Corporate governance became a pressing issue following the year 2002 introduction of the Sarbanes-Oxley (SOX) Act in the US which was ushered in to restore public confidence in companies and markets after accounting fraud bankrupted high profile companies, such as Enron and WorldCom. Now-a-days most companies strive to have a high level of corporate governance.
Corporate Governance
By the term corporate governance, we mean the system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of the many stakeholders in a company. These includes its shareholders, management, customers, suppliers, financers, government and the community.
According to World Bank-
“Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal rights/goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability.”
American Management Association defines-
“Corporate Governance is about how suppliers of capital to get managers to return profits, make sure managers do not misuse the capital by investing in bad projects, and how shareholders and creditors monitor managers.”
Major Issues in Corporate Governance
Duties of directors: Duties of directors include the fiduciary duties to act in the best interests of the company, use their powers for a purpose, avoid conflicts of interest and exercise a duty of care.
Leadership: Leadership is a very important issue in corporate governance framework. A successful leadership can ensure enormous changes in any institution.
Accountability: Corporate Governance is regarded as a main instrument of accountability in any institution of society. The main basis of a good corporate governance is trust between its shareholders. Accountability is the key element of ensuring employee’s responsibility.
Boardroom Appraisal: Boardroom appraisal refers to the way in which a corporation is directed, administered and controlled. Boardroom self evaluation schemes creates competitions among the directors of the board and also evaluates the activities of directors. If poor performance is found in the evaluation process, he or she may be terminated.
Read More: Role of Citizen Charter as a mechanism of voice
Models of Corporate Governance
There are three models that are widely used. These are-
- American Model
- German Model
- Japanese Model
1. American Model
American model, developed within the context of the free market economy, assumes the separation of ownership. This model is basically considered as a “Outsiders Model.” An outsider is a person or institution which has no direct relationship with the corporation.
Players in the American model include management, directors, shareholders, government agencies, stock exchanges, self-regulatory organizations and consulting firms. Of these, the three major players are management, directors and shareholders.
In this model, managerial tasks are controlled by the board of directors and a Chief Executive Officer (CEO). CEO or directors may be terminated for their poor performances. In a996-97, Apple Computer Company terminated their CEO.
2. German Model
German model of corporate governance is opposite from American model. In this model, there is a general committee and a board of directors. For monitoring, there is an Auditors Committee.
The German model prescribes two boards with separate members. One of them is called management board which composed entirely of insiders, that is, executives of the corporation. And the another is called Supervisory board, which composed of employee representatives and shareholder representatives. The size of the supervisory board is set by law and cannot be changed by shareholders.
German Banks, and to a lesser extent, corporate shareholders, are the key players in the German corporate governance system.
3. Japanese Model
The Japanese model is characterized by a high level of stock ownership by affiliated banks.
In the Japanese model, the four key players are; main bank, affiliated company, management and the government.
The board of directors of Japanese corporations is composed almost completely of insiders, that is executive managers, usually the heads of major divisions of the company and its central administrative body. If a company’s profits fall over an extended period, the main bank and members of inside shareholders may remove directors and appoint their own candidates to the company’s board.
Challenges of Corporate Governance
- Developing competitive markets through measures, such as appropriate competitive legislation, promoting foreign direct investments subject to suitable restrictions, and evolving norms for fair trade practices.
- Strengthening the judicial, legal, regulatory, institutions for effective enforcement of laws.
- Establishing suitable mechanism for ensuring transparency of operations of enterprises through appropriate disclosure of financial and non-financial operations.
- Building human capacities and capabilities to discharge the tasks of governance.
- Lessening resistance to reforms, especially disclosure of information through dialogue and networking between the enterprise and all concerned stakeholders.
