Q1. Explain the need for Corporate Governance.

Discuss its role and

importance in improving the performance of corporate sector.

A:- The Need for Corporate Governance:

There are various reasons for the need for corporate governance in an
Organization. These are:

1. A corporation, which is a union of many stakeholders, such as employees,

customers, investors, vendors, and so on, must be fair and transparent to
its stakeholders in all its dealings. It is very important in today’s
globalized business world, where corporations require to have access to
global pools of capital attract and retain the best human resource from all
parts of the globe. If a corporation does not take up and show ethical
conduct, it is not considered to be successful.

2. Corporate governance covers ethical conduct in business, the code of

values and principles that helps an individual to choose between right and
wrong or make the right selection from the options or alternatives
provided. Managers decide on certain actions on the basis of an principles
that are governed by the culture, context and values of an organization.
An organization that follows ethical values feel that it is better for the
business, as it helps in the long run and the stakeholders observe that the
management is running the organization in the desired way.

3. It is beyond the sphere of law, i.e., it stems from the background and
outlook of the management and cannot be regulated by legislation alone.
It deals with running the affairs of a company in such a way that it is fair
to all the stakeholders and that its dealings benefit the greatest number of
stakeholders. It is about honesty, integrity and responsibility. Laws
should set up a common framework to maintain standards. Since
substance is very much linked with the mind-set and ethical standards of
management, it shall in the end lay down the creditability and integrity of
the process.

4. Corporations should realize that it is necessary for all the stakeholders to

Co-operate in order to facilitate development. Such cooperation and
support can only be possible by adhering to the best practices of corporate
governance. In this context, management has to take the responsibility of
the shareholders at large and stop any unbalanced benefits of the varied
sections of the shareholders.
5. The economic competence of a company can be improved through
corporate governance. Corporate governance also ensures that
corporations consider the interests of a wide range of constituencies and
also of the communities within which they function. Corporate
governance also makes sure that the boards of directors are responsible to
the shareholders. This even helps to ensure that corporations work for the
benefit of the society at large, including the society’s concerns about
labour and environment.

6. If the execution of good governance fails, heavy losses can result in

terms of cost other than regulatory problems. Many organizations that do
not give due importance to corporate governance end up paying a large
risk premium while contending for scarce capital in the public markets.
Of late, stock market analysts have started realizing, accepting and
appreciating the relationship between returns and corporate governance.

7. The confidence of both foreign and domestic investors is maintained and

upheld due to the trustworthiness that comes from good measures of
corporate governance. The cost of capital should be brought down so that
more long-term investment is attracted.

8. Often, importance and attention is given to corporate governance in times

of financial crisis. In the US, when scandals disturbed the otherwise calm
and contented corporate environment, new initiatives thrown up by them
led to fresh debates in Asia and the European Union. With many
instances of corporate misdemeanour coming into limelight, the emphasis
now is on compliance with substance, rather than on form. It has also
brought to the fore the need of intellectual honesty and integrity. The
financial and other disclosures made by firms are only as good as the
people who make it.

9. In 1998, the Confederation of Indian Industry (CII) made public a

desirable and voluntary code. This marked the beginning of corporate
governance initiatives in India. Then, on the basis of the Kumarmangalam
Birla Committee Report in February 2000, Securities and Exchange
Board of India (SEBI) made the first formal regulatory framework for
listed companies.

10.Corporate governance has been defined in different ways. Many

definitions do not give its scope and the motives of many of the
definitions vary. However, the crux is that corporate governance is a
concept and not an individual instrument. It encompasses necessary
management and control structures of a company, the rules about the
 power relationship between owners, the board of directors, stakeholders
and others. The easiest definition of corporate governance has been given
by the Cadbury Report. It has been paraphrased as, ‘the system by which
business are directed and controlled’. The other all-inclusive definition
has been given by the OECD (Organization for Economic Cooperation
Code). According to it, corporate governance includes complex
relationships among the management, its shareholders, board and others.
It also establishes the framework through which the aims of the company
are established and the methods of attaining those objectives and
observing the working are decided.

11.Corporate governance is aimed at increasing the long-term value of an

organization for not only its shareholders, but also partners. It represents
an amalgamation of all those involved in a process that is socioeconomic.
It is imperative for all organizations to govern and manage. Corporate
governance includes the entire stakeholder and at the same time the
process is economic as well as social.

12. Studies related to corporate governance practices conducted worldwide

by various institutions clearly indicate that no single model is available
for good corporate governance. The OECD also recognizes this. It also
accepts the fact that a wide range of approaches to corporate governance
have developed due to the differences that exist in institutional
frameworks, legal systems as well as traditions in various countries. All
good corporate governance regimes place high preference on the interests
of shareholders, as the latter place their trusts on corporations to use their
investment funds in an effective and wise manner.