In the last article, we talked about the meaning of corporate governance along with its formation, framework and functionality.
Here’s a quick recap:
Corporate governance refers to the set of rules, practices, processes and principles that exist to regulate and operate a company. It helps ensure that the interests of all parties involved such as the shareholders, employees, customers, government and the community are duly fulfilled in a balanced and fair manner.
Corporate governance revolves around the 4 basic principles of:
1) Accountability
2) Fairness
3) Responsibility
4) Transparency
Now we’ll take a look at how these elements/principles come into play through the Board of Directors and what effects they have on the other stakeholders.
1) Accountability
A company is liable and answerable for every action, transaction and decision taken during the course of business. This is the reason why it is of paramount importance to have an extremely reliable and competent Board of Directors. They are responsible for all the actions and the subsequent consequences, if any, right from financial reporting and information disclosure to results of audits and correction of errors.
Laws alone can’t help a company with good corporate governance if the members on the BoD aren’t upholding them on a day-to-day basis.
Moreover, all the other parties such as shareholders, financiers, vendors and employees rely on the skillset and decision making of the board.
2) Fairness
This directly applies to all the shareholders whether they are minority shareholders or the majority ones. Good corporate governance protects the shareholders from fraud and other malpractices. It also makes the company responsible for disclosing all the relevant information accurately in order to allow the shareholders to make informed decisions.
Furthermore, shareholders’ rights enables the expression and redressal of queries and grievances in a fair manner. This leads to fairness, transparency and accountability.
3) Responsibility
The Board of Directors take full responsibility for the functioning of the company, its corporate governance policies and the welfare of all the stakeholders involved.
Timely decisions, inclusion of diversity in terms of skills and people, respecting the law and upholding the sanctity of the society are just some of the many responsibilities on their shoulders.
A competent board shoulders the responsibility at all times, even in times of peril, instead of crumbling under the pressure and external influences.
4) Transparency
Transparency forms the foundation for accountability and trust. Sound corporate governance holds the Board of Directors accountable for their actions and errors, while transparency provides a platform to openly discuss and disclose them.
Lack of transparency leads to frauds and unknowing participation in frauds and scams by innocent parties. It also casts doubts in the minds of investors as well as the community and law enforcement authorities.
This is why it is important for a company to openly furnish its code of conduct, ethics guidelines, financial reports and audit results in order to practice good corporate governance.
Written by Gagan Dhawan
