Importance Of Corporate Governance

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Importance of Corporate Governance

Several changes have taken place in the corporate environment, corporate structure, stakeholders’ expectations, and various laws and government policies relating to corporation since the initiation of economic reforms in India. Various factors which have promoted a re-thinking about corporate governance and accountability over the years are as follows:

(i)    Scattered Shareholders. The basic idea of the effectiveness of company’s accountability to its shareholders has come in doubt. Today a company has a very large number of shareholders spread all over the world, who are generally indifferent towards the management of the company. Thrust eh idea of shareholders’ democrat remains confined only to the statute and to the Articles of Association of the company which provide them voting right.

(ii)    Institutional Investors. Government departments concerned with corporate affairs have often submitted critical reports about violations of the rights of shareholders. Need for extending corporate accountability to its employees, creditors, consumers and even to the society at large has been emphasized by not only academicians but also by several committees and commissions in many countries.

(iii)    Social Responsibility. Institutional investors as subscribers of both ownership as well as debt capital have affected the structure of corporate governance.

(iv)    Restructuring. Society’s expectations from corporations have changed. It expects corporate management to be more responsible to the needs and expectations of the society. For instance, pollution of environment is no longer tolerated.

(v)    Hostile Takeovers. As a result of intense competition all over the world, corporate giants known for providing well-paying jobs are going for corporate restructuring, down-sizing and also board-room shake-ups. Corporations have become vastly risky places to work with no job security at any level.

(vi)    Excutive Compensation. Hostile takeovers have been witnessed in several countries. Many people attribute such happening to the complacency on the part of the managements of taken-over companies. This also raises the question of the effectiveness of corporate governance.

(vii)    Executive Compensation. While the employment in corporations is declining, a huge increase in compensation packages of top level executives has been observed both in developed as well as developing countries. This particularly objected to n companies suffering from losses.

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