Corporate governance refers to the system of rules, policies and practices by which a company is directed and controlled. It is a critical concept in business management that ensures companies operate with transparency, accountability and fairness. It establishes the framework for ethical decision-making, regulatory compliance and the protection of stakeholders’ interests, including shareholders, management, customers, suppliers, financiers, the government and the community.
"Corporate governance is the system by which companies are directed and controlled."
- Cadbury Committee (1992)
Principles of Corporate Governance
Corporate governance operates on several key principles that ensure ethical and responsible management:
| Principle | Description |
|---|---|
| Transparency | Companies must disclose accurate information regarding financial performance, operations and decisions. |
| Accountability | Corporate leaders should be held accountable for their actions and decisions. |
| Fairness | All stakeholders, including minority shareholders, should be treated equally. |
| Responsibility | Organizations must take responsibility for their impact on society and the environment. |
| Independence | Board decisions should be independent and free from undue influence. |
Importance of Corporate Governance
Effective corporate governance provides several benefits, including:
Enhancing Investor Confidence: A well-governed company attracts investors due to reduced risks.
Ensuring Compliance with Laws and Regulations: Adherence to legal frameworks prevents legal complications.
Preventing Corporate Scandals and Fraud: Ethical business practices mitigate financial misconduct.
Improving Organizational Performance: A structured governance model leads to better decision-making.
Protecting Stakeholders’ Interests: Ensures fairness and equity in business operations.
Theories of Corporate Governance
Several theories provide insights into corporate governance structures and mechanisms:
Agency Theory (Jensen & Meckling, 1976)
Suggests a conflict of interest between owners (principals) and managers (agents), necessitating governance mechanisms like incentives and monitoring.
Stakeholder Theory (Freeman, 1984)
Expands governance beyond shareholders to include all stakeholders such as employees, customers and the community.
Stewardship Theory (Donaldson & Davis, 1991)
Argues that managers act as stewards of the company, prioritizing organizational success over personal gains.
Resource Dependence Theory (Pfeffer & Salancik, 1978)
Emphasizes the role of external resources in corporate decision-making and governance.
Ethical Theories of Governance
Focuses on ethical behavior, corporate social responsibility (CSR) and sustainability.
Corporate Governance Mechanisms
To ensure corporate governance effectiveness, companies implement various mechanisms:
Internal Mechanisms:
Board of Directors – Oversees management and ensures strategic alignment.
Audit Committees – Reviews financial reporting and internal controls.
Internal Controls & Risk Management – Prevents financial mismanagement.
External Mechanisms:
Regulatory Frameworks – Laws and regulations set by government bodies.
Market Discipline – Investor reactions and shareholder activism influence governance.
Industry Standards & Best Practices – Corporate benchmarking ensures accountability.
Corporate Governance in India
In India, corporate governance is regulated by:
SEBI (Securities and Exchange Board of India) – Regulates stock-listed companies.
Companies Act, 2013 – Establishes legal provisions for governance.
Clause 49 of SEBI Listing Agreement – Mandates board structures and disclosures.
Corporate Social Responsibility (CSR) Rules – Enforces CSR activities.
Corporate Governance Failures:
Satyam Scandal (India) – Fraudulent financial statements led to shareholder losses.
Enron Scandal (USA) – Manipulation of financial data resulted in bankruptcy.
Successful Corporate Governance:
Tata Group (India) – Strong ethics and governance practices ensure sustainability.
Infosys (India) – Transparency and shareholder-friendly policies strengthen investor trust.
Corporate governance is a cornerstone of modern business, ensuring accountability, fairness and ethical conduct. For UGC NET aspirants and commerce students, understanding governance principles, theories and practices is essential for grasping business management concepts.