Corporate Governance What exactly does it mean

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Corporate governance is a new subject and took a leading seat in organizational system and there is not even a single definition which covers the total character of the subject , up to nineties the corporate were less in number in the total investments in the terms of value and number were also less . After introduction of information technology and fast mechanisation the changes were very fast and entire globe which has turned into a small village due to speedy expansion of international business ''ADAM SMITHs '' 332 years old theory has multiplied the cooperate operation in no. of countries value e.t.c . earlier the corporate governance based on agency was having a narrow description which was relationship between corporate and share holder's . In modern this definition has turned wider and broad all the guardians of governance has been covered and their interrelation turns more important. It is a relationship and activity performed between corporates and stake holders , employees , board of directors . CEO and suppliers . This has been accepted all over the world mainly among united states and U.K. investors and corporates .


In 1984 , Tricker defined corporate governance as ''The governance role is not concerned with the running of the business of the company but with giving overall direction to the company .

During 1992 the Cod bury report defined corporate governance as- the companies are directed and controlled .

During 1993 Kersey and Wright defined corporate governance as ''the structure process cultures and systems that engender the successful operation of the organisation .

During 1994 Parkinson defines corporate governance as the process of supervision and control intended to ensure that the company management acts in accordance with the interest of share holders .


When EURON , WORLD COM AND PARAMALAT filed for bankruptcy the bill was introduced and this act brought major changes in the area of corporate governance with emphasis on auditors independence , better financial disclosure and legal penalties and imprisonment . company affairs appoint a high level committee to examine issues related to corporate governance this committee submits its reports related to following aspects :-

The auditor is = company relationship - the auditor must be independent as should not have any financial interest , he should not avail any loan from the firms , he should not have any business relationship , apart from these he should not have any personal relationship with board members and in no way he should turn or prove to be selfish .

In accordance with the recommendations a company has to follow

Audit partner rotation

Auditor disclosure of contingent liabilities

Disclosure of qualification

Audit replacement

Auditors annual certificate

CEO to certify the annual accounts

Independent quality review board

Disciplinary mechanism for auditors


U.K. was the first country which set up several committee to study on corporate governance and has given system for it .

1992 - Cadbury report

Under the chairmanship of Cadbury a study was conducted on the financial aspects on corporate governance which defined the code for corporate governance , Cadbury code was not binding for corporates . It focussed attention on the board of directors auditors and share holders. The last importance was given to investors .

Summary of the recommendations were :-

The board of director should report on the system of internal control

Service control of directors should not be more than three years

Companies were suggested to create an audit committee.


The terms of reference were about the accountabilities , director compensation , reporting to share holder's and transparency .


Remuneration committee


Remuneration policy

Service contracts


It developed the Cadbury report and produced a combined code

Auditor to control and review all control and should not just limit to financial control


Guidance to assist corporate to implement the combined code

Corporates do not have internal auditing system


Fall of euron allowed U.K. and other countries to revaluate the corporate governance . In euron the non executive directors role was non effective and gives report to cover this issue . This report recommends the inclusion of more non executive directors and these directors should work in the interest of non executive directors it also suggests compensation for them .


As supplement to higgs report the U.K. government examined audit committee for proper governance , this report made relationship between external auditor and corporate which is audited by them . In case of enrol failure the main reason was the failure of audit committee , this committee recommends a honest account


Based on various reports the following codes were accepted abd found to be more effective

At least half of the board of directors should consist of non executive directors

Company CEO should not become the chairman

Board chairman should be independent

One senior independent director should be used to serve share holder

Board should take up rigorous evaluation of their own performance

Investor should avoid box ticking

Adopt transparent procedure to recruit new director

Non executive director should be re appointed after six years of service

This approach is adopted by U.K. which monitor directional conduct in the U.K.


In corporate governance it is necessary to maintain transparency in the entire system of reporting which disclosed turns to be most vital . In the other words the transparency cannot be achieved unless there is proper disclosure of information and without transparency the correct governance is impossible . True information results into true governance . Transparency is very important ingredient of a better functional system of corporate governance and to maintain it. To keep the share holders happy and satisfied transparency is the major way.

Disclosure is critical for the proper functioning of the corporate , disclosure relates to all types of information . This includes mainly annual financial statement and other mandatory requirements and honest disclosure results into a transparency all over the world . Increased transparency in corporate governance in U.K and all over the world is an indicator how important is the disclosure and transparency all over the world in various committee reports of U.K the major stress has been laid on transparency . It all depends on the quality of information and quality of reporting the agent of the company has to see that they function truly and the board and CEO of company have to govern the corporation with transparency angle and ignoring the self interest in the company .