CORPORATE GOVERNANCE
• Corporate governance is a concept which revolves around the appropriate management and control of a company.
• It includes the rules relating to the power relations between owners, the board of directors, management and the stakeholders such as employees, suppliers, customers as well as the public at large.
• Sustained growth of any organization requires the cooperation of all stakeholders, which requires adherence to the best corporate governance practices.
• In this regard, the management needs to act as trustees of the shareholders at large and prevent asymmetry of benefits between various sections of shareholders, especially between the owner-managers and the rest of the shareholders.
• In general, corporate governance corresponds to the fair, transparent and ethical administration of a corporation giving maximum benefits to the shareholders.
• Ethics is at the core of corporate governance, and management must reflect accountability for their actions on the global community scale.
• Corporate governance is a relatively new term used to describe a process, which has been practised for as long as there have been corporate entities.
• This process seeks to ensure that the business and management of corporate entities is carried on in accordance with the highest prevailing standards of ethics and efficacy upon the assumption that it is the best way to safeguard and promote the interests of all corporate stakeholders.
Definition of Corporate Governance
• A basic definition of corporate governance, which has been widely recognized, was given in a report by the committee under the chairmanship of Sir Adrian Cadbury tiled (the Cadbury Report):
Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies.
• The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place.
• The responsibilities of the directors include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship.
• The Board’s actions are subject to laws, regulations and the shareholders in general meeting.
Guidelines for Corporate Governance at International Level
- Cadbury Committee Report-The Financial Aspects of Corporate Governance (1992)
- Greenbury Committee Report on Directors’ Remuneration (1995)
- Hampel Committee Report on Corporate Governance (1998)
- The Combined Code, Principles of Good Governance and Code of Best Practice, London Stock Exchange (1998)
- CalPERS’ Global Principles of Accountable Corporate Governance (1999).
- Blue Ribbon Report (1999)
- King Committee On Corporate Governance (2002)
- Sarbanes Oxley Act (2002)
- Higgs Report: Review of the role and effectiveness of non-executive directors (2003)
- The Combined Code on Corporate Governance (2003)
- ASX Corporate Governance Council Report (2003)
- OECD Principles of Corporate Governance (2004)
- The Combined Code on Corporate Governance (2006)
- UNCTAD Guidance on Good Practices in Corporate Governance Disclosure (2006)
- The Combined Code on Corporate Governance (2008)
Corporate Governance Initiatives in India
• In India, corporate governance initiatives have been undertaken by the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI).
• The first formal regulatory framework for listed companies specifically for corporate governance was established by the SEBI in February 2000, following the recommendations of Kumarmangalam Birla Committee Report.
• Further, SEBI is maintaining the standards of corporate governance through other laws like the Securities Contracts (Regulation) Act, 1956; Securities and Exchange Board of India Act, 1992; and Depositories Act, 1996.
• The Ministry of Corporate Affairs had appointed a Naresh Chandra Committee on Corporate Audit and Governance in 2002 in order to examine various corporate governance issues.
• It made recommendations in two key aspects of corporate governance: financial and non-financial disclosures: an independent auditing and board oversight of management.
• India’s SEBI Committee on Corporate Governance defines corporate governance as the “acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company.”
• It has been suggested that the Indian approach is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution, but this conceptualization of corporate objectives is also prevalent in Anglo-American and most other jurisdictions.
• With the goal of promoting better corporate governance practices in India, the Ministry of Corporate Affairs, Government of India, has set up National Foundation for Corporate Governance (NFCG) in partnership with Confederation of Indian Industry (CII), Institute of Company Secretaries of India (ICSI) and Institute of Chartered Accountants of India (ICAI).
Understanding Corporate Governance
• Just like the governance of a country, the governance of a corporation is also not an easy matter.
• Almost all modern corporations work transparently; there will be elections to the top posts.
• Shareholders elect the Board of Directors.
• Board of Directors appoint the officers (management) for day to day administration.
• They will run the company on behalf of shareholders.
• Commitment to the highest standards of ethics and integrity should be an uncompromising principle of every corporation.
• The objective of establishing a good governance structure is to foster entrepreneurial drive within a system of accountability to ensure maximum returns to all stakeholders.
• While it is debatable whether consensus can be reached on what is ‘Best Practice’ in terms of Corporate Governance, considering the structure, complexity and diversity of organizations.
• However, as a responsible corporate citizen, we make sure that we adhere to corporate best practices at all times.
• Corporate governance is based on principles such as conducting the business with all integrity and fairness, being transparent with regard to all transactions, making all the necessary disclosures and decisions, complying with all the laws of the land, accountability and responsibility towards the stakeholders and commitment to conducting business in an ethical manner.
• Another point which is highlighted in the SEBI report on corporate governance is the need for those in control to be able to distinguish between what are personal and corporate funds while managing a company.
Importance of Corporate Governance
• The term is highlighted whenever there are corporate frauds.
• Corporate Governance calls for ethical and accountable corporate administration.
• The best practices of corporate governance are important not only for public or shareholders but also for the very existence of the company itself.
• Adopting corporate governance will increase the value, sustainability and long-term profits. These days, it is not enough for a company to merely be profitable; it also needs to demonstrate good corporate citizenship through environmental awareness, ethical behaviour and sound corporate governance practices.
• Corporate governance became a pressing issue following the 2002 introduction of the Sarbanes-Oxley Act in the U.S., which was ushered in to restore public confidence in companies and markets after accounting fraud bankrupted high-profile companies such as Enron and WorldCom.
• Importance of corporate governance was highlighted at the time of Satyam Fraud and also when Kingfisher Airlines was making a loss.
CORPORATE SOCIAL RESPONSIBILITY (CSR)
• Corporate Social responsibility (CSR) is continuing commitment by businesses to integrate social and environmental concerns in their business operations.
• Changes in the global environment increasingly challenge business around the world to look beyond financial performance, and to integrate social and environmental concerns into their strategic management.
• Prior to Companies Act 2013, CSR in India has traditionally been seen as a philanthropic activity. And in keeping with the Indian tradition, it was believed that every company has a moral responsibility to play an active role in discharging the social obligations, subject to the financial health of the company.
• In the early 90’s Mahatma Gandhi introduced the concept of trusteeship helping socio-economic growth. CSR was influenced by family values, traditions, culture and religion.
• On 29th August 2013, the Companies Act 2013 replaced the Companies Act of 1956.
• The new Act has introduced far-reaching changes that affect company formation, administration, and governance, and incorporates an additional section i.e. Section 135 – clause on Corporate Social Responsibility obligations (“CSR”) for companies listed in India. The clause covers the essential prerequisites pertaining to the execution, fund allotment and reporting for successful project implementation.
Entities Covered by the CSR Obligations
The Section 135 is applicable to companies which have
• an annual turnover of Rs.1,000 crore or more
• or a net worth of Rs.500 crore or more
• or a net profit of Rs.5 crore or more.
The companies falling under the prescribed criteria are required to spend a minimum 2% of its average net profit for its preceding three financial years amount on CSR activities and report on the activities detailed in Schedule VII, or prepare to explain why they didn’t.
• Companies meeting the above criteria are required to constitute a CSR Committee consists of three directors and one director shall be an independent director.
• An unlisted public company or a private company covered under Section 135(1) of the Act, which is not required to appoint an independent director, shall have its CSR Committee without such director and a private company with two directors on Board should constitute its CSR Committee with only two directors.
• The CSR Committee shall institute a transparent monitoring mechanism for implementation of the CSR projects or programs or activities undertaken by the company.
Suggested Areas of Activities for companies to implement their CSR are:(as per Schedule VII of the Companies Act, 2013)
• Eradicating hunger, poverty and malnutrition, promoting health care including preventive health care and sanitation including contribution to the Swachh Bharat Kosh set-up by the Central Government for the promotion of sanitation and making available safe drinking water
• promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly and the differently abled and livelihood enhancement projects
• promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups
• ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water including contribution to the Clean Ganga Fund setup by the Central Government for rejuvenation of river Ganga
• protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional art and handicrafts
• measures for the benefit of armed forces veterans, war widows and their dependents
• training to promote rural sports, nationally recognized sports, Paralympic sports and olympic sports
• contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Govt. for socio economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women
• contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Govt.
• rural development projects
• slum area development
• India became the first country to legislate the need to undertake CSR activities and mandatorily report CSR initiatives under the new Companies Act 2013. This is the beginning of a new era for CSR in India.
• The CSR initiatives of companies thrust on creating value in the lives of the communities around its areas of business and manufacturing operations.
• CSR has become an effective tool to work in the line of Sustainable Development Goals (SDGs) with a strong focus on social performance indicated in the CSR projects of the organizations. The SDGs, otherwise known as the Global Goals, are a universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity.
Power
• Power, in the context of politics, can be defined as the ability to get others to do things even when they might not want to.
• Power can operate through persuasion, so that people cooperate willingly and freely, on the basis of reasons they accept (which may include incentives that are offered for cooperation); or through coercion – the use of threats, sanctions, and force.
• States have power, in the end, because they can make laws. And laws are enforced by the police, again in the end, by the use of force. If you don’t obey the law, at some point, you will be fined or jailed or worse.
• However, we want to be able to make a distinction between cases in which it is right that the state has power, and cases in which it is wrong or objectionable in some way. To make this distinction, we need the concepts of ‘authority’ and ‘legitimacy’.
Types of Power
• These are known as bases of power also.
Reward Power
• It refers to the ability and resources to reward others for doing desired actions. In every organization, managers may have potential rewards such as pay increase, promotions, favourable work assignment, recognition etc.
• The manager has power to administer these rewards. Success or failure of this reward depends upon subordinate’s perception of reward. If subordinates do not value the reward, it will not have desired effect on then for example, on employee is offered a pay increase of Rs. 5001- in a year but he may not value it positively if he is very rich already.
• Under this condition, reward will not be able to control behaviour of subordinate.
• Sometimes middle managers may not really have opportunity to administer reward because top management has more control on rewards. But as long as subordinates perceive that manager is instrumental in administration of reward, he will have reward power over subordinates.
Coercive Power
• The manager with coercive power has the ability to inflict punishment or coercive consequences on other employees. They have the ability to threaten the employees which can result in punishment and undesirable outcomes.
• In my organization, managers have the power to fire or demote employees, check their increments and salary also. Management can directly or indirectly threaten an employees with these consequences and therefore, his behaviour can be controlled.
Legitimate Power
• This is known as position power, it depends upon the hierarchical position the manager holds in the organization. There are three sources of position power.
• Firstly, the prevailing cultural values of a society or group that determines what is legitimate.
• Secondly, hierarchical organisational structure of the company is source of legitimate power.
• Thirdly, legitimate power can come from being designated as representative of a group -for example, elected officials, chairperson of a committee, a member of various social groups or management committee etc. In
• Indian organisations managers mostly use their legitimate power. It is bound to be effective in controlling behaviour of employees.
Expert Power
• It is based on knowledge and expertise of the manager. Experts will have knowledge and expertise in a well-defined area for example production, finance, etc. It is possible to influence and control subordinates if managers are perceived to have knowledge and expertise.
• However, expert power is highly dependent upon perception of subordinates. They should perceive the manager to be credible, and trust worthy before expert power can be effective.
• It should be noted that expert power is not dependent upon position of manager.
Referrent Power
• This type of power courses from the desire on behalf of subordinates to identify with the agent having power. They wish to identify with powerful people regardless of outcome.
• Referrent power depends upon personal qualities
Authority
• Authority is a much more complex concept, and we need to make distinctions between several different ideas of authority.
• A first sense of authority is theoretical authority or expertise. This is the sense in which a person can be ‘an authority’, an expert, on a particular topic. We ask the advice of theoretical experts, as they can give us reasons for what to believe – for instance, whether whales are fish – but also for what to do – for example, an engineer knows how to build a bridge that won’t collapse.
• Our interest is in the second sense of authority, practical authority. This is the sense in which a person can be an ‘authority figure’. An authority can get us to act in particular ways, because they have power. However, just having power is not enough to also having authority.
• There are two senses of practical authority. In the descriptive sense of practical authority, a state has authority if it maintains public order and makes laws that are generally obeyed by its citizens. It has the power to make and impose laws successfully.
• Authority goes beyond power because it can secure public order, which depends in part, on people respecting the law. Contrast with this a state in which many people break the law, but the state still has a police force that punishes some of the law-breakers. In this case, in which citizens and the state are in conflict, the state no longer has authority.
• In the normative sense, a state has practical authority if its authority in the descriptive sense is legitimate ‘normative’ means relating to norms, rules or reasons for conduct.
• In this case, it means that the practical authority is right, justified, supported by good reasons.
Need for Power and Authority
• Whenever, a group of people work together to achieve common goal, it is seen that most part of their effort contributes to goal of organisations. But some part of their effort deviates from goal. We need power and authority to control this deviation of behaviour.
• In every organisation, employees are trying to achieve a common goal. Sometimes, their behaviour deviates from expected behaviour – for example, late coming to office.
• Managers need power and authority to control deviations of behaviour. It helps them to use manpower effectively. Power is potential ability to change the course of events and get people do things that they would not otherwise do.
• Every manager uses power to control, to direct behaviour of employees towards goal of organization.
Legitimacy
• So in addition to whether a state has authority, in the sense that people obey its laws, we can ask whether it has legitimacy.
• The term legitimate comes from the Latin for ‘lawful’. In the most basic sense, a state is legitimate if it exists and operates according to the law.
• But this definition is too shallow: if a country has no laws about how a government can come to power, then no matter how the government came to power, it will be legitimate. Or again, if a government is elected lawfully, but then changes the laws to create a police state ruled by a dictatorship, the dictatorship will be legitimate. But this is not what we mean by a legitimate government.
• If a government is legitimate, then in some way, the fact that it has power is right or justified. If it is right it has power, then we can argue that we ought to obey it. If it is objectionable that it has power, then we don’t have an obligation to obey it.
• We can object that this definition does not require that the people over which the government has authority willingly obey it. A state could have legitimate authority in this sense without those under its rule recognising its authority as legitimate.
• Second, it does not claim that the people have a duty to obey the state. It only requires that the exercise of power is morally justified.
• If we add these conditions, we can say that the state is legitimate if it can impose duties on the people under it. To impose a duty is not the same as forcing someone to do something.
• To impose a duty is to put them in a position where they have an obligation to do something, in this case, to obey the law.
• The definition does not specify who the imposed duties are owed to. There are two possible answers: we owe it to the state to obey the law, or we owe it to our fellow citizens.
• Which is the better answer? If we consider the state of nature story, at the point at which we consent to obey the law, who do we agree this with? Not with the state, because the state doesn’t exist yet. The state is created through our agreement.
• So we agree it with other people. Our obligation to obey the law is therefore owed to other citizens. This reflects the idea that we are equal; our obligation is not to something that has power over us, but to other people, and it is all of us – not the state – that will benefit from the agreement.
LEADERSHIP STYLE
• It is closely related to power and authority. Leadership style refers to a manager’s characteristic ways to interacting with his group members. All managers exercise power and authority to control subordinates, however, their means of exercising influence differ.
• In very general terms, some managers have authoritarian style which some managers have democratic style of leadership.
Characteristics of Authoritarian Leader
• He decides all policies himself. The subordinates are not involved in decision-making process.
• He expects compliance to his decisions.
• He usually defines the tasks and instructs members to accomplish them.
• He makes group dependent upon himself. The team members have to ask his advice before doing anything.
• He provides emotional support to his subordinates and acts like father-figure.
• He does not tolerate opposition to his ideas.
Characteristics of Democratic Leader
• He decides major policies and issues in consultation with other members of group.
• The members of group have opportunity to share information and express their opinion in the group.
• He has confidence and trust on his subordinates.
• The members are free to work with whomever they like and division of task is left to the group.
• He maintains good interpersonal relationship with all members of group.
Characteristics of Charismatic Leader
• They have an idealized goal they want to active, strong personal commitment to goal.
• They are perceived as unconventional, and agent of radical change rather than an ordinary manager who maintains the system.
• When organisations are facing rapid change, such style of leadership at top level of management is very effective.
The characteristics of charismatic leader are given below :
• They have very high level of self confidence in taking their judgements.
• They have ability to visualize future and communicate it to people in the language which they can understand.
• They believe that they can change the situation. People have confidence in their ideas.
• They have strong conviction about vision and they are willing to take personal risk and engage in self-sacrifice to achieve their vision.
• They have tendency to show unconventional behaviour.
Delegation
• Delegation is the act of assigning formal authority and responsibility to the subordinate to carry out specific activity. The more tasks the manager delegate the more opportunity they have to seek higher responsibilities.
• Delegation cause employee to accept accountability and exercise judgment. Delegation not only helps to train them but al so improves their self confidence and willingness to take initiative.
• Delegation leads to better decision making as employee have clear view of the fact. Effective delegation n speeds up decision making process because delay is eliminated when employee is authorized to take necessary steps.
Advantages of Delegation
• It increases managerial effectiveness and reduces managers’ burden of work.
• It provides opportunity to subordinates to share responsibility and sharpen their skills.
• Many executives have high need for achievement. They enjoy work and like to share responsibility. Such executives feel motivated when managers practice delegation.
• It makes executives result oriented.
Disadvantages of not Delegating
• Managers will feel burden of work continuously.
• There will be feeling of mistrust between managers and his subordinates.
• Subordinates will not get opportunity for developing their skills.
• Manpower utilization will be inadequate.
Why Managers do not Delegate
• Some managers feel insecure because of competences and skills of subordinate who can do very efficient job.
• Some managers think that
– I can do better job than subordinates,
– subordinates are incompetent, and
– they will make mistakes.
• They do not trust subordinates.
• They fear that subordinates can be appreciated by top management.
• Some managers want to create an impression of indispensable person.
• Some managers have authoritarian style of leadership. They do not like to share power and decision-making.
Prerequisite of delegation:
• Willingness of manager –
□ Give employee freedom
□ Let them choose methods that is different than his
□ Give freedom to make mistakes
□ Mistakes are not viewed as excuse to stop delegation
□ Opportunity to offer training
• Open communication between employee and manager-
□ Manager need to know the capabilities of employee
□ Manager need to encourage their ability and back them up
• Manager’s ability to analyze and understand the factors
□ Organizational goal
□ Capability of employee
□ Task’s requirements
Steps of delegation:
1. Decide which task can be delegated:
□ Many items should be delegated
□ Firstly minor decisions and recurring chores
□ Demanding jobs and challenging tasks to capable one
2. Decide who should get the assignment:
□ Who have available time
□ For whom it would be a useful developmental exercise
□ Who have special skill
3. Provide sufficient resource to carry out delegated tasks:
□ Financial resources
□ Staff resources
□ Time resources
4. Delegating the assignment:
□ Provide all relevant information about task
□ Specify expected result
□ Cultivate a climate of open communication
5. Be prepared to run interference if necessary:
□ Resources may be insufficient
□ Person may run up against resistance of others
6. Establish a feedback system:
□ Establish checkpoints and feedback system
□ Design feedback system carefully
□ Tighter the control less actual delegation will take place