Here is a compilation of essays on ‘Corporate Governance’ for class 10, 11 and 12. Find paragraphs, long and short essays on ‘Corporate Governance’ especially written for school and college students.
Essay on Corporate Governance
Essay Contents:
- Essay on the Meaning of Corporate Governance
- Essay on the Salient Features of Corporate Governance
- Essay on the Significance of Corporate Governance
- Essay on the Principles of Corporate Governance
- Essay on the Corporate Governance Practices in India
- Essay on the BOD for Corporate Financial Governance
1. Essay on the Meaning of Corporate Governance:
The Cadbury Committee Report (1991) defines corporate governance as “a system by which the corporate are directed and controlled.”
Corporate governance means the idea of ensuring proper management of companies through the institutions and mechanisms available to the shareholder. According to Kumaramangalam Birla, the principal objective of good corporate governance is to enhance shareholder value.
A system of good corporate governance focuses on the relationship of accountability between the principal actors of sound financial reporting—the Board, the Management and the Auditor. It holds the management accountable to the board, and the board accountable to the shareholders, and in the process, audit acts as a catalyst for effective financial reporting.
Good corporate governance should ensure:
(i) Clear responsibilities and functional authorities,
(ii) Precise distinction between direction and management, and
(iii) Total transparency in respect of all actions of management.
2. Essay on the Salient Features of Corporate Governance:
‘Corporate governance’ has the following features:
1. It deals with how a company fulfil its obligations to investors and stakeholders;
2. It is about commitment to values and ethical business conduct and a high degree of transparency;
3. It is about creating shareholder wealth while ensuring a fair play to all other stakeholders and society at large [Stakeholders mean people other than shareholders—that is, creditors, employees, govt., society, etc.];
4. It is about financial transparency and the related role of directors and auditors;
5. No vital information is concealed from the board; and
6. The directors have to make a statement about the effectiveness of the system of internal control.
In a corporate enterprise, shareholders are the owners of the company and their responsibilities lie in selecting the board of directors. Good corporate governance is the outcome of logical and rational decision taken at the board level.
It is stipulated that the board should discuss and approve, specifically, the following among others:
(i) All major investment and disinvestment proposals;
(ii) Changes in financial, operational and marketing structures;
(iii) Appointment of internal auditors, their scope of function and audit findings; and
(iv) Progress of different projects under implementation.
3. Essay on the Significance of Corporate Governance:
The significance of corporate governance can be best understood from several constituents of it. Some significant ones must include the following:
The hall mark of sound corporate governance is that it must pave the way for a fair balance between shareholders and management interests.
The Chartered Institute of Management Accountants (CIMA), in their evidence to the UK Hampel Committee on Corporate Governance, stressed as below:
“The Cadbury Code on Corporate Governance must be given extra weight by reflecting expected best practice rather than just recommended practice.”
CIMA’s Submission Emphasized:
1. That all public interest companies should be expected to have an internal audit function (except in the minority of cases where this would be inappropriate owing to the nature of the organisation);
2. That the internal audit function’s report should cover the whole system of controls established by management, not just internal financial controls;
3. That public reporting on internal control is of limited value and should focus on the measures in place rather than try to assess their effectiveness; and
4. That the benefits of private reporting i.e., between internal and external auditors. Audit Committees and senior management need to be more positively portrayed and the practice encouraged.
CIMA encouraged the Committee to look at the broader control environment of which the financial aspects of corporate governance form but a part, and in particular, at corporate ethics, codes of conduct and behaviour.
The crying call of today is to strengthen the theme of One World—One Market. A forward thrust is needed to operationalize the practical aspects of corporate governance to help strengthen efficient operations of market economy.
It is the global need to develop a sound and workable system of corporate governance so that corporate ills are eliminated, sickness is reduced to the minimum, wealth is multiplied, corporate savings register an upswing contribution of corporate sector to shareholders, and above all corporate sector makes transparent and significant contribution to the stakeholders.
4. Essay on the Principles of Corporate Governance:
A good corporate governance should include the following principles:
i. Review of Operations:
There should be review of operations of the company at a regular interval. It may include comparison of monthly/quarterly production and sales targets with actual, cash flow analysis, etc.
ii. Compliance with Statutory and Regulatory Requirements:
The Board should ensure compliance with various statutory and regulatory requirements. It may include clearance of statutory dues, compliance with FERA regulations, following suitable accounting policies and standards, etc.
iii. Appointment of Various Committees:
There should be appointment of various committees to look after different matters:
There can be following committees:
(a) Audit Committee,
(b) Grievance Committees,
(c) Remuneration Committee and
(d) Investment Committee, etc.
(a) Audit committee:
It should meet periodically to review the effectiveness of the system of internal controls and reports to shareholders.
(b) Grievance committee:
It should look after the grievances from customers, suppliers, creditors in respect of price, quality, discount, etc. It should also look after the problems of executives/employees of the organisation.
(c) Remuneration committee:
Its role should be to fix remuneration of nonexecutive directors. It may be fixed in relation to company performance.
(d) Investment committee:
It should look after the investment decisions. It should be in accordance with the guidelines approved by the Board. Shareholders expect that investment decisions are judicious and do not incur any losses, which affect shareholder’s interest.
iv. Contribution of Employees’ Union:
Employees or workers union should also contribute significantly to good corporate behaviour by promoting work culture. In this case, inclusion of employees or worker’s representative on the board may be thought of.
v. Contribution to Community Development:
A good corporate governance should help community development programmes by active participation. It should adopt measures for pollution control, and fair and ethical business practices.
Good corporate governance calls for accountability for all concerned. The Shareholders, directors, auditors, executives, advisers and other staff who are associated with the working of the corporate should combine their efforts to improve the system and ensure good management practice.
In can, thus, be stated that a joint stock company is of the shareholders, and has to be controlled by the shareholders and run by Boards and managers for the shareholders. The process of corporate governance has to be consistent with this, and nothing else.
5. Essay on the Corporate Governance Practices in India:
The Confederation of Indian Industries (CII) issued a corporate governance code, a few years back.
The CII Charter on corporate governance includes the following points:
1. A single board should meet at least six times a year, preferably at an interval of two months.
2. A listed company with a turnover of Rs. 100 crore and above should have professionally competent, independent, non-executive directors who should constitute at least 30 per cent of the board if the chairman of the company is a non-executive director and at least 50 per cent of the board if the chairman and managing director is the same person.
3. No single person should hold directorships in more than 10 listed companies.
4. The non-executive directors should actively participate in the board with clearly defined responsibilities. They should know how to read balance sheet, profit and loss account, cash flow statements, etc. They should have some knowledge of company law.
5. The company should pay a commission over and above the sitting fees to the non-executive directors.
6. Attendance record should be considered while reappointing directors.
7. The Board should be provided with the following key information:
(a) Annual operating plans and budgets along with long-term plans.
(b) Capital, manpower and over-head budgets.
(c) Quarterly results of the company as a whole and its operating divisions.
(d) Internal audit reports.
(e) Various notices from revenue authorities.
(f) Accidents, pollution problems, etc.
(g) Default in payment of interest or non-payment of principal on any public deposit or secured creditors;
(h) Defaults in payment of inter corporate deposits;
(i) Any issue which involves possible public or product liability claims;
(j) Details of any joint venture of collaboration agreements;
(k) Transactions that involve substantial payment towards goodwill, brand equity, etc.
(l) Recruitment or remuneration of senior officers below the board level;
(m) Labour problems and solutions;
(n) Quarterly details of foreign exchange exposure.
(8) Listed companies with either a turnover of over Rs. 100 crore or paid-up capital of Rs. 20 crore should set up audit committees within two years. The audit committee should assist the board in accounting and reporting functions, should periodically interact with the statutory auditors and internal auditors and discharge their fiduciary responsibilities with due diligence.
(9) The listed companies should give data on:
(a) High and low monthly averages of share prices in a major stock exchange,
(b) Greater details on business segments, up to 10 per cent of turnover, sales revenue, etc.
(10) Major stock exchanges should insist on a compliance certificate signed by the CEO and CFO stating that the management is responsible for the preparation and integrity of the financial statements and other information on the annual reports, that its accounting policies conform to standard practice and that the board has overseen the company’s system of international accounting and administrative controls either directly or through the audit committee.
(11) If any company goes to more than one credit rating agency it must divulge all the previous ratings.
(12) Companies that default on fixed deposits should not be permitted to accept further deposits and make inter-corporate loans or investments or declare dividends until the default is made good.
(13) Financial Institutions should take a policy decision to withdraw from boards where their individual shareholding is five per cent or less or total Financial Institution’s holding is under ten per cent.
But no survey is, however, available on how many companies actually adopted the code and to what extent.
In India, the concept of corporate governance is gaining importance because of two reasons:
(A) After liberalisation, there has been institutionalisation of financial markets. Foreign Institutional Investors, Financial Institutions, and mutual funds became dominant players in the stock market. The market began to discriminate between wealth creators and wealth destroyers. Corporate governance is a critical by-product of market discipline.
(B) Another factor is the increased role being played by the private sector. Companies are realising that shareholders love to stay with those corporate that create value for their shareholders. This is only possible by adopting fair, honest and transparent corporate practices.
Some Examples:
1. Infosys Technologies Limited has set up a role model for practising corporate governance in India. It has a combination of six internal directors and four external directors. The internal directors are involved in running the company and external directors bring in wisdom, strategic inputs and global practices.
The directors also handle the audit committee, compensation committee, nomination committee, etc. The company has also set board membership criteria with reference to expertise, skill, age, experience, etc.
Its corporate governance policy prohibits its executive directors and independent directors to serve on the board of any other company. This ensures that its directors devote adequate amount of time and energy to the company.
It is also evaluating its board performance. The board members have performance indicators and the compensation committee decides the benefits based on the performance.
2. Wipro is another company which practices high standards of ethics and corporate governance. It has also various committees like audit, compensation, etc. It is publishing segment-wise results since 1998. It is publishing quarterly audited results. It has a quality system and audit. Its majority of directors are non-executives and persons of high repute.
3. Housing Development Finance Corporation (HDFC) is also practising the principles of corporate governance over the years. It believes that corporate governance is a voluntary self-disciplining code. Its board of directors has 15 members and majority of them are non-executive directors. The board’s focus is on strategy formulation, policy and control, delegation of power, etc.
The independent directors play an important role in deliberations at the board meeting. They bring their experience in the field of finance, accountancy, law, etc. The audit committee and the compensation committee consist entirely of independent directors.
General Notes:
With the dawn of globalisation in 1991, the quality as well as quantity of the institutional investors have altogether changed. Indian financial institutions have now started changing their role as development institutions.
The prerogative right so far enjoyed by the promoters in appointing the Chief Executive Officer (CEO) is also being challenged by the financial institutions. The financial institutional investors have selected and appointed the CEO of Larsen and Toubro, where a powerful private promoter with 7% holding is in existence. The Unit Trust of India took the lead to select a successor to the retiring CEO of L & T.
Further, some positive developments are taking place in the corporate governance of family controlled businesses. The Tata group has reduced the retirement age so that young persons can be infused into the board. Similarly A. V. Birla group reduced the retirement age for all management personnel and prepared a succession plan.
The Eicher group had even gone to the extent of CEO resigning the post and handing over the assignment to a professional, and is also planning a model which more or less resembles a supervisory board prevalent in Germany—a two-tier structure.
One of the charges against business houses is lack of corporate transparency. Among the charges, secret pay-off to political parties is one. A positive development in this regard is the announcement of the creation of an Electoral Trust by Tata Sons.
The electoral trust will make voluntary contributions to political parties—that is purely transparent, non-discretionary and non-discriminatory. The trust will distribute funds to the parties and not to the individuals.
In pre-globalisation era, qualified audit reports were very rare even if it was needed for a sample study purpose. Recent development is that the qualified audit reports have started appearing regularly owing to change in the role perception of the auditors and their independence.
Another noticeable feature is that the Government of India (Department of Company Affairs) has recently formed E-Corporate Business Working Group to synergise the provisions of Companies Act 1956 with the Information Technology Act 2000.
The working group would identify various areas of corporate governance falling within the domain of company law and other related laws with necessary harmonisation with I. T. Act.
This working groups, if necessary, shall consult other experts in the field and also the professional bodies (like The Institute of Chartered Accountants of India, The Institute of Cost and Works Accountants of India, The Institute of Company Secretaries of India and National Informatics Centre).
6. Essay on the BOD for Corporate Financial Governance:
A board of directors (BOD) is involved in strategic management to the extent that it carries out three tasks:
(1) Monitoring,
(2) Evaluating and Influencing, and
(3) Initiating and Determining.
The BOD continuum shown in Table below shows the possible degree of involvement (from low to high) in the strategic management process, As types, boards can range from phantom boards with no real involvement to catalyst boards with a very high degree of involvement.
Research on the issue suggests that active board involvement in strategic management is positively related to corporate financial governance.
The role of the board of directors in strategic management is to carry out three basic tasks:
i. Monitor:
By acting through its committees, a board can keep abreast of developments inside and outside the corporation, bringing to management’s attention developments it might have overlooked.
ii. Evaluate and influence:
A board can examine management’s proposals, decisions, and actions, agree or disagree with them to give advice and offer suggestions, outline alternatives. More active boards perform this task in addition to monitoring.
iii. Initiate and determine:
A board can delineate a corporation’s mission and specify strategic options to its management. Only the most active boards take on this task in addition to previous ones. Highly involved boards tend to be very active. They take their tasks of monitoring, evaluating and influencing plus initiating and determining very seriously.
They provide advice when necessary and keep management alert. As depicted in the Table above their heavy involvement in the strategic management process places them in the active participation or even catalyst positions.