Value of good corporate governance

thumbnail
Reading Time: 4 minutes


Why it’s Important to have good corporate governance? 

Shuchi. P. Nahar

Corporate failures prompted interest in the link between corporate governance and firm performance. The relation between corporate governance and firm performance has been the subject for many extensive studies in the last decade. 

Corporate governance term has many theoretical and empirical definitions in the 

literature. There is no universally accepted definition of corporate governance since it can be 
seen as a narrow or broad subject (Solomon, 2004). 

Need of Corporate Governance:

The need for corporate governance has arisen because of the increasing concern about the non-compliance of standards of financial reporting and accountability by boards of directors and management of corporate inflicting heavy losses on investors.

The collapse of international giants likes Enron, World Com of the US and Xerox of Japan are said to be due to the absence of good corporate governance and corrupt practices adopted by management of these companies and their financial consulting firms.

The failures of these multinational giants bring out the importance of good corporate governance structure making clear the distinction of power between the Board of Directors and the management which can lead to appropriate governance processes and procedures under which management is free to manage and board of directors is free to monitor and give policy directions.

In India, SEBI realised the need for good corporate governance and for this purpose appointed several committees such as Kumar Manglam Birla Committee, Naresh Chandra Committee and Narayana Murthy Committee.




9 Positive Impacts of Good Corporate Governance in Companies: 

A good corporate governance system:

  • Ensures that the management of a company considers the best interests of everyone
  • Helps companies deliver long-term corporate success and economic growthgrowth. 
  • Maintains the confidence of investors and as consequence companies raise capital efficiently and effectively. 
  • Has a positive impact on the price of shares as it improves the trust in the market. 
  • Improves the control over management and information systems (such as security or risk management). 
  • Gives guidance to the owners and managers about what are the goals strategy of the company;
  • Minimizes wastages, corruption, risks, and mismanagement. 
  • Helps to create a strong brand reputation. 
Also Read on FinMedium:  Should I Invest in Axis Long Term Equity Fund?

Importance of Corporate Governance:

A good system of corporate governance is important on account of the following:

1. Investors and shareholders of a corporate company need protection for their investment due to lack of adequate standards of financial reporting and accountability. It has been noticed in India that companies raised capital from the market at high valuation of their shares by projecting wrong picture of the company’s performance and profitability.

The investors suffered a lot due to unscrupulous management of corporate that performed much less than reported at the time of rais­ing capital. “Bad governance was also exemplified by allotment of promoter share at preferential prices disproportionate to market value affecting minority holders interest”.

There is increasing awareness and consensus among Indian investors to invest in companies which have a record of observing practices of good corporate governance. Therefore, for encourag­ing Indian investors to make adequate investment in the stock of corporate companies and thereby boosting up rate of growth of the economy, the protection of their interests from fraudulent practices of corporate of boards of directors and management are urgently needed.

2. Corporate governance is considered as an important means for paying heed to investors’ grievances. Kumar Manglam Birla Committee on corporate governance found that companies were not paying adequate attention to the timely dissemination of required information to investors in by India.

Though some measures have been taken by SEBI and RBI but much more required to be taken by the companies themselves to pay heed to the investors grievances and protection of their investment by adopting good standards of corporate governance.

3. The importance of good corporate governance lies in the fact that it will enable the corporate firms to (1) attract capital and (2) perform efficiently. This will help in winning investors confidence. Investors will be willing to invest in the companies with a good record of corporate governance.

New policy of liberalization and deregulation adopted in India since 1991 has given greater freedom to management which should be prudently used to promote investors’ interests. In India there are several instances of corporate’ failures due to lack of transparency and disclosures and instances of falsification of accounts. This discourages investors to make investment in the companies with poor record of corporate governance.

4. Global Perspective. 

The extent to which corporate enterprises observe the basic principles of good corporate governance has now become an important factor for attracting foreign investment. In this age of globalisation when quantitative restrictions have been removed and trade barriers dis­mantled, the relationship between corporate governance and flows of foreign investment has become increasingly important.

Studies in India and abroad show that foreign investors take notice of well- managed companies and respond positively to them, capital flows from foreign institutional investors (FII) for investment in the capital market and foreign direct investment (FDI) in joint ventures with Indian corporate companies will be coming if they are convinced about the implementation of basic principles of good corporate governance.

Corporate governance in the business context refers to the systems of rules, practices, and processes by which companies are governed. In this way, the corporate governance model followed by a specific company is the distribution of rights and responsibilities by all participants in the organization. It assures that everyone in an organization has appropriate and transparent decision-making processes and that the interests of all stakeholders (shareholders, managers, employees, suppliers, customers, among others) are protected.





Also Read on FinMedium:  The Flying V-Shaped Recoveries

The structure of the triangle represents the governance model in which good Corporate Governance represents a balance and equilibrium among the three groups, thereby providing optimal conditions for the business to thrive, fulfil its strategic goals and achieve sustainable long-term performance.


Conclusion: 

Corporate governance keeps a company honest and out of trouble. If this shared philosophy breaks down, then corners will be cut, products will be defective and management will grow complacent and corrupt. The end result is a fall and will be reflected in audited financial report, criminal investigations and federal probes – finally catches up, bankrupting the company overnight. Dishonest and unethical dealings can cause shareholders to flee out of fear, distrust and disgust.



                                Shuchi. P. Nahar

Source link

Every Wednesday and Saturday, we send Info-Graphic and FinMedium Weekly Digest newsletters to our 25000+ Subscribers.

Join Them Now!

Please Share :)
Shuchi Nahar
Shuchi is NISM Certified Equity Research Analyst, CFA - Level 1, a student of Law and Finance, and an aspiring CS.
Back To Top