Corporate governance

• Apart from the Enron and WorldCom debacles, which have thrown lot of focus to corporate governance, in the recent past the issue of backdating stock options to senior executives of leading corporations in an effort to ‘sweeten’ their compensation packages, has attracted lot of attention and scrutiny by the now famous Eliot Spitzer, NewYork State’s Attorney General. But what exactly is corporate governance?
• This is how wikipedia’s introduction on the subject runs: Corporate governance is the set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many players involved (the stakeholders) and the goals for which the corporation is governed. The principal players are the shareholders, management and the board of directors. Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large.
• In a very good article in today’s ET, Nitin Bhatt highlights that the ‘spirit’ of corporate governance is about putting in place safeguards around any eventuality that could have a serious negative impact on a company and its stakeholders. Good corporate governance practices are tedious to implement, because they require buy-in from people across the enterprise, from the boardroom to the shopfloor. These practices however, do not guarantee that mishaps such as fraud will not occur. However the implementation of such practices does give the stakeholders a reasonable assurance that their interests will be protected by the management on a proactive basis.
• There is a globally accepted standard on corporate governance called the COSO framework. It derives its name from the Committee of Sponsoring Organizations (COSO) of the US-based Treadway Commission. According to this framework the elements of good corporate governance include:
• Effectiveness and efficiency of operations
• Compliance with laws and regulations
• Reliability of financial reports that are provided to the public.