to say that 'the perceived quality of a company's corporate

governance can influence its share price as well as the cost of raising capital. Quality is
determined by the financial markets, legislation and other external market forces plus
how policies and processes are implemented and how people are led. External forces are,
to a large extent, outside the circle of control of any board. The internal environment is
quite a different matter, and offers companies the opportunity to differentiate from
competitors through their board culture. To date, too much of corporate governance
debate has centred on legislative policy, to deter fraudulent activities and transparency
policy which misleads executives to treat the symptoms and not the cause.'[2]

It is a system of structuring, operating and controlling a company with a view to achieve

long term strategic goals to satisfy shareholders, creditors, employees, customers and
suppliers, and complying with the legal and regulatory requirements, apart from meeting
environmental and local community needs.

Report of SEBI committee (India) on Corporate Governance defines corporate

governance as 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 & corporate funds in the management of a
company.” The definition is drawn from the Gandhian principle of trusteeship and the
Directive Principles of the Indian Constitution. Corporate Governance is viewed as ethics
and a moral duty.

[edit] History
In the 19th century, state corporation laws enhanced the rights of corporate boards to
govern without unanimous consent of shareholders in exchange for statutory benefits like
appraisal rights, to make corporate governance more efficient. Since that time, and
because most large publicly traded corporations in the US are incorporated under
corporate administration friendly Delaware law, and because the US's wealth has been
increasingly securitized into various corporate entities and institutions, the rights of
individual owners and shareholders have become increasingly derivative and dissipated.
The concerns of shareholders over administration pay and stock losses periodically has
led to more frequent calls for corporate governance reforms.

In the 20th century in the immediate aftermath of the Wall Street Crash of 1929 legal
scholars such as Adolf Augustus Berle, Edwin Dodd, and Gardiner C. Means pondered
on the changing role of the modern corporation in society. Berle and Means' monograph
"The Modern Corporation and Private Property" (1932, Macmillan) continues to have a
profound influence on the conception of corporate governance in scholarly debates today.

From the Chicago school of economics, Ronald Coase's "The Nature of the Firm" (1937)
introduced the notion of transaction costs into the understanding of why firms are
founded and how they continue to behave. Fifty years later, Eugene Fama and Michael
Jensen's "The Separation of Ownership and Control" (1983, Journal of Law and
Economics) firmly established agency theory as a way of understanding corporate
governance: the firm is seen as a series of contracts. Agency theory's dominance was
highlighted in a 1989 article by Kathleen Eisenhardt ("Agency theory: an assessement
and review", Academy of Management Review).

US expansion after World War II through the emergence of multinational corporations

saw the establishment of the managerial class. Accordingly, the following Harvard
Business School management professors published influential monographs studying their
prominence: Myles Mace (entrepreneurship), Alfred D. Chandler, Jr. (business history),
Jay Lorsch (organizational behavior) and Elizabeth MacIver (organizational behavior).
According to Lorsch and MacIver "many large corporations have dominant control over
business affairs without sufficient accountability or monitoring by their board of
directors."

Since the late 1970’s, corporate governance has been the subject of significant debate in
the U.S. and around the globe. Bold, broad efforts to reform corporate governance have
been driven, in part, by the needs and desires of shareowners to exercise their rights of
corporate ownership and to increase the value of their shares and, therefore, wealth. Over
the past three decades, corporate directors’ duties have expanded greatly beyond their
traditional legal responsibility of duty of loyalty to the corporation and its shareowners.[3]

In the first half of the 1990s, the issue of corporate governance in the U.S. received
considerable press attention due to the wave of CEO dismissals (e.g.: IBM, Kodak,
Honeywell) by their boards. The California Public Employees' Retirement System
(CalPERS) led a wave of institutional shareholder activism (something only very rarely
seen before), as a way of ensuring that corporate value would not be destroyed by the
now traditionally cozy relationships between the CEO and the board of directors (e.g., by
the unrestrained issuance of stock options, not infrequently back dated).

In 1997, the East Asian Financial Crisis saw the economies of Thailand, Indonesia, South
Korea, Malaysia and The Philippines severely affected by the exit of foreign capital after
property assets collapsed. The lack of corporate governance mechanisms in these
countries highlighted the weaknesses of the institutions in their economies.

In the early 2000s, the massive bankruptcies (and criminal malfeasance) of Enron and
Worldcom, as well as lesser corporate debacles, such as Adelphia Communications,
AOL, Arthur Andersen, Global Crossing, Tyco, led to increased shareholder and
governmental interest in corporate governance. This is reflected in the passage of the
Sarbanes-Oxley Act of 2002.[3]

[edit] Impact of Corporate Governance

The positive effect of corporate governance on different stakeholders ultimately is a

strengthened economy, and hence good corporate governance is a tool for socio-
economic development.[4]

Mechanisms and controls

Corporate governance mechanisms and controls are designed to reduce the inefficiencies
that arise from moral hazard and adverse selection. For example, to monitor managers'
behaviour, an independent third party (the external auditor) attests the accuracy of
information provided by management to investors. An ideal control system should
regulate both motivation and ability.
[edit] Internal corporate governance controls

Internal corporate governance controls monitor activities and then take corrective action
to accomplish organisational goals. Examples include:

• Monitoring by the board of directors: The board of directors, with its legal
authority to hire, fire and compensate top management, safeguards invested
capital. Regular board meetings allow potential problems to be identified,
discussed and avoided. Whilst non-executive directors are thought to be more
independent, they may not always result in more effective corporate governance
and may not increase performance.[5] Different board structures are optimal for
different firms. Moreover, the ability of the board to monitor the firm's executives
is a function of its access to information. Executive directors possess superior
knowledge of the decision-making process and therefore evaluate top
management on the basis of the quality of its decisions that lead to financial
performance outcomes, ex ante. It could be argued, therefore, that executive
directors look beyond the financial criteria.
• Internal control procedures and internal auditors: Internal control procedures
are policies implemented by an entity's board of directors, audit committee,
management, and other personnel to provide reasonable assurance of the entity
achieving its objectives related to reliable financial reporting, operating
efficiency, and compliance with laws and regulations. Internal auditors are
personnel within an organization who test the design and implementation of the
entity's internal control procedures and the reliability of its financial reporting.
• Balance of power: The simplest balance of power is very common; require that
the President be a different person from the Treasurer. This application of
separation of power is further developed in companies where separate divisions
check and balance each other's actions. One group may propose company-wide
administrative changes, another group review and can veto the changes, and a
third group check that the interests of people (customers, shareholders,
employees) outside the three groups are being met.
• Remuneration: Performance-based remuneration is designed to relate some
proportion of salary to individual performance. It may be in the form of cash or
non-cash payments such as shares and share options, superannuation or other
benefits. Such incentive schemes, however, are reactive in the sense that they
provide no mechanism for preventing mistakes or opportunistic behaviour, and
can elicit myopic behaviour.

[edit] External corporate governance controls

External corporate governance controls encompass the controls external stakeholders

exercise over the organisation. Examples include:

• competition
• debt covenants
 • demand for and assessment of performance information (especially financial
statements)
• government regulations
• managerial labour market
• media pressure
• takeovers

Corporate governance and firm performance

In its 'Global Investor Opinion Survey' of over 200 institutional investors first undertaken
in 2000 and updated in 2002, McKinsey found that 80% of the respondents would pay a
premium for well-governed companies. They defined a well-governed company as one
that had mostly out-side directors, who had no management ties, undertook formal
evaluation of its directors, and was responsive to investors' requests for information on
governance issues. The size of the premium varied by market, from 11% for Canadian
companies to around 40% for companies where the regulatory backdrop was least certain
(those in Morocco, Egypt and Russia).

Other studies have linked broad perceptions of the quality of companies to superior share
price performance. In a study of five year cumulative returns of Fortune Magazine's
survey of 'most admired firms', Antunovich et al. found that those "most admired" had an
average return of 125%, whilst the 'least admired' firms returned 80%. In a separate study
Business Week enlisted institutional investors and 'experts' to assist in differentiating
between boards with good and bad governance and found that companies with the highest
rankings had the highest financial returns.

On the other hand, research into the relationship between specific corporate governance
controls and firm performance has been mixed and often weak. The following examples
are illustrative.

Actions that might be taken to Strengthen

Corporate Governance
• Develop principles of corporate governance; punish them; report
annually on conformance
• Key institutions and associations such as The New York Stock
Exchange and the Conference Board should establish a
Directors’ Institute where corporations can send new directors
for orientation as to their duties and responsibilities
• Outside directors should always constitute the majority of the
board
• Audit/Compensation/Nominating committees of the board
should be composed of exclusively outside directors
Actions that might be taken to Strengthen
Corporate governance (continued)
• The CEO and board chair should not be held by the same
person; if they are one, a lead director that is an outsider should
be elected to chair executive sessions
• The outside directors should meet regularly in executive session
• No more than three directors should be company executives
• Directors should be annually evaluated; if they do not attend
75% of scheduled meetings, they should not be retained

Ethical and Unethical Business Practices

I have always recognized that the object of business is to make money in an honorable
manner. I have endeavored to remember that the object of life is to do good." - Peter
Cooper, American Inventor, Manufacturer and Philanthropist

Business ethics are moral values and principles, that determine our conduct in the
business world. It refers to the commercial activities, either with other business houses or
with a single customer. They can be applied to all aspects of business; from generation of
an idea to its sale. Business use the society for its resources and functioning, thereby
obligating it to the welfare of the society. While the objective of all business is to make
profits, it should contribute to the interest of the society by ensuring fair practices.
However, greed has led the present business scenario towards unethical business
practices, legal complications and general mistrust.

Code of Ethics

Many organizations now implement the code of ethics in their company polices, which
they implement during induction and regular training. A Code of Ethics "is generally a
more blanket statement of values and beliefs that defines the organization or group"
(Brandl and Maguire). It is primarily for the following areas:

• Company's assets, funds and records

• Conflict of interest
• Management and employee practices
• Information on competition

Ethical Business Practices

Following are a few ethical business practices that should be followed to build a honest
reputation and ensure smooth running of the organization.

• Investors: Ensuring safety of their money and timely payment of interest.

 • Employees: Provision of fair opportunities in promotions and training, good
working conditions and timely payment of salaries.
• Customer: Complete information of the service and product should be made
available. Personal information of the customers should not be used for personal
gain.
• Competition: Unscrupulous tactics and methods should be avoided while
handling competitors.
• Government: Rules and regulations regarding taxes, duties, restrictive and
monopolistic trade practices and unlawful activities like corruption and bribing
should be adhered to.
• Environment: Polluting industries should ensure compliance with the
government norms regarding air, water and noise pollution

Ethical Business Practices

Ethical Behavior by Companies Benefits Society and

Business
© Tracey Lloyd

Jun 13, 2009

Ethical business practices can be adopted by all businesses in order to improve corporate
citizenship, increase consumer confidence and protect brand value.

Consumers vote with their wallets and 91% are more likely to purchase goods or services
from businesses that the consumer sees as acting ethically (KPMG "Ethical Business and
Sustainable Communities" Report). Ethical business practices are an important arm of
corporate social responsibility, focusing on transparency towards stakeholders, taking a
long term view of the business and society rather than a short term profit centered vision
and investing responsibly.

Ethical business practices can help to increase consumer confidence, improve business
performance and protect the value of the business brand. In the United States, as a result
of corporate collapses such as Enron, the Sarbanes-Oxley Act (2002) was passed into
legislation; this act requires that companies have amongst other things, a code of ethics
and mechanisms in place to address risk management and transparent disclosure of
financial practices.

While Sarbanes-Oxley has resulted in improved financial reporting for public owned
companies, it is not a panacea for ethical business practices. Ethical business practices
require strong financial reporting together with consideration of the social and
environmental impacts of business.

Production Methods and Ethical Business Practices

When applying ethical business practices to production methods, businesses should

ensure that the production of a good or service is environmentally sustainable and that
human beings involved in the production, either as workers or as members of the
community in which production takes place are not unduly harmed.

Human Resources and Ethical Business Practices

Many businesses have codes of conduct or codes of practice to deal with ethics issues,
however while codes of conduct assist employees to deal in an ethical manner when
negotiating contracts or in dealings with other employees, they do not address the broader
ethical issues surrounding human resources in business.

Ethical business practices in human resources include considering the impact the work of
the business has on employees and their families, reviewing pay scales to ensure fairness
and providing access to mechanisms that enable family support including employee
assistance plans, child care, family leave provisions and health care benefits.

Ethical Business Practices and Society

Business and society exist in a mutually beneficial relationship with business providing
goods and services required by society and the environment and people in the community
providing resources for business, in terms of production resources and financial resources
through spending. A 2008 MORI poll “Sustainability Issues in the Retail Sector” found
that 77% of consumers had a preference to purchase environmentally friendly goods and
79% felt that in order to trust a company, the company needed to provide evidence that it
was ethical.

In order to be successful, ethical business practices need to be supported by the culture of

the business. Management should lead from the front on ethical business practices and
build ethical business practices into each dimension of the business from production to
follow up customer service.

The copyright of the article Ethical Business Practices in Ethical Business Management
is owned by Tracey Lloyd. Permission to republish Ethical Business Practices in print
or online must be granted by the author in writing.
Ethical Behavior
by Companies
Benefits Society

Ethical issues and approaches

Philosophers and others disagree about the purpose of a business ethic in society. For
example, some suggest that the principal purpose of a business is to maximize returns to
its owners, or in the case of a publicly-traded concern, its shareholders. Thus, under this
view, only those activities that increase profitability and shareholder value should be
encouraged, because any others function as a tax on profits. Some believe that the only
companies that are likely to survive in a competitive marketplace are those that place
profit maximization above everything else. However, some point out that self-interest
would still require a business to obey the law and adhere to basic moral rules, because the
consequences of failing to do so could be very costly in fines, loss of licensure, or
company reputation. The noted economist Milton Friedman was a leading proponent of
this view.

Some take the position that organizations are not capable of moral agency. Under this,
ethical behavior is required of individual human beings, but not of the business or
corporation.

Other theorists contend that a business has moral duties that extend well beyond serving
the interests of its owners or stockholders, and that these duties consist of more than
simply obeying the law. They believe a business has moral responsibilities to so-called
stakeholders, people who have an interest in the conduct of the business, which might
include employees, customers, vendors, the local community, or even society as a whole.
Stakeholders can also be broken down into primary and secondary stakeholders. Primary
stakeholders are people that are affected directly such as stockholders, where secondary
stakeholders are people who are not affected directly such as the government. They
would say that stakeholders have certain rights with regard to how the business operates,
and some would suggest that this includes even rights of governance.

Some theorists have adapted social contract theory to business, whereby companies
become quasi-democratic associations, and employees and other stakeholders are given
voice over a company's operations. This approach has become especially popular
subsequent to the revival of contract theory in political philosophy, which is largely due
to John Rawls' A Theory of Justice, and the advent of the consensus-oriented approach to
solving business problems, an aspect of the "quality movement" that emerged in the
1980s. Professors Thomas Donaldson and Thomas Dunfee proposed a version of contract
theory for business, which they call Integrative Social Contracts Theory. They posit that
conflicting interests are best resolved by formulating a "fair agreement" between the
parties, using a combination of i) macro-principles that all rational people would agree
upon as universal principles, and, ii) micro-principles formulated by actual agreements
among the interested parties. Critics say the proponents of contract theories miss a central
point, namely, that a business is someone's property and not a mini-state or a means of
distributing social justice.

Ethical issues can arise when companies must comply with multiple and sometimes
conflicting legal or cultural standards, as in the case of multinational companies that
operate in countries with varying practices. The question arises, for example, ought a
company to obey the laws of its home country, or should it follow the less stringent laws
of the developing country in which it does business? To illustrate, United States law
forbids companies from paying bribes either domestically or overseas; however, in other
parts of the world, bribery is a customary, accepted way of doing business. Similar
problems can occur with regard to child labor, employee safety, work hours, wages,
discrimination, and environmental protection laws.

It is sometimes claimed that a Gresham's law of ethics applies in which bad ethical
practices drive out good ethical practices. It is claimed that in a competitive business
environment, those companies that survive are the ones that recognize that their only role
is to maximize profits.

Need for corporate governance

Corporate governance is about the way in which boards oversee the running of a
company by its managers, and how board members are in turn accountable to
shareholders and the company. This has implications for company behaviour towards
employees, shareholders, customers and banks. Good corporate governance plays a vital
role in underpinning the integrity and efficiency of financial markets. Poor corporate
governance weakens a company’s potential and at worst can pave the way for financial
difficulties and even fraud. If companies are well governed, they will usually outperform
other companies and will be able to attract investors whose support can help to finance
further growth.

India needs good corporate governance: experts

By IANS
Tuesday,31 October 2006, 18:28 hrs

Print
Forward
New Delhi: Corporate governance in India has undergone a paradigm shift by gradually
becoming more conscience-driven due to interests of customers, employees, vendors and
regulators, say experts.

The ever-changing dynamics of corporate governance was discussed and debated

Monday in a seminar - "Visionary Corporate Governance Practices" - organized by the
Confederation of Indian Industry (CII) here.

"Realizing the need for good governance, corporate governance has gradually evolved
into a conscience approach from the traditional compliance one. There has been
recognition of the need to balance interests of not just shareholders but different
stakeholders who are equally important for the health of a company," said K.V. Kamath,
managing director and chief executive of ICICI Bank Ltd.

"If practiced in the right spirit it can lead to unlocking the intellectual power of the board
and management to focus organizational efforts on value-creating objectives using ethical
means," he said.

"Technology, laws and regulations, disruptive events and demand for greater
accountability are the business drivers for embracing new governance practices," said
Rajiv Srivastava, Microsoft's group director.

"Security, identity and access, information rights management, e-mail retention, centrally
controlled spreadsheets, management and reporting are the enabling technologies for
visionary corporate governance practices."

Factors behind Corporate Governance

The Securities and Exchange Board of India (SEBI) appointed the Committee on
Corporate Governance on May 7, 1999 under the Chairmanship of Shri Kumar
Mangalam Birla, member SEBI Board, to promote and raise the standards of Corporate
Governance.

the primary objective of the Committee was to view corporate governance from the
perspective of the investors and shareholders and to prepare a Code to suit the Indian
corporate environment, as corporate governance frameworks are not exportable. The
Committee also took note of the various steps already taken by SEBI for strengthening
corporate governance, some of which are:

• strengthening of disclosure norms for Initial Public Offers following the

recommendations of the Committee set up by SEBI under the Chairmanship of
Shri Y H Malegam;
• providing information in directors’ reports for utilisation of funds and variation
between projected and actual use of funds according to the requirements of the
 Companies Act; inclusion of cash flow and funds flow statement in annual reports
;
• declaration of quarterly results;
• mandatory appointment of compliance officer for monitoring the share transfer
process and ensuring compliance with various rules and regulations;
• timely disclosure of material and price sensitive information including details of
all material events having a bearing on the performance of the company;
• despatch of one copy of complete balance sheet to every household and abridged
balance sheet to all shareholders;
• issue of guidelines for preferential allotment at market related prices; and
• issue of regulations providing for a fair and transparent framework for takeovers
and substantial acquisitions.

2.7 The Committee has identified the three key constituents of corporate governance as
the Shareholders, the Board of Directors and the Management and has attempted to
identify in respect of each of these constituents, their roles and responsibilities as also
their rights in the context of good corporate governance. Fundamental to this examination
and permeating throughout this exercise is the recognition of the three key aspects of
corporate governance, namely; accountability, transparency and equality of treatment for
all stakeholders.

2.8 The pivotal role in any system of corporate governance is performed by the board of
directors. It is accountable to the stakeholders and directs and controls the Management.
It stewards the company, sets its strategic aim and financial goals and oversees their
implementation, puts in place adequate internal controls and periodically reports the
activities and progress of the company in the company in a transparent manner to the
stakeholders. The shareholders’ role in corporate governance is to appoint the directors
and the auditors and to hold the board accountable for the proper governance of the
company by requiring the board to provide them periodically with the requisite
information ,in a transparent fashion, of the activities and progress of the company. The
responsibility of the management is to undertake the management of the company in
terms of the direction provided by the board, to put in place adequate control systems and
to ensure their operation and to provide information to the board on a timely basis and in
a transparent manner to enable the board to monitor the accountability of Management to
it.