Company Law: What is Corporate Governance?

Are you aware of the corporate scandals that took place in the U.K  during the 1980s? The sudden bankruptcy of the Bank of Credit led to such public fury in the UK that it finally led to the development of corporate governance. Today, we all recognize that one of the main buzzwords in the business world is corporate governance. Typically, corporate governance relates to the arrangement by which companies are run. Let’s discuss its meaning in detail to understand it better.

Company Law: Meaning and Concept of Corporate Governance

Corporate governance is a broader term than corporate management. It includes fair, competent and transparent, corporate management to attain certain well defined objectives. The system encompasses several dimensions spanning managing, operating and controlling a business entity so that strategic goals can be met, keeping in mind the interests of the shareholders, customers, employees and other members associated with the organization.

The Institute of Chartered Accountants of India defines corporate governance as an “imbedded configuration of values, ethics and appropriate and expected behavior which provide the coordinates for the organization’s performance of its role as a societal entity, in all its aspects.” Further, it defines a code of corporate governance as one that “makes explicit both the auditable and the desirable aspects of such a configuration.”

Company Law: Need and Significance of Corporate Governance

Here are some reasons why corporate governance has become the backbone of accountability in the corporate world:

Changing Ownership Structure

The ownership profile of corporate houses has changed in the recent past. This, in turn, has increased the probability of takeover bids and led most companies to opt for corporate governance.

Social Responsibility

The directors of the company are responsible to safeguard the interests of the stakeholders. Corporate governance regulates the working of directors in the best manner.

Scams

To avoid scams that shake the confidence of the public and throws doubt on all corporate activities or endeavors.

Corporate Oligarchy

Corporate governance has led to the establishment of shareholder’s democracy, which has been facilitated by better awareness and education standards.

Globalization

Corporate governance has assumed importance with the era or globalization. An example is the growing presence of Indian companies in foreign markets.

No doubt, corporate governance ensures smooth running of a company and that the management exercises its powers to serve the best interests of all the stakeholders.