Corporate Governance - Features, Theories, Risks and Importance

Corporate Governance - Features, Theories, Risks and Importance

What is Corporate Governance?
Corporate governace is that system or mechanics which helps in deciding the manner with the help of which companies can be directed or controlled. It is the responsibility of the Board of directors to control and run the company in the favor of shareholders and shareholder's duty is to appoint suitable directors and auditors who can run the company effectively and efficiently.

Since corporate governance likewise gives the structure to achieving an organization's destinations, it incorporates basically every circle of management, from activity plans and inner controls to execution estimation and corporate exposure. Corporate governance involves the territories of environmental mindfulness, moral conduct, corporate system, pay, and risk management.
Features of Corporate Governance:

1. Discipline : Main feature of corporate governace is to ensure Discipline in the organization. It is duty of the BOD to follow all designed rules and regulations which are universally acceptable so that discipline can be maintained in the company.

2. Transparency : It is the duty of BOD to disclose all the true and relevant information to the stakeholders without concealing anything from them.

3. Accountability : Corporate governace held board of directors responsible for all the actions which affects the interest of stakeholders.

4. Ethics : Corporate governace should be based on ethics means BOD should not indulge themselves in unfair practices, fraud, cheating, misrepresentation and exploitation.

5. Systematic : CG should be Systematic in nature means it should be based on sound rules and regulations, procedures, laws etc. Every efforts of the BOD must adhere to the maximization of the wealth of the shareholders.

6. Independence : In order to ensure effective working, many companies appoint independent directors who are not associated with the company. They come to the company once in a while and make searches and inspection to ensure that everything is going well.

Basic Principles of Corporate Governance 

There are four basic principles to corporate governance- Accountability, Fairness, Transparency, Responsibility.

Accountability. The Code accommodates accountability of the Company's Board of Directors to all shareholders as per material law and gives direction to the Board of Directors in settling on choices and observing the exercises of the chief bodies.

Fairness. The Company attempts to secure shareholders' privileges and guarantee equivalent treatment of shareholders. The Board of Directors will offer all shareholders the chance to acquire compelling review for infringement of their privileges.

Transparency. The Company will give ideal, precise divulgence of information pretty much all material realities identifying with its exercises, including its financial circumstance, social and ecological pointers, execution, proprietorship design and governance of the Company, just as free admittance to such information for all stakeholders.

Responsibility. The Company perceives the privileges of all invested individuals allowed by relevant law and tries to help out such people or organizations for their own turn of events and financial security.

Theories of corporate governance :

1. Agency theory : Important characteristic of this theory is separation of ownership and management. This theory establish the relationship between principal and agent where shareholders are the principal and board of directors and managers are the agents. Principals delegate their authority to the agents and agents are responsible for the well being of the company. Shareholders have the power to punish the agents in case of any wrong doings.

2. Stewardship theory : Stewards are the persons who take care of the company and their prime function is to maximaise the shareholders wealth. Satisfaction of the shareholders is the result of the hardwork of steward. Company's stewards are its board of directors and managers.

3. Stakeholders theory : Stakeholders theory states that the management of the company is responsible for the satisfaction of the stakeholders which include employees, customers, suppliers and other business partners.

4. Resource dependency theory : This theory holds the directors responsible for arranging the resources for the successful running of the business such as information, skills, business expertise, various other kinds of services etc.

5. Transaction cost theory : This theory holds that company enter into a number of contracts and each and every contract has cost associated with it. This cost is called Transaction cost. Directors should try to keep the cost as minimum as possible and try to take maximum benefits out of it so that market value of the company an increase.

Risks of poor corporate governance:

Poor corporate governance can leads to issues like fraud, negligence, corruption and lack of accountability. However, it’s not just scandals that point to governance failures. Stunted business growth, repetitive complaints, and high levels of waste also highlight lack of control and strategic alignment.

Advantages of good corporate governance:

Good corporate governance can turn a good company into a great one. The leaders in any industry are at the helm of their respective industries, mainly because of outstanding corporate governance practices.
  • Encouraging positive behaviour.
  • Reducing the cost of capital.
  • Improving top-level decision-making.
  • Assuring internal controls.
  • Enabling better strategic planning.
  • Attracting talented directors.

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