Dear Readers,
Its about Management Perspective,
Ethics, also known as moral philosophy, is a branch of philosophy which seeks to address questions about morality; that is, about concepts such as good and bad, right and wrong, justice, and virtue.
Business ethics, also known as corporate ethics, is a form of applied ethics that examines ethical principles and moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and business organizations as a whole.
Corporate Governance is about governing, directing, administering, and controlling the activities of company management board in business affairs, for the explicit purpose of safeguarding the confidence & interest of its stakeholders (i.e, shareholders, investors, creditors, government, employees, suppliers, customers and the society as whole) through commitment of values in making distinction between personal and corporate funds. It ensures sufficient accountability and transparency of company management strategic decisions, honestly verified and legally monitored. Company’s CG can influence its share price as well as the cost of raising capital. It actually strengthens the confidence of its investors about exercising their rights of corporate ownership and increasing value of their shares and therefore, wealth.
Relating Ethics and Governance: Key elements of good CG principles include honesty, trust and integrity, openness, performance orientation, responsibility and accountability, mutual respect, and commitment to the organization. A corporation should be fair and transparent to its stakeholders in all its transactions. This has become imperative in today’s globalize business world where corporations need to access global pools of capital, need to attract and retain the best human capital from various parts of the world, need to partner with vendors on mega collaborations and need to live in harmony with the community. Unless a corporation embraces and demonstrates ethical conduct, it will not be able to succeed. Corporate Governance is the system by which companies are directed and managed. It influences how the objectives of the company are set and achieved, how risk is monitored and assessed and how performance is optimized. Sound Corporate Governance is therefore critical to enhance and retain investors’ trust. Corporate governance is about ethical conduct in business. Ethics is concerned with the code of values and principles that enables a person to choose between right and wrong, and therefore, select from alternative courses of action.
Why Corporate Governance?
a) The liberalization and de-regulation world over gave greater freedom in management. This would imply greater responsibilities.
b) The players in the field are many. Competition brings in its wake weakness in standards of reporting and
accountability.
c) Market conditions are increasingly becoming complex in the light of global developments like WTO, removal of barriers/reduction in duties.
d) The failure of corporate due to lack of transparency and disclosures and instances of falsification of accounts / embezzlement and the effect of such undesirable practices in other companies.
It is the increasing role of foreign institutional investors in emerging economies that has made the concept of corporate governance a relevant issue today. In fact, the expression was hardly in the public domain. In the increasingly close interaction of the economies of different countries lies the process of globalization. This involves the rapid migration of four elements across national borders. These are (i) Physical capital in terms of plant and machinery; (ii) Financial capital; (iii) Technology; and (iv) Labor.
The increasing concern of the foreign investors is that the enterprise in which they invest should not only be effectively managed but should also observe the principles of corporate governance. In other words, the enterprises will not do anything illegal or unethical. This need for re-assurance is felt by the FIIs due to the fact that there have been cases of dramatic collapse of enterprises which were apparently doing well but which were not observing the principles of corporate governance.
The Kumar Mangalam Committee made mandatory and non-mandatory recommendations. Based on the recommendations of this Committee, a new clause 49 was incorporated in the Stock Exchange Listing Agreements (“Listing Agreements”). The important aspects, in brief, are:
(i) Board of Directors are accountable to shareholders.
(ii) Board controls are laid down code of conduct and accountable to shareholders for creating, protecting and enhancing wealth and resources of the Company reporting promptly in transparent manner while not involving in day to day management.
(iii) Classification of non-executive directors into those who are independent and those who are not.
(iv) Independent directors not to have material or pecuniary relations with the Company/subsidiaries and if had, to disclose in Annual Report.
(v) Laying emphasis on calibre of non-executive directors especially independent directors.
(vi) Sufficient compensation package to attract talented non-executive directors.
(vii) Optimum combination of not less than 50% of non-executive directors and of which companies with non-executive Chairman to have at least one third of independent directors and under executive Chairman at least one half of independent directors.
(viii) Nominee directors to be treated on par with any other director,
(ix) Qualified independent Audit committee to be setup with minimum of three all being non-executive directors with one having financial and accounting knowledge.
(x) Corporate governance report to be part of Annual Report and disclosure on directors’ remuneration etc., to be included.
Naresh Chandra Committee recommendations relate to the Auditor-Company relationship and the role of Auditors. Report of the SEBI Committee on Corporate Governance recommended that the mandatory recommendations on matters of disclosure of contingent liabilities, CEO/CFO Certification, definition of Independent Director, independence of Audit Committee and independent director exemptions in the report of the Naresh Chandra Committee, relating to corporate governance, be implemented by SEBI.
Narayana Murthy Committee recommendations include role of Audit Committee, Related party transactions, Risk management, compensation to Non- Executive Directors, Whistle Blower Policy, Affairs of Subsidiary Companies, Analyst Reports and other non-mandatory recommendations.
10 Essential Governance Principles:
o Lay solid foundations for management and oversight - Recognize and publish the respective roles and
responsibilities of board and management.
o Structure the board to add value - Have a board of an effective composition, size and commitment to adequately discharge its responsibilities and duties.
o Promote ethical and responsible decision-making - Actively promote ethical and responsible decision-making.
o Safeguard integrity in financial reporting - Have a structure to independently verify and safeguard the integrity of the company’s financial reporting.
o Make timely and balanced disclosure - Promote timely and balanced disclosure of all material matters concerning the company.
o Respect the rights of shareholders - Respect the rights of shareholders and facilitate the effective exercise of those rights.
o Recognize and manage risk - Establish a sound system of risk oversight and management and internal control.
o Encourage enhanced performance - Fairly review and actively encourage enhanced board and management effectiveness.
o Remunerate fairly and responsibly - Ensure that the level and composition of remuneration is sufficient and reasonable and that its relationship to corporate and individual performance is defined.
o Recognize the legitimate interests of stakeholders - Recognize legal and other obligations to all legitimate stakeholders.
o Corporate Governance Rating be made mandatory for listed companies.
Ethics in managing an organization are vital for long term survival. It is defined as disciplined dealing with what is good and what is bad and what are moral duties and obligations. As far as business ethics are concerned, a minimum code of ethics has to be practiced in competition, public relations and social responsibilities. Corporate Governance encourages ethical standards and sound business practices.
Thanx for knowledge enhancement.
Raghvendra s/o Sandeep Singh
Jodhpur, Rajasthan
