Corporate Governance states the set of principles, processes, and systems that regulate the Company. On the basis, these principles, processes, and guidelines Company directs and controls the decisions to fulfil its goals and objectives. It helps to add value to the Company, and proves beneficial for all the stakeholders in the long term. In this blog, we will learn about the objectives of Corporate Governance, factors affecting corporate governance.
Readers will also get knowledge about the essentials of corporate Governance, Who are the stakeholders? How corporate Governance affects these stakeholders?, etc.
The elementary principles of corporate governance are as follows;
The scope of corporate Governance includes but limited to the collection of procedures, processes, and provisions through which the Company controls and operates. It refers to the mechanism by which the Company directs and manages its affairs. Business ethics play a substantial part in corporate governance and it is among the key factors influencing corporate governance.
The ideal model of corporate Governance follows the universally accepted principles of corporate Governance. As per the good Corporate Governance model, the Company carries out the business according to the stakeholders’ desire to earn profits. Board of directors and other related committees are responsible for running the organization conduct these business decisions to maintain a balance between individual & societal goals, and economic & social goals.
It is essential to refer to the Shareholder vs. stakeholder theories of Corporate Governance to understand the aim and beneficiaries of the corporate governance process
As per the Agency Theory of Corporate Governance, the management and the shareholder hold a principal-agent relationship. This means that the management is bound to serve the interests of shareholders as an agent. However, shareholders are not the only group that is having interests in the company. Proper implication of these theories are important factors affecting corporate governance.
Let us read more about Shareholder vs. Stakeholder Theory of Corporate Governance.
The shareholder theory of corporate Governance states that the primary focus of any organization is the protection and value maximization of shareholders interests. The aim is defined to increase the market value of equity held by shareholders. As per this theory, the principles of corporate Governance aims to resolve the conflicts between shareholders and management.
The scope of stakeholder theory is broader in comparison to shareholders theory. As per the stakeholder theory, the function of corporate governance is to protect the interests of various stakeholders that have interests in the Company. This list of beneficiaries is not limited to shareholders but also includes managers, employees, creditors, suppliers, etc.
Corporate Governance is a dynamic practice consisting of internal control provisions and procedures to manage a company. It affects and gets affected by a number of factors. These factors can range from internal to external factors. Let us read more about the factors affecting corporate governance.
Market factors can be cited as an example of external factors, whereas the practice of effective communication can be an example of internal factors.
There are different models of corporate Governance in practice as per the local laws and affiliated economic ecosystem. These have different issues in the corporate governance process as per the affairs of the organization and the influence of external factors
The prominent factors that affect corporate Governance are as follows.
Activist shareholders pressure companies to pass their proposals of change. This class of people acts in the belief that the proposal will increase the market values of their equity.
They may use various tactics for creating pressure on the board, such as filing of lawsuits and seeking representation on the board. Raising their issues during shareholders meetings or even among the public is another tactic practised by activist shareholders to influence the decision making and ultimately the corporate governance processes.
The management acts as an agent of the shareholders. The principle job of the board is to serve the interests of the shareholders. If the management fails to do so, the shareholders may replace the board. Shareholders do so in a belief that by doing so, the performance will improve, and results will change.
This threat of hostile takeover for management keeps them in pressure to act in the best interest of the shareholders. Policies, procedures, and practices adopted by the board are influenced by their expected alignment with the shareholder’s interest. This may act as a factor to keep other stakeholders at a disadvantaged position. Principles of good corporate Governance expect that board to work in an impartial manner.
Another factor that influences the relationship between the Company and its stakeholders is the prevailing legal environment. The legal system of the state influences the affairs of corporate Governance.
Shareholders and creditors tend to have more protection in countries where common law is in practice. Under this system, previously held rulings can act as the rule of law. This is unlike the civil law system, where the rule of law books has the highest authority. The punishment, compensation, and procedures are defined in the book of the law, and rulings are based on these enacted laws.
There is a social responsibility of business to make profits along with social welfare. To increase the share value of the investors in the short-term, companies may take some irrational steps such as putting off the safety corners, or reducing expenditure on research and development, or compromising with the workplace safety, or stopping the customer support expenses, etc. These steps will increase in the share value and satisfy the investors but for the short term.
However, this is not what shareholders want. Any shareholder invests his or her money, once they have trust in a company as a whole. These shareholders want better returns, but not only in the short run. They are looking for steady and increasing dividends out of their investments.
These goals will only be possible with the perfect essentials corporate Governance of a company involved. Dissatisfied shareholders is one of the factors affecting corporate governance negatively which leads to organisational downfall.
The Company must look to protect and ease the way to exercise the rights of shareholders. Below are the rights of shareholders-
Stakeholder management refers to the practice of safeguarding the interest of various stakeholders by means of polices, procedures, and incentives. Effective communication with stakeholders plays an important role in the stakeholder management process. Stakeholders management is one of the leading factors affecting corporate governance process.
There are four infrastructure of shareholder relationship management.
The legal infrastructure talks about the governing laws and legal remedies available to the stakeholders in case of violation of their rights.
The contractual infrastructure defines the contract between the Company and the stakeholders. This contractual relationship defines the rights and responsibilities of both parties.
Organizational infrastructure refers to processes, policies, and routine practice of the organization mentioned in the corporate governance doctrine for managing the relationship with stakeholders.
The government infrastructure refers to laws and regulations which a company is obliged to follow. These include regulatory regulations and laws of the state.
In every Company, there is a time to time communication with the stakeholders through transparent and effective communication by demonstration of general and annual reports and holding meetings.
The Company must have the most effective Governance to retain these stakeholders and have their confidence. Your Company must be able to understand the requirements of various stakeholders so that you can address them in the best way possible.
You must know when an employee wants a bonus, a shareholder looking for controlling rights, or a government wants you to fulfil the new compliance, etc. The need for corporate governance is essential for the satisfaction of various stakeholders.
Companies who are having effective communication with the stakeholders other than statutory meetings tend to have better relations with stakeholders.
Corporate Governance plays an important role in every Company. Let’s see how it is important for an organization-
If the Company is practising good corporate governance , it ensures lots of benefits to the Company-
There is an institutional framework for corporate Governance in India that layout the constitution of Corporate Governance. Below is the list of noticeable forums and institutions of corporate Governance-
For the smooth and better operation of the Company, the Ministry of Corporate Affairs has mandated good corporate Governance . It keeps the stakeholders intact with the Company. The Company could focus on long-term growth and huge profits.
The Company needs to follow the fundamental principle of the essentials of corporate Governance for better profits and keep the shareholders happy. Taking diligent care of factors affecting corporate governance is the roadmap to stakeholders satisfaction.
In case of not practicing the good corporate Governance, companies face brutal consequences, losing their shareholders, drop in share prices, etc. Please mention your questions, suggestion and doubts regarding working of corporate governance in the comment section.