In today's globalized economy, corporate play a major role in shaping quality of life of the society as a whole. According to Nobel Laureate, Amartya Sen, "Market forces alone are not sufficient for equitable distribution and some sort of intervention is enquired, be it political or from business houses, towards society."
Companies should be responsible to the society for their activities and owe to the environment in which they operate. Consequently, environmental protection, transparency among stake-holders, education, health, employee welfare activities and compliance with the legal requirements, has gained importance for corporate world-wide.
A company should take a balanced view of the components of corporate social responsibility and implement the strategies in coherence with the vision, mission and values of the company.
Corporate Governance is the method by which a corporation is directed, administered, or controlled. Corporate governance includes the laws and customs affecting that direction, as well as the goals for which the corporation is governed. The principal participants are the share-holders, management and the board of directors. Other participants include regulators, employees, suppliers, partners, customers, constituents (for elected bodies) and the general community.
As a result of the separation of stake-holder influence from control in modern organizations, a system of corporate governance controls is implemented on behalf of stake-holders to reduce agency costs and information asymmetry. Corporate governance is used to monitor whether outcomes are in accordance with plans; and to motivate the organization to be more fully informed in order to maintain or alter organizational activity. Primarily, though, corporate governance is the mechanism via which individuals are motivated to align their actual behaviors with the overall corporate good (i.e., maximum aggregate value generated by the organization and shared fairly amongst all participants).
Key elements of good corporate governance principles include honesty, trust and integrity, openness, performance orientation, responsibility and accountability, mutual respect, and commitment to the organization.
Of importance is how directors and management develop a model of governance that aligns the values of the corporate participants and then this model periodically for its effectiveness. In particular, senior executives should conduct themselves honestly and ethically, especially concerning actual or apparent conflicts of interest, and disclosure in financial reports.
Equitable Treatment of Share-holders:
The CEO should respect the rights of share-holders and help share-holders to exercise those rights. He can help share-holders
exercise their rights by effectively communicating information that is understandable and accessible, and encouraging share-holders to participate in general meetings. Interests of Other Stake-holders:
The CEO should recognize that they have legal and other obligations to all legitimate stake-holders.
Role & Responsibilities of the Board:
The board needs a range of skills and understanding - to be able to deal with various business issues and have the ability to review and challenge management performance. It needs to be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties. There are issues about the appropriate mix of executive and non-executive directors. The key roles of Chairperson and CEO should not be shared.
Integrity & Ethical Behaviour:
The CEO should develop a code of conduct for their directors and executives that promotes ethical and responsible decision-making. It is important to understand, though, that systemic reliance on integrity and ethics is bound to eventual failure.
Disclosure & Transparency:
The CEO should be ready to clarify the company's position to the share-holders and the board and management to provide share-holders with a level of accountability. They should also implement procedures to independently verify and safe-guard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.
Issues involving Corporate Governance Principles include: -
* Oversight of the preparation of the entity's financial statements.
* Internal controls and the independence of the entity's auditors.
* Review of the compensation arrangements for the chief executive officer and other senior executives.
* The way in which individuals are nominated for positions on the board.
* The resources made available to directors in carrying out their duties.
* Oversight and management of risk.
Mechanisms & Controls:
Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse
selection. For example, to monitor managers' behaviour, an independent third party (the auditor) attests the accuracy of information provided by management to investors. An ideal control system should regulate both motivation and ability. Systemic Problems of Corporate Governance: -
a. Supply of Accounting Information - Financial accounts form a crucial link in enabling providers of finance to monitor directors. Imperfections in the financial reporting process will cause imperfections in the effectiveness of corporate governance. This should, ideally, be corrected by the working of the external auditing process, but lack of auditor independence may prevent this.
b. Demand for Information - A barrier to share-holders using good information is the cost of processing it, especially to a small share-holder. The traditional answer to this problem is the efficient market hypothesis, which suggests that the small share-holder will free-ride on the judgments of larger professional investors. However, there is an expanding empirical literature on apparent departures from this.
c. Monitoring Costs - In order to influence the directors, the share-holders must combine with others to form a significant voting group, which can pose a real threat of carrying resolutions or appointing directors at a general meeting. The costs of combining in this way might well be prohibitive relative to the benefits.
Corporate Governance & Firm Performance
In its 'Global Investor Opinion Survey' of over 200 institutional investors first undertaken in 2000 and updated in 2002, McKinsey found that 80% of the respondents would pay a premium for well-governed companies. They defined a well-governed company as one that had mostly out-side directors, who had no management ties, undertook formal evaluation of its directors, and was responsive to investors' requests for information on governance issues. The size of the premium varied by market, from 11% for Canadian companies to around 40% for companies where the regulatory backdrop was least certain (those in Morocco, Egypt and Russia).
The Role CEO in Corporate Governance
To constantly improve what is essential to human progress by mastering science and technology -
Constantly Improve
The CEO must have the oath "If you can't do it better, why do it?" It under-scores our drive to become an ever better and bigger company.
Essential to Human Progress
The products that are made by the company to find their way into products that provides people the world over with improved life-styles. One must understand and take pride in this. The company must also use this concept to further connect with the external markets and its serve. When the company thinks in terms of the markets it serve, the company becomes more outside-in focused and the company can better seek growth opportunities.
Mastering Science & Technology
The company must put the science and technology to work to create solutions for the customers and for society.
Integrity
The company believes that its promise is its most vital product - 'our word is our bond'. The relationships that are critical to the company's success depend entirely on maintaining the highest ethical and moral standards around the world. As a vital measure of integrity, the company will ensure the health and safety of its communities, and protect the environment in all it does.
Respect for People
The company believes in the inherent worth of people and will honor its relationships with those who let it be part of their world.
The company's stake-holders are the engines of value creation; their imagination, determination, and dedication are essential to growth. The company will work to celebrate and reward the unique backgrounds, view-points, skills, and talents of everyone. Respect for people is measured by how the company treats them, by the contributions that flow from the company diversity, by the productivity of the company's relationships, and by a job well done, no matter what the job. The company communities are the neighbors; their acceptance of the company is vital to its ability to operate.
The customers are the company's partners in creating value; their loyalty is its greatest reward.
The share-holders are the beneficiaries of the company's success; their on-going commitment to the company is based on returning to them superior profits over time.
The company's respect for people also extends to the consumers whose lives it touches. The company will strive to answer people's most vital needs: for food, water, shelter, transportation, communication, health and medicine.
Unity
The CEO must think like this, "We are one company, one team." The company believes that succeeding as one enterprise is as important as succeeding independently. Balancing empowerment and interdependence makes the company strong.
As one company, impact on the world is far greater than the impact of any one of its parts. The company's stake-holders will work together, building relationships to create ever-greater value for the customers and consumers the company serves.
Outside-in Focus
The company believes that growth comes from looking at opportunity through the eyes of customers and all those it serves. Taking an "outside-in" view ensures that the company's efforts are always relevant and that the company's unique talents are applied to "real world" opportunities.
The company will see through the eyes of those whose lives the company affects, identifying unmet needs and producing innovative and lasting solutions. The company will bring to this task all of its experience and knowledge as the unique individuals the company are.
Agility
The company believes its future depends on speed and flexibility - mental, emotional and physical. Responding resourcefully to society's fast-changing needs is the only road to success. The company will meet the forces of change with power and grace. The company will make course corrections that demonstrate flexibility as well as courage, and that highlight the company's ability to keep itself aligned with a world in motion.
Innovation
The company believes that meaningful, productive change - solving problems - only comes by looking at challenges and opportunities from new angles and exercising the company's curiosity.
In the name of innovation, the company will make science a way of living. The company will not only master the science of the physical world, but the science of the mind and heart. The company's job is to unlock answers that make a fundamental difference to people's lives. The company will use technology to help lead society forward. The company will conceive, design, engineer, and execute solutions that remove barriers to human potential and productivity.
