Corporate Governance | NABARD Grade A & Grade B Preparation - Bank Exams PDF Download

 Page 1


Strategy Implementation 
and Control 
 
 
UNIT 11 CORPORATE GOVERNANCE 
 
 
Objectives 
After going through this unit you should be able to: 
? Know the evolution of corporate governance; 
? Acquaint yourself with five pillars of corporate governance; 
? Understand the various drivers of corporate governance; 
? Discuss the models of corporate governance. 
Structure 
11.1 Introduction 
11.2 Evolution of corporate governance 
11.3 Business Ethics 
11.4 Pillars of corporate governance 
11.5 Models of corporate governance 
11.6 Corporate governance and Strategy 
11.7 Challenges of corporate governance 
11.8 Summary 
11.9 Key-words 
11.10 Self-Assessment Questions 
11.11 References and Further Readings 
 
 
 
 
11.1 INTRODUCTION 
 
 
The growth of corporate sector and the competitive market has together introduced 
the concept of corporate governance. Corporate governance has become an 
integral part of business life so as to achieve the objectives and to protect the 
organizations from failure in future. There are two aspects which are important 
to understand the corporate governance: a) the internal structure which includes 
the management, board structure etc. and b) the external structure which includes 
shareholders and other stakeholders. This helps in ensuring an efficient internal 
control, robust management structure, appropriate performance measures and 
effective succession plans. At the domestic as well as international fronts, the 
organizations have been applying corporate governance as codes of best practices 
and have set examples for others. In this unit we will discuss the basics of corporate 
governance and how it is related to strategy. 
 
 
11.2 EVOLUTION OF CORPORATE GOVERNANCE 
 
 
 
190 
If we go back and see the Indian history way back in the third century B.C. we 
will find that Patliputra, the capital of the Mauryan Empire was said to be the 
Page 2


Strategy Implementation 
and Control 
 
 
UNIT 11 CORPORATE GOVERNANCE 
 
 
Objectives 
After going through this unit you should be able to: 
? Know the evolution of corporate governance; 
? Acquaint yourself with five pillars of corporate governance; 
? Understand the various drivers of corporate governance; 
? Discuss the models of corporate governance. 
Structure 
11.1 Introduction 
11.2 Evolution of corporate governance 
11.3 Business Ethics 
11.4 Pillars of corporate governance 
11.5 Models of corporate governance 
11.6 Corporate governance and Strategy 
11.7 Challenges of corporate governance 
11.8 Summary 
11.9 Key-words 
11.10 Self-Assessment Questions 
11.11 References and Further Readings 
 
 
 
 
11.1 INTRODUCTION 
 
 
The growth of corporate sector and the competitive market has together introduced 
the concept of corporate governance. Corporate governance has become an 
integral part of business life so as to achieve the objectives and to protect the 
organizations from failure in future. There are two aspects which are important 
to understand the corporate governance: a) the internal structure which includes 
the management, board structure etc. and b) the external structure which includes 
shareholders and other stakeholders. This helps in ensuring an efficient internal 
control, robust management structure, appropriate performance measures and 
effective succession plans. At the domestic as well as international fronts, the 
organizations have been applying corporate governance as codes of best practices 
and have set examples for others. In this unit we will discuss the basics of corporate 
governance and how it is related to strategy. 
 
 
11.2 EVOLUTION OF CORPORATE GOVERNANCE 
 
 
 
190 
If we go back and see the Indian history way back in the third century B.C. we 
will find that Patliputra, the capital of the Mauryan Empire was said to be the 
best example of a city which followed the best practices of governance. Chanakya 
in his book Arthshastra, mentioned the virtues of an ideal kind which can be 
related to the chief of any organization. These virtues are: 
? Well-being of the subjects;; 
? Welfare of the subjects. 
If these two are followed, then the king automatically will be happy and something 
which is desirable and beneficial to the subjects is desirable and beneficial to the 
king. 
If we substitute the state with the organization and the king with the chief of the 
organization or the board of a company, and the subjects with the shareholders, 
the principles of corporate governance which is the belief that public good should 
be ahead of private good; and that the corporation’s resources should not be used 
for personal benefit fits well. The duties of the king when applied for a business 
organization implies as follows: 
? Protecting the shareholders wealth, 
? Proper utilization of assets; 
? Maintenance of wealth; 
? Accountability and transparency. 
The advent of company law happened in the middle of 19
th 
century. This was 
basically done to protect the interests of the shareholders in the joint stock 
companies. The concept of Board of Directors (BOD) as trustees of the 
shareholders emanated from the need for appropriate governance structure. 
The BOD would be responsible for overseeing the management of the 
organization in order to protect the interests of the shareholders. As the time 
passed the ownership of shareholdings gradually shifted from individuals to 
institutional investors and also with privatization throughout the globe, control 
of assets shifted from State to market economy. This led to the views of 
various experts who felt good governance is a useful indicator of good 
performance in the market systems. 
In the developed market economies, the concern for Board governance framework 
became important due to rise in corporate sector financial and related irregularities 
at different points of time especially during the twentieth century. This showed 
the inefficiency in the governance structure. Further, with the gradual opening 
up of the global economy, trade, investment and international financial market 
liberalization, the framework of effective corporate governance gained 
recognition. This was considered as an important instrument for sustained 
development of the world economy. Worldwide a series of expert committee 
reports led to the evolution of different codes of corporate governance to reflect 
the challenges of a competitive and globalised system. 
There is no fixed way as to how corporate governance can be incorporated in 
an organization’s strategy. There are different views and different experts 
have given different definitions of corporate governance. The dictionary 
meaning of governance includes both ‘the action or manner of governing’ 
and ‘a mode of living, behaviour, and demeanor’. Corporate governance is 
essentially concerned with the process by which organizations are governed and 
managed.  
Corporate Governance 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
191 
Page 3


Strategy Implementation 
and Control 
 
 
UNIT 11 CORPORATE GOVERNANCE 
 
 
Objectives 
After going through this unit you should be able to: 
? Know the evolution of corporate governance; 
? Acquaint yourself with five pillars of corporate governance; 
? Understand the various drivers of corporate governance; 
? Discuss the models of corporate governance. 
Structure 
11.1 Introduction 
11.2 Evolution of corporate governance 
11.3 Business Ethics 
11.4 Pillars of corporate governance 
11.5 Models of corporate governance 
11.6 Corporate governance and Strategy 
11.7 Challenges of corporate governance 
11.8 Summary 
11.9 Key-words 
11.10 Self-Assessment Questions 
11.11 References and Further Readings 
 
 
 
 
11.1 INTRODUCTION 
 
 
The growth of corporate sector and the competitive market has together introduced 
the concept of corporate governance. Corporate governance has become an 
integral part of business life so as to achieve the objectives and to protect the 
organizations from failure in future. There are two aspects which are important 
to understand the corporate governance: a) the internal structure which includes 
the management, board structure etc. and b) the external structure which includes 
shareholders and other stakeholders. This helps in ensuring an efficient internal 
control, robust management structure, appropriate performance measures and 
effective succession plans. At the domestic as well as international fronts, the 
organizations have been applying corporate governance as codes of best practices 
and have set examples for others. In this unit we will discuss the basics of corporate 
governance and how it is related to strategy. 
 
 
11.2 EVOLUTION OF CORPORATE GOVERNANCE 
 
 
 
190 
If we go back and see the Indian history way back in the third century B.C. we 
will find that Patliputra, the capital of the Mauryan Empire was said to be the 
best example of a city which followed the best practices of governance. Chanakya 
in his book Arthshastra, mentioned the virtues of an ideal kind which can be 
related to the chief of any organization. These virtues are: 
? Well-being of the subjects;; 
? Welfare of the subjects. 
If these two are followed, then the king automatically will be happy and something 
which is desirable and beneficial to the subjects is desirable and beneficial to the 
king. 
If we substitute the state with the organization and the king with the chief of the 
organization or the board of a company, and the subjects with the shareholders, 
the principles of corporate governance which is the belief that public good should 
be ahead of private good; and that the corporation’s resources should not be used 
for personal benefit fits well. The duties of the king when applied for a business 
organization implies as follows: 
? Protecting the shareholders wealth, 
? Proper utilization of assets; 
? Maintenance of wealth; 
? Accountability and transparency. 
The advent of company law happened in the middle of 19
th 
century. This was 
basically done to protect the interests of the shareholders in the joint stock 
companies. The concept of Board of Directors (BOD) as trustees of the 
shareholders emanated from the need for appropriate governance structure. 
The BOD would be responsible for overseeing the management of the 
organization in order to protect the interests of the shareholders. As the time 
passed the ownership of shareholdings gradually shifted from individuals to 
institutional investors and also with privatization throughout the globe, control 
of assets shifted from State to market economy. This led to the views of 
various experts who felt good governance is a useful indicator of good 
performance in the market systems. 
In the developed market economies, the concern for Board governance framework 
became important due to rise in corporate sector financial and related irregularities 
at different points of time especially during the twentieth century. This showed 
the inefficiency in the governance structure. Further, with the gradual opening 
up of the global economy, trade, investment and international financial market 
liberalization, the framework of effective corporate governance gained 
recognition. This was considered as an important instrument for sustained 
development of the world economy. Worldwide a series of expert committee 
reports led to the evolution of different codes of corporate governance to reflect 
the challenges of a competitive and globalised system. 
There is no fixed way as to how corporate governance can be incorporated in 
an organization’s strategy. There are different views and different experts 
have given different definitions of corporate governance. The dictionary 
meaning of governance includes both ‘the action or manner of governing’ 
and ‘a mode of living, behaviour, and demeanor’. Corporate governance is 
essentially concerned with the process by which organizations are governed and 
managed.  
Corporate Governance 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
191 
Strategy Implementation 
and Control 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
192 
It is a set of standards, which aims to improve the organization’s image, 
efficiency, effectiveness and social responsibility. The concept of corporate 
governance primarily relies on complete transparency, integrity and 
accountability of the management, with an increasingly higher focus on 
investor protection and public interest. A key element of good governance is 
transparency projected through a code of good governance, which incorporate 
a system of checks and balances between key players – boards, management, 
auditors and shareholders. 
The corporate governance framework in many countries of the world is largely 
inward-focused. It mainly highlights the composition of management structure 
at various levels. The composition at different levels is different assuming that 
the right structure will automatically ensure quality to delivery. All corporate 
governance systems depend on 5 key pillars which will be discussed later in this 
unit. These are: 
1. Accountability 
2. Fairness 
3. Transparency 
4. Integrity 
5. Social responsibility 
The challenges of upholding these pillars depend upon the ownership structure 
of the corporate. The corporate ownership structures are of two types: 1) “Insider” 
(concentrated) and 2)”Outsider” (dispersed). In the concentrated ownership 
structure, ownership control is concentrated in the hands of a small number of 
individuals, families, holding companies, banks or other non-financial companies. 
In this structure insiders exercise control over organization in different ways. 
The most common feature in this structure is that insiders own the majority of 
the shares of the organization with voting rights. Most nations, especially those 
governed by civil law, have concentrated ownership structure. In dispersed 
ownership structures, there are number of owners, each of whom holds a small 
number of shares of the organization. Small shareholders have little incentive to 
closely monitor organizations’ activities and tend not be involved in management 
decisions or policies. Common law countries such as United Kingdom and United 
States tend to have dispersed ownership structure. Each ownership structure has 
its own corporate governance challenges. 
Evolution globally 
In the early 1990’s in the United Kingdom, the United States and Canada began 
the modern trend of developing corporate governance guidelines and codes of 
best practice. This was in response to problems in the corporate performance of 
leading organizations, the perceived lack of effective board oversight that 
contributed to performance problems and pressure for change from institutional 
investors. 
In the year 1992 in the United Kingdom, the Cadbury committee report, defined 
corporate governance as “the system by which organizations are directed and 
controlled”, became a pioneering reference code for stock exchanges both in 
UK and abroad. General Motors Board of Directors Guidelines in the U.S., and 
Page 4


Strategy Implementation 
and Control 
 
 
UNIT 11 CORPORATE GOVERNANCE 
 
 
Objectives 
After going through this unit you should be able to: 
? Know the evolution of corporate governance; 
? Acquaint yourself with five pillars of corporate governance; 
? Understand the various drivers of corporate governance; 
? Discuss the models of corporate governance. 
Structure 
11.1 Introduction 
11.2 Evolution of corporate governance 
11.3 Business Ethics 
11.4 Pillars of corporate governance 
11.5 Models of corporate governance 
11.6 Corporate governance and Strategy 
11.7 Challenges of corporate governance 
11.8 Summary 
11.9 Key-words 
11.10 Self-Assessment Questions 
11.11 References and Further Readings 
 
 
 
 
11.1 INTRODUCTION 
 
 
The growth of corporate sector and the competitive market has together introduced 
the concept of corporate governance. Corporate governance has become an 
integral part of business life so as to achieve the objectives and to protect the 
organizations from failure in future. There are two aspects which are important 
to understand the corporate governance: a) the internal structure which includes 
the management, board structure etc. and b) the external structure which includes 
shareholders and other stakeholders. This helps in ensuring an efficient internal 
control, robust management structure, appropriate performance measures and 
effective succession plans. At the domestic as well as international fronts, the 
organizations have been applying corporate governance as codes of best practices 
and have set examples for others. In this unit we will discuss the basics of corporate 
governance and how it is related to strategy. 
 
 
11.2 EVOLUTION OF CORPORATE GOVERNANCE 
 
 
 
190 
If we go back and see the Indian history way back in the third century B.C. we 
will find that Patliputra, the capital of the Mauryan Empire was said to be the 
best example of a city which followed the best practices of governance. Chanakya 
in his book Arthshastra, mentioned the virtues of an ideal kind which can be 
related to the chief of any organization. These virtues are: 
? Well-being of the subjects;; 
? Welfare of the subjects. 
If these two are followed, then the king automatically will be happy and something 
which is desirable and beneficial to the subjects is desirable and beneficial to the 
king. 
If we substitute the state with the organization and the king with the chief of the 
organization or the board of a company, and the subjects with the shareholders, 
the principles of corporate governance which is the belief that public good should 
be ahead of private good; and that the corporation’s resources should not be used 
for personal benefit fits well. The duties of the king when applied for a business 
organization implies as follows: 
? Protecting the shareholders wealth, 
? Proper utilization of assets; 
? Maintenance of wealth; 
? Accountability and transparency. 
The advent of company law happened in the middle of 19
th 
century. This was 
basically done to protect the interests of the shareholders in the joint stock 
companies. The concept of Board of Directors (BOD) as trustees of the 
shareholders emanated from the need for appropriate governance structure. 
The BOD would be responsible for overseeing the management of the 
organization in order to protect the interests of the shareholders. As the time 
passed the ownership of shareholdings gradually shifted from individuals to 
institutional investors and also with privatization throughout the globe, control 
of assets shifted from State to market economy. This led to the views of 
various experts who felt good governance is a useful indicator of good 
performance in the market systems. 
In the developed market economies, the concern for Board governance framework 
became important due to rise in corporate sector financial and related irregularities 
at different points of time especially during the twentieth century. This showed 
the inefficiency in the governance structure. Further, with the gradual opening 
up of the global economy, trade, investment and international financial market 
liberalization, the framework of effective corporate governance gained 
recognition. This was considered as an important instrument for sustained 
development of the world economy. Worldwide a series of expert committee 
reports led to the evolution of different codes of corporate governance to reflect 
the challenges of a competitive and globalised system. 
There is no fixed way as to how corporate governance can be incorporated in 
an organization’s strategy. There are different views and different experts 
have given different definitions of corporate governance. The dictionary 
meaning of governance includes both ‘the action or manner of governing’ 
and ‘a mode of living, behaviour, and demeanor’. Corporate governance is 
essentially concerned with the process by which organizations are governed and 
managed.  
Corporate Governance 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
191 
Strategy Implementation 
and Control 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
192 
It is a set of standards, which aims to improve the organization’s image, 
efficiency, effectiveness and social responsibility. The concept of corporate 
governance primarily relies on complete transparency, integrity and 
accountability of the management, with an increasingly higher focus on 
investor protection and public interest. A key element of good governance is 
transparency projected through a code of good governance, which incorporate 
a system of checks and balances between key players – boards, management, 
auditors and shareholders. 
The corporate governance framework in many countries of the world is largely 
inward-focused. It mainly highlights the composition of management structure 
at various levels. The composition at different levels is different assuming that 
the right structure will automatically ensure quality to delivery. All corporate 
governance systems depend on 5 key pillars which will be discussed later in this 
unit. These are: 
1. Accountability 
2. Fairness 
3. Transparency 
4. Integrity 
5. Social responsibility 
The challenges of upholding these pillars depend upon the ownership structure 
of the corporate. The corporate ownership structures are of two types: 1) “Insider” 
(concentrated) and 2)”Outsider” (dispersed). In the concentrated ownership 
structure, ownership control is concentrated in the hands of a small number of 
individuals, families, holding companies, banks or other non-financial companies. 
In this structure insiders exercise control over organization in different ways. 
The most common feature in this structure is that insiders own the majority of 
the shares of the organization with voting rights. Most nations, especially those 
governed by civil law, have concentrated ownership structure. In dispersed 
ownership structures, there are number of owners, each of whom holds a small 
number of shares of the organization. Small shareholders have little incentive to 
closely monitor organizations’ activities and tend not be involved in management 
decisions or policies. Common law countries such as United Kingdom and United 
States tend to have dispersed ownership structure. Each ownership structure has 
its own corporate governance challenges. 
Evolution globally 
In the early 1990’s in the United Kingdom, the United States and Canada began 
the modern trend of developing corporate governance guidelines and codes of 
best practice. This was in response to problems in the corporate performance of 
leading organizations, the perceived lack of effective board oversight that 
contributed to performance problems and pressure for change from institutional 
investors. 
In the year 1992 in the United Kingdom, the Cadbury committee report, defined 
corporate governance as “the system by which organizations are directed and 
controlled”, became a pioneering reference code for stock exchanges both in 
UK and abroad. General Motors Board of Directors Guidelines in the U.S., and 
the Dey Report in Canada also proved to be influential sources for guidelines 
and code initiatives adopted by other countries. 
in July 2003, in U.K., the Financial Reporting Council (FRC) of the U.K. 
published the new Combined code which was referred to as “U.K. code (2003)” 
thereafter. The U.K. Code (2003) was based on the proposed revision of the 
Cabined Code (1998), in the report by Derek Higgs on the role and effectiveness 
of non-executive directors, which incorporated the recommendations on audit 
committees by Robert Smith. 
The most significant changes in the code were as follows: 
? the expanded definition of independent director; 
? an increase in the recommended proportion of independent directors 
from one-third to a majority of the Board for larger listed organizations; 
? Separate Chairperson and CEO 
? Chairperson being an independent director. 
? Stringent guidelines on membership of the Audit Committee; 
? Increased emphasis on the need for internal audit and control functions; 
? Allows for some differences in corporate governance arrangements for 
larger and smaller organizations, particularly pertaining to the number 
and proportion of independent directors on the Board and number of 
members on certain Board committees. 
Following various other committee recommendations in different nations of the 
world, there have been efforts to homogenize the code of corporate Governance, 
particularly in listed organizations. In the U.S., in 1998, the New York Stock 
Exchange (NYSE) and the National Association of Securities Dealers (NASD) 
sponsored a committee to study the effectiveness of audit committees. This 
committee was known as the Blue Ribbon Committee and was set up to improve 
the effectiveness of Corporate Audit Committees. In its 1999 report, the Blue 
Ribbon Committee recognized the importance of audit committees and issued 
ten recommendations to enhance their effectiveness. In response to these 
recommendations, the NYSE and the NASD, as well as other exchanges, revised 
their listing standards relating to audit committees. 
In 2002, the Sarbanes-Oxley Act was passed in response to a number of major 
corporate and accounting scandals involving prominent companies in the United 
States. This Act is considered to be one of the most significant changes to federal 
securities laws in the United States. An interesting aspect in the Sarbanes Oxley 
Act is the protection to whistleblowers. 
The Organization for Economic co-operating and Development (OECD) 
Principles of Corporate Governance, originally adopted by the 30 member 
countries of the OECD in 1999, have provided a good insight into corporate 
governance framework at a macro level. Following an extensive review process 
that led to adoption of revised OECD Principles of Corporate Governance 2004, 
they now reflect a global consensus regarding the critical importance of good 
corporate governance in contributing to the economic viability and stability of 
Corporate Governance 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
193 
Page 5


Strategy Implementation 
and Control 
 
 
UNIT 11 CORPORATE GOVERNANCE 
 
 
Objectives 
After going through this unit you should be able to: 
? Know the evolution of corporate governance; 
? Acquaint yourself with five pillars of corporate governance; 
? Understand the various drivers of corporate governance; 
? Discuss the models of corporate governance. 
Structure 
11.1 Introduction 
11.2 Evolution of corporate governance 
11.3 Business Ethics 
11.4 Pillars of corporate governance 
11.5 Models of corporate governance 
11.6 Corporate governance and Strategy 
11.7 Challenges of corporate governance 
11.8 Summary 
11.9 Key-words 
11.10 Self-Assessment Questions 
11.11 References and Further Readings 
 
 
 
 
11.1 INTRODUCTION 
 
 
The growth of corporate sector and the competitive market has together introduced 
the concept of corporate governance. Corporate governance has become an 
integral part of business life so as to achieve the objectives and to protect the 
organizations from failure in future. There are two aspects which are important 
to understand the corporate governance: a) the internal structure which includes 
the management, board structure etc. and b) the external structure which includes 
shareholders and other stakeholders. This helps in ensuring an efficient internal 
control, robust management structure, appropriate performance measures and 
effective succession plans. At the domestic as well as international fronts, the 
organizations have been applying corporate governance as codes of best practices 
and have set examples for others. In this unit we will discuss the basics of corporate 
governance and how it is related to strategy. 
 
 
11.2 EVOLUTION OF CORPORATE GOVERNANCE 
 
 
 
190 
If we go back and see the Indian history way back in the third century B.C. we 
will find that Patliputra, the capital of the Mauryan Empire was said to be the 
best example of a city which followed the best practices of governance. Chanakya 
in his book Arthshastra, mentioned the virtues of an ideal kind which can be 
related to the chief of any organization. These virtues are: 
? Well-being of the subjects;; 
? Welfare of the subjects. 
If these two are followed, then the king automatically will be happy and something 
which is desirable and beneficial to the subjects is desirable and beneficial to the 
king. 
If we substitute the state with the organization and the king with the chief of the 
organization or the board of a company, and the subjects with the shareholders, 
the principles of corporate governance which is the belief that public good should 
be ahead of private good; and that the corporation’s resources should not be used 
for personal benefit fits well. The duties of the king when applied for a business 
organization implies as follows: 
? Protecting the shareholders wealth, 
? Proper utilization of assets; 
? Maintenance of wealth; 
? Accountability and transparency. 
The advent of company law happened in the middle of 19
th 
century. This was 
basically done to protect the interests of the shareholders in the joint stock 
companies. The concept of Board of Directors (BOD) as trustees of the 
shareholders emanated from the need for appropriate governance structure. 
The BOD would be responsible for overseeing the management of the 
organization in order to protect the interests of the shareholders. As the time 
passed the ownership of shareholdings gradually shifted from individuals to 
institutional investors and also with privatization throughout the globe, control 
of assets shifted from State to market economy. This led to the views of 
various experts who felt good governance is a useful indicator of good 
performance in the market systems. 
In the developed market economies, the concern for Board governance framework 
became important due to rise in corporate sector financial and related irregularities 
at different points of time especially during the twentieth century. This showed 
the inefficiency in the governance structure. Further, with the gradual opening 
up of the global economy, trade, investment and international financial market 
liberalization, the framework of effective corporate governance gained 
recognition. This was considered as an important instrument for sustained 
development of the world economy. Worldwide a series of expert committee 
reports led to the evolution of different codes of corporate governance to reflect 
the challenges of a competitive and globalised system. 
There is no fixed way as to how corporate governance can be incorporated in 
an organization’s strategy. There are different views and different experts 
have given different definitions of corporate governance. The dictionary 
meaning of governance includes both ‘the action or manner of governing’ 
and ‘a mode of living, behaviour, and demeanor’. Corporate governance is 
essentially concerned with the process by which organizations are governed and 
managed.  
Corporate Governance 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
191 
Strategy Implementation 
and Control 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
192 
It is a set of standards, which aims to improve the organization’s image, 
efficiency, effectiveness and social responsibility. The concept of corporate 
governance primarily relies on complete transparency, integrity and 
accountability of the management, with an increasingly higher focus on 
investor protection and public interest. A key element of good governance is 
transparency projected through a code of good governance, which incorporate 
a system of checks and balances between key players – boards, management, 
auditors and shareholders. 
The corporate governance framework in many countries of the world is largely 
inward-focused. It mainly highlights the composition of management structure 
at various levels. The composition at different levels is different assuming that 
the right structure will automatically ensure quality to delivery. All corporate 
governance systems depend on 5 key pillars which will be discussed later in this 
unit. These are: 
1. Accountability 
2. Fairness 
3. Transparency 
4. Integrity 
5. Social responsibility 
The challenges of upholding these pillars depend upon the ownership structure 
of the corporate. The corporate ownership structures are of two types: 1) “Insider” 
(concentrated) and 2)”Outsider” (dispersed). In the concentrated ownership 
structure, ownership control is concentrated in the hands of a small number of 
individuals, families, holding companies, banks or other non-financial companies. 
In this structure insiders exercise control over organization in different ways. 
The most common feature in this structure is that insiders own the majority of 
the shares of the organization with voting rights. Most nations, especially those 
governed by civil law, have concentrated ownership structure. In dispersed 
ownership structures, there are number of owners, each of whom holds a small 
number of shares of the organization. Small shareholders have little incentive to 
closely monitor organizations’ activities and tend not be involved in management 
decisions or policies. Common law countries such as United Kingdom and United 
States tend to have dispersed ownership structure. Each ownership structure has 
its own corporate governance challenges. 
Evolution globally 
In the early 1990’s in the United Kingdom, the United States and Canada began 
the modern trend of developing corporate governance guidelines and codes of 
best practice. This was in response to problems in the corporate performance of 
leading organizations, the perceived lack of effective board oversight that 
contributed to performance problems and pressure for change from institutional 
investors. 
In the year 1992 in the United Kingdom, the Cadbury committee report, defined 
corporate governance as “the system by which organizations are directed and 
controlled”, became a pioneering reference code for stock exchanges both in 
UK and abroad. General Motors Board of Directors Guidelines in the U.S., and 
the Dey Report in Canada also proved to be influential sources for guidelines 
and code initiatives adopted by other countries. 
in July 2003, in U.K., the Financial Reporting Council (FRC) of the U.K. 
published the new Combined code which was referred to as “U.K. code (2003)” 
thereafter. The U.K. Code (2003) was based on the proposed revision of the 
Cabined Code (1998), in the report by Derek Higgs on the role and effectiveness 
of non-executive directors, which incorporated the recommendations on audit 
committees by Robert Smith. 
The most significant changes in the code were as follows: 
? the expanded definition of independent director; 
? an increase in the recommended proportion of independent directors 
from one-third to a majority of the Board for larger listed organizations; 
? Separate Chairperson and CEO 
? Chairperson being an independent director. 
? Stringent guidelines on membership of the Audit Committee; 
? Increased emphasis on the need for internal audit and control functions; 
? Allows for some differences in corporate governance arrangements for 
larger and smaller organizations, particularly pertaining to the number 
and proportion of independent directors on the Board and number of 
members on certain Board committees. 
Following various other committee recommendations in different nations of the 
world, there have been efforts to homogenize the code of corporate Governance, 
particularly in listed organizations. In the U.S., in 1998, the New York Stock 
Exchange (NYSE) and the National Association of Securities Dealers (NASD) 
sponsored a committee to study the effectiveness of audit committees. This 
committee was known as the Blue Ribbon Committee and was set up to improve 
the effectiveness of Corporate Audit Committees. In its 1999 report, the Blue 
Ribbon Committee recognized the importance of audit committees and issued 
ten recommendations to enhance their effectiveness. In response to these 
recommendations, the NYSE and the NASD, as well as other exchanges, revised 
their listing standards relating to audit committees. 
In 2002, the Sarbanes-Oxley Act was passed in response to a number of major 
corporate and accounting scandals involving prominent companies in the United 
States. This Act is considered to be one of the most significant changes to federal 
securities laws in the United States. An interesting aspect in the Sarbanes Oxley 
Act is the protection to whistleblowers. 
The Organization for Economic co-operating and Development (OECD) 
Principles of Corporate Governance, originally adopted by the 30 member 
countries of the OECD in 1999, have provided a good insight into corporate 
governance framework at a macro level. Following an extensive review process 
that led to adoption of revised OECD Principles of Corporate Governance 2004, 
they now reflect a global consensus regarding the critical importance of good 
corporate governance in contributing to the economic viability and stability of 
Corporate Governance 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
193 
Strategy Implementation 
and Control 
our economies. OECD Principles of Corporate Governance reflects not only the 
experience of OECD countries but also that of emerging and developing 
economics. 
 
 
11.3 BUSINESS ETHICS 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
194 
When we talk about ethics, it relates to the demarcation between right and wrong. 
It is actually the moral values and certain codes of conduct which are presumed 
to be followed by an individual as well as an organization. Garret has defined 
ethics as “the science of judging specifically human ends and the relationship of 
means of those ends. In some way it is also the art of controlling means so that 
they will serve specifically human ends”. There are many such definitions but at 
the end of the day we can say that there are no fixed set of rules which can define 
as the action right or wrong. Ethics is not legally defined but it does not permit to 
violate the laws. Role of ethics and values is quite important for business 
organization and we call it as business ethics. 
Business Ethics: As the name suggests, it deals with certain sets of rules of any 
business organization. It is the set of permissible rules which have a positive 
impact to the organization. It deals with certain set of values of the organization 
leading to the socially responsible behaviour of the organization. In a nutshell 
we can say that it is the application of ethical principles in a business organization. 
There are certain common features of business ethics which are as follows: 
1. It demarcates between the right and wrong, 
2. It deals with the operating issues in an organization; 
3. It relates to the corporate social responsibility; 
4. It directs the organization to be good corporate citizens apart from being 
profitable; 
5. It defines the descriptive (what is being done) as well as normative ethics 
(what should be done); 
6. Though it is not legal but it is much larger than any law. 
Let us see a hypothetical example where the organization is termed to be ethical. 
Organization ‘T’ is said to be one of the most ethical and socially responsible 
organization. 
Q. What does it do to become an ethical organization? 
Ans.  It follows the following business activities: 
? It makes the organization effective; 
? It follows the concept of wealth maximization than profit maximization; 
? It treats it customers as kings/queens, 
? It builds a culture where the employees have a high level of integrity; 
? It gives importance to the families of the employees; 
? It deals with the ethical dilemmas in teams.