Chapter -4.pptx of business ethicssssssssssssss

Chapter -4.pptx of business ethicssssssssssssss

1. Unit 4: Corporate Governance LH 6 Corporate governance: concept, scope, and significance; theories governing corporate governance: agency theory, transaction cost economics, stewardship theory, and stakeholder theory; issues in corporate governance systems: board of directors, shareholder activism, investor confidence, internal control and risk management, and executive compensation; corporate governance around the world; impact of governance on business, society, and the economy .

2. Corporate Governance Corporate governance refers to the set of principles, policies, and practices that guide the direction, control, and management of a company. It encompasses the relationships and responsibilities among various stakeholders, including shareholders, management, board of directors, employees, customers, suppliers, and the broader community. The fundamental objective of corporate governance is to ensure transparency, accountability, fairness, and ethical conduct within the organization. By establishing robust governance structures and processes, companies aim to protect the interests of stakeholders and foster sustainable long-term growth . Effective corporate governance cultivates trust, mitigates risks, enhances decision-making, and promotes a culture of responsible business practices.

3. Conti… Corporate governance is a multifaceted concept that encompasses more than just corporate management . It entails the establishment of a fair, efficient, and transparent administration that strives to meet well-defined objectives. In essence, it is a system that governs the structure, operation, and control of a company, while considering the interests of various stakeholders, such as creditors, employees, customers, and suppliers. Moreover , it necessitates compliance with legal and regulatory requirements and the pursuit of long-term strategic goals to satisfy shared regulatory obligations . Furthermore, corporate governance should address environmental concerns and the needs of the local community and maintain a strong legal, commercial, and institutional framework. Defining clear boundaries ensures that all functions and activities are conducted within a well-laid-out system. When implemented effectively, corporate governance contributes to the overall success and sustainability of a company.

4. Conti… According to Catherwood ,  the concept of corporate governance entails that a company conducts its business in a manner that is both accountable and responsible to its shareholders. However, it goes beyond shareholder accountability and extends to other stakeholders, including employees, suppliers, customers, and the local community. Corporate governance involves ensuring that the Board of Directors and management fulfil their responsibilities effectively. This includes carrying out their duties in a manner that builds trust and confidence among stakeholders. By doing so, corporate governance plays a crucial role in establishing and maintaining the confidence of all those w ho have a vested interest in the company’s success . According to the Institute of Company Secretaries of India (ICSI),  corporate governance can be defined as the application of management practices that ensure compliance with laws, ethical standards, and the responsible and effective management and distribution of wealth. It encompasses the commitment to social responsibility and the pursuit of sustainable development for the benefit of all stakeholders involved. In essence, corporate governance seeks to establish a framework that promotes transparency, accountability, and ethical conduct within an organization to ensure the holistic well-being of its stakeholders.

5. Significance of Corporate Governance

6. Conti… Changing Ownership Structure:  The corporate landscape has witnessed a notable shift in ownership structures, particularly in large private-sector corporations. The traditional model of concentrated ownership by a few individuals or families has given way to a more diverse ownership base. This evolution has been driven by factors, such as the threat of hostile takeovers and the emergence of institutional investors. As a result, corporate governance has gained heightened significance in ensuring accountability, transparency, and protection of the rights of all shareholders. It plays a crucial role in preventing undue influence, promoting fair   decision-making, and safeguarding the interests of minority shareholders. Social Responsibility:  Corporate governance serves as a driving force in fostering social responsibility among companies. Integrating ethical practices and considering the interests of various stakeholders, including customers, lenders, suppliers, and the local community, helps organizations contribute positively to society. Effective corporate governance ensures that directors act in the best interests of the company while considering the broader impact of their decisions. It provides a framework for responsible management and distribution of resources, ultimately enhancing value for all stakeholders and facilitating sustainable development.

7. Conti… Scams :  Instances of   corporate fraud have eroded public confidence and underscored the need for robust corporate governance practices. Scandals, such as the Harshad Mehta case and CRB Capital fraud have inflicted substantial losses on small investors and highlighted the importance of transparency, accountability, and risk management. By implementing effective governance mechanisms, including independent audits, internal controls, and board oversight, companies can detect and prevent fraudulent activities. Strong corporate governance acts as a safeguard, protecting the interests of shareholders, upholding ethical standards, and maintaining the trust of the investing public. Corporate Oligarchy: T he promotion of shareholder activism and democracy remains an ongoing challenge. Corporate governance practices need to address the issue of concentrated power and promote transparency, accountability, and shareholder participation. Encouraging diverse representation on boards, allowing proxies to speak at meetings, and fostering shareholder associations are vital steps toward countering corporate oligarchy. Effective corporate governance ensures a level playing field, promotes equitable decision-making, and helps establish a culture of inclusivity and fairness within organizations.

8. Conti… Globalization :  The integration of companies into global markets and the pursuit of international listings have underscored the importance of robust corporate governance practices. Strong governance frameworks are vital for establishing trust among global investors, complying with international regulations, and fostering transparency and accountability. By adhering to global governance standards, companies can enhance their competitiveness, attract capital, and ensure the confidence of international stakeholders. Effective corporate governance facilitates strategic decision-making, risk management, and integrity in financial reporting, enabling companies to thrive in a globalized business environment .

9. Principles of Corporate Governance Integrity and Fairness:  Upholding integrity and fairness lies at the heart of sound corporate governance. It entails embracing ethical standards, promoting transparency, and ensuring equitable treatment of all stakeholders. Cultivating a culture of honesty, trustworthiness, and ethical behaviour at every level of the organization is vital. Transparency:  Transparency is a fundamental principle that drives corporate governance. It involves providing stakeholders with timely, accurate, and comprehensive information, including financial reports, performance updates, and significant disclosures. Transparent reporting builds trust, enables informed decision-making, and showcases a commitment to accountability.

10. Conti… Accountability :  Accountability is a cornerstone of effective corporate governance. It necessitates holding directors, executives, and management teams responsible for their actions, decisions, and performance. Establishing clear lines of responsibility and decision-making, along with robust oversight and control mechanisms, ensures accountability to both shareholders and stakeholders. Independence :  Independence is a critical principle, particularly about the board of directors. Independent directors bring objectivity and impartial judgment to board deliberations and decision-making. They act in the best interests of the company and its stakeholders, devoid of conflicts of interest or undue influence. Social Responsibility: Apart from the 4 main principles, there is an additional principle of corporate governance. Company social responsibility obligates the company to be aware of social issues and take action to address them. In this way, the company creates a positive image in the industry. The first step towards Corporate Social Responsibility is to practice good Corporate Governance.

11. Benefits of Corporate Governance Good corporate governance ensures corporate success and economic growth. S trong corporate governance maintains investors’ confidence, as a result of which, company can raise capital efficiently and effectively. It lowers the capital cost. There is a positive impact on the share price. It provides proper inducement to the owners as well as managers to achieve objectives that are in interests of the shareholders and the organization. Good corporate governance also minimizes wastages, corruption, risks and mismanagement. I t helps in brand formation and development . It ensures organization in managed in a manner that fits the best interests of all.

12. Theories of Corporate Governance Agency Theory Stewardship Theory Stakeholder Theory Transaction Cost Theory

13. a. Agency Theory Agency theory defines the relationship between the principals (such as shareholders of company) and agents (such as directors of company ). According to this theory, the principals of the company hire the agents to perform work. The principals delegate the work of running the business to the directors or managers, who are agents of shareholders. The shareholders expect the agents to act and make decisions in the best interest of principal. On the contrary, it is not necessary that agent make decisions in the best interests of the principals. The agent may be succumbed to self-interest, opportunistic behavior and fall short of expectations of the principal. The key feature of agency theory is separation of ownership and control. The theory prescribes that people or employees are held accountable in their tasks and responsibilities. Rewards and Punishments can be used to correct the priorities of agents.

14. b. Stewardship Theory The steward theory states that a steward protects and maximizes shareholders wealth through firm Performance. Stewards are company executives and managers working for the shareholders, protects and make profits for the shareholders . The stewards are satisfied and motivated when organizational success is attained. It stresses on the position of employees or executives to act more autonomously so that the shareholders’ returns are maximized. The employees take ownership of their jobs and work at them diligently.

15. c. Stakeholder Theory Stakeholder theory incorporated the accountability of management to a broad range of stakeholders. It states that managers in organizations have a network of relationships to serve – this includes the suppliers, employees and business partners. The theory focuses on managerial decision making and interests of all stakeholders have intrinsic value, and no sets of interests is assumed to dominate the others

16. d. The Transaction Cost Theory The transaction cost is the expense incurred while moving the thing from one place to another or conducting an economic transaction. The transaction cost can be monetary, extra time or inconvenience caused. The Company works by making contracts and each contract brings with it the compliance requirement and some transaction costs. This theory suggests that the Company’s decision should be such that it works to achieve the optimum organizational structure. It should be economically efficient so that the cost of exchange is minimized. Transaction cost theory states that a company has number of contracts within the company itself or with market through which it creates value for the company. There is cost associated with each contract with external party; such cost is called transaction cost. If transaction cost of using the market is higher, the company would undertake that transaction itself.