Ethics in Business and Corporate Governance

S K MANDAL
Developed by: Anubhuti Jain

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Corporate Governance: Principles and Practices

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Ethics i n Business and Corporate Governance

ROLE OF CORPORATE GOVERNANCE

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Corporate governance broadly refers to the rules, processes or laws by which businesses are operated, regulated and controlled. Todays corporate governance places a strong emphasis on both, economic efficiency and safeguarding the welfare of shareholders. Presence of an effective corporate governance system, within a company and across an economy as a whole, helps to strengthen the economy, create investor confidence, and contribute to social wellbeing.

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The role of good corporate governance is to: set right objectives; chart the right processes of operations and process of governance; ensure ethics in the corporate objectives and practice; develop right kind of people and talent in the organisation; inculcate the culture of ethics amongst people; obey the rules, laws and regulations concerning the business; adopt methods of measures and means to control and regulate within the rules and regulations; and adhere to the environmental laws and regulatory principles.

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Ethics i n Business and Corporate Governance

PRINCIPLES OF CORPORATE GOVERNANCE

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Rights and Equitable Treatment of Shareholders Interests of Other Stakeholders Role and Responsibilities of the Board Integrity and Ethical Behaviour Disclosure and Transparency

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Ethics i n Business and Corporate Governance

CODES AND STANDARDS OF CORPORATE GOVERNANCE

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Corporate governance principles and codes have been developed in different countries and issued either from stock exchanges or corporations or by the associations (institutes) of directors and managers with the support of governments and international organisations. The aim of these codes and guidelines has been to: bring transparency and accountability in the functions and decisions; seek to establish accountability standards of the board and management of the company; protect investors interests; care for other stakeholders; and promote investor confidence in the business system.

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Ethics i n Business and Corporate Governance

The Cadbury Committee Report of 1992

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The purpose of the Cadbury Report was to establish corporate standards to control and report the functions of boards, and on the roles of auditors. The Code of Best Practice was designed to achieve the necessary high standards of corporate behavior. The report recognized that these codes have to be reviewed as and when business circumstances change and a broader view of governance develops.

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Ethics i n Business and Corporate Governance

The OECD Principles of Corporate Governance

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As per some important highlights of the OECD principles, the corporate governance framework should: 1. Promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities. Protect and facilitate the exercise of shareholders rights. Ensure the equitable treatment of all shareholders.

2. 3.

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4.

Recognize the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises. Ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company. Ensure the strategic guidance of the company, the effective monitoring of management by the board, and the boards accountability to the company and the shareholders.

5.

6.

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Ethics i n Business and Corporate Governance

The Combined Code of Corporate Governance

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Here, the recommendations, codes or principles have mainly focused on the companys structure; its financial and non-financial disclosures; compliance with codes of corporate governance; competitive remuneration policy; shareholders rights and responsibilities; and financial reporting and internal controls.

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Ethics i n Business and Corporate Governance

New provisions in the Clause 49 of the SEBI guidelines on corporate governance

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The board will lay down a code of conduct for all board members and senior management of the company to compulsorily follow. The CEO and CFO will certify the companys financial statements and cash flow statements. At least one independent director of the holding company will be a member of the board of a material non-listed subsidiary. The audit committee of the listed company shall review the financial statements of the unlisted subsidiary, in particular its investments.

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If while preparing financial statements, the company follows a treatment that is different from that prescribed in the accounting standards, it must disclose this in the financial statements and the management should also provide an explanation for doing so in the corporate governance report of the annual report.

The company will have to lay down procedures for informing the board members about the risk management and minimization procedures.

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Where money is raised through public issues, rights issues etc., the company will have to disclose the uses/applications of funds according to major categories as part of quarterly disclosures of financial statements. The company will have to publish its criteria for making its payments to non-executive directors in its annual report.

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Ethics i n Business and Corporate Governance

MODELS OF CORPORATE GOVERNANCE

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The Anglo-American Model The Coordinated Model The Family-Owned Company Model

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Ethics i n Business and Corporate Governance

The Anglo-American Model

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This is a typical liberal model of governance, which is prevalent in the US, UK, and many English speaking countries of the erstwhile British Empire. This model calls for governance by the board of directors, which has the power to choose the CEO. While the CEO has the power delegated by the board to manage the company on a daily basis, he or she needs board approval for certain major decisions.

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In this model, the board of directors is responsible towards the shareholders; however, the by-laws of many companies make it difficult for all but the largest shareholders to have any influence or say over the make up of the board. Contrary to the spirit of good corporate governance, individual shareholders are not given the opportunity to choose their nominees to the board.

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Ethics i n Business and Corporate Governance

The Coordinated Model

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This model, prevalent in Europe and Japan, acquiesces to shareholder interest but also gives priority to the interests of managers, employees, customers, suppliers and the community in general. The coordinated model encourages innovation and profit on a more incremental level.

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Ethics i n Business and Corporate Governance

The Family-Owned Company Model

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This is prevalent in Asian and Latin American countries, where companies owned by families often dominate the market. This business model views the transparency and disclosure norms of the Anglo-American model as exposing the core business financials and strategies to others, which would mostly benefit the competitors and regulators, with few tangible benefits to the organisation. The system is more amenable to self serving gains from business, and vulnerable with regard to ethics and social responsibility. Family-owned companies do not necessarily harm the interests of shareholders because they themselves are major beneficiaries of their dividend policy or related benefits.
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BEST PRACTICES IN CORPORATE GOVERNANCE

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Adherence to a code of conduct and the practice of whistle-blowing is important; but how they are communicated and practised across the organisation is even more important. It is vital for board members and senior managers to lead by example. Following trusteeship in order to protect shareholders including minority shareholders is essential. An independent and transparent process is needed to evaluate the functioning of the board. Integrity and ethical values should be emphasized as being fundamental to the governance system.

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Focus on sustainability. Increased responsibility and empowerment of independent directors. Skills to listen to and understand stakeholders their needs and interests. Concern for purposeful corporate social responsibility.

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Ethics i n Business and Corporate Governance

CORPORATE GOVERNANCE AND THE INDIAN ETHOS

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The Holistic approach in governance Equal importance to subjectivity/objectivity Karma yoga Respect to each soul as potential God Cooperation Yogah Karmashu Kushalam

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Ethics i n Business and Corporate Governance