What is Governance?
Governance has been defined to refer to structures and processes that are designed to ensure accountability, transparency, responsiveness, rule of law, stability, equity and inclusiveness, empowerment, and broad-based participation. Governance also represents the norms, values, and rules of the game through which public affairs are managed in a manner that is transparent, participatory, inclusive, and responsive. Governance, therefore, can be subtle and may not be easily observable. International agencies such as the UNDP, the World Bank, the OECD Development Assistance Committee (DAC), and others define governance as the exercise of authority or power in order to manage a country’s economic, political, and administrative affairs.
Principles of Good Governance
For the World Bank, good governance consists of the following components: capacity and efficiency in public sector management, accountability, a legal framework for development, and information and transparency.
In the development literature, the term ‘good governance’ is frequently used. In particular, the donors promote the notion of ‘good governance’ as a necessary pre-condition for creating an enabling environment for poverty reduction and sustainable human development. The good governance agenda stems from the donor’s concern with the effectiveness of the development efforts. Good governance is expected to be participatory, transparent, accountable, effective, and equitable, and to promote the rule of law.
Under the Sustainable Development Goals, Goal 16 can be considered to be directly linked to good governance as it is dedicated to improvement in governance, inclusion, participation, rights, and security. According to former United Nations Secretary-General Kofi Annan, “Good governance is ensuring respect for human rights and the rule of law; strengthening democracy; and promoting transparency and capacity in public administration.”
[8 Principles of Good Governance: United Nations]
Corporate Governance: International Models and Legal Environment
Corporate governance is a subset of omnibus governance. Thus, not all principles of good governance apply in equal measure to corporate governance.
Corporate governance refers to the system of rules, principles, practices, and processes by which a company is governed. Since it also provides a framework for attaining a company’s objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.
There has been renewed interest in the corporate governance practices of modern corporations, particularly in relation to accountability, since high-profile collapses of a number of large corporations during 2001–2002, most of which involved accounting fraud. Corporate scandals of various forms have maintained public and political interest in the regulation of corporate governance. In the U.S., these include Enron Corporation and MCI Inc. (formerly WorldCom). Their demise is associated with the U.S. federal government passing the Sarbanes-Oxley Act in 2002, intending to restore public confidence in corporate governance. Comparable failures in Australia (HIH, One.Tel) are associated with the eventual passage of the CLERP 9 reforms. Similar corporate failures in other countries stimulated increased regulatory interest (e.g., Parmalat in Italy).
OECD PRINCIPLES: 2023
One of the most influential guidelines has been the OECD Principles of Corporate Governance, published in 1999, revised in 2004, and in 2023. The OECD guidelines are often referenced by countries developing local codes or guidelines. This internationally agreed benchmark consists of more than fifty distinct disclosure items across five broad categories: Auditing; Board and management structure and process; Corporate responsibility and compliance; Financial transparency and information disclosure; and Ownership structure and exercise of control rights.
The latest OECD Principles of Corporate Governance (2023) are as follows:
G-20 Summit 2023 and Corporate Governance
The Leaders’ Declaration issued at the end of the recent G-20 summit, 2023, held in New Delhi, inter alia, underscored the need to address skill gaps, promote decent work, and ensure inclusive social protection policies for all. To achieve this objective, the signatories agreed to:
The summit also recognised the importance of harnessing Artificial Intelligence (AI) responsibly for the welfare for all. To this end the signatories:
In India, the SEBI Committee on Corporate Governance defines corporate governance as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct, and about making a distinction between personal and corporate funds in the management of a company. The Companies Act of 2013 has brought renewed focus to corporate governance. Some of its key features are:
Diversity and Independence
In public companies exceeding the threshold limit of paid-up capital, turnover, outstanding loans, and so on, independent directors should comprise one-third of the board. Further, a requirement for at least one female director applies to listed companies and other public companies exceeding a threshold limit of paid-up capital or turnover.
The government has adopted the ‘comply or explain’ approach, and no specific penalties are prescribed for non-compliance at present, provided there is adequate disclosure of reasons for failure. However, responsible corporate citizens should set benchmarks for socially responsible behaviour and be wary of reporting a failure.
The Board of Directors should provide several mandatory disclosures in its report related to risk management policy, compliance monitoring processes, CSR initiatives, contracts with related parties, and so on. It should ensure that robust internal processes are in place to support the disclosures, as non-compliance could have severe repercussions.
Internal and External Corporate Governance Controls
The Board should ensure that there are adequate corporate governance controls in place, and are monitored timely. Internal corporate governance controls monitor activities and then take corrective action to accomplish organisational goals. External Corporate Governance Controls encompass the controls external stakeholders exercise over the organisation.
Financial Reporting and Independent Auditing
The board of directors has primary responsibility for the corporation’s external financial reporting functions. The Chief Executive Officer and Chief Financial Officer are crucial participants, and boards usually have a high degree of reliance on them for the integrity and supply of accounting information.
Current accounting rules under International Accounting Standards and U.S. GAAP allow managers some choice in determining the methods of measurement and criteria for recognition of various financial reporting elements. The potential exercise of this choice to improve apparent performance increases the information risk for users. Financial reporting fraud, including non-disclosure and deliberate falsification of values, also contributes to users’ information risk. To reduce this risk and enhance the perceived integrity of financial reports, they must be audited by an independent external auditor who issues a report that accompanies the financial statements.
One area of concern is whether the auditing firm acts as both an independent auditor and a management consultant to the firm they are auditing. This may result in a conflict of interest, which places the integrity of financial reports in doubt due to client pressure to appease the management. The power of corporate clients to initiate and terminate management consulting services and, more fundamentally, to select and dismiss accounting firms contradicts the concept of an independent auditor. Changes enacted in the United States in the form of the Sarbanes-Oxley Act prohibit accounting firms from providing both auditing and management consulting services. Similar provisions are in place under clause 49 of the Standard Listing Agreement in India.
In spite of all these framework regulations, some systemic problems continue to plague corporate governance. These may be: demand for information; monitoring costs; and supply of accounting information.
Whichever way we look, governance, public as well as corporate, appears to be in a perpetual crisis mode. Public governance is unable to meet the rising expectations of the people, and often suffers from policy paralysis on account of being pulled in different direction by warring interest groups. This, no doubt, affects corporate governance, which is beset with its own malaise of a peculiar kind of innovative greed. As Mahatma Gandhi said, there is enough on this earth for everyone’s need but not for everyone’s greed.
To control the corporate greed, various countries are making more and more stringent laws to introduce transparency in their functioning and enforce accountability, particularly against the backdrop of ESG ecosystem. However, laws will never be enough, as novel methods to bypass them are being found all the time. The need of the day is to internalise the universal message of sustainability in all its dimensions. The earlier we do it the better it would be for long term survival of all concerned.
He is an IAS officer of 1968 batch. He has Ph. D. in Public Policy Analysis and Design from IIT Delhi. He was a Visiting Fellow to the University of Oxford. He superannuated as Secretary to Government of India. Post retirement, he was a Member of Central Administrative Tribunal and later Secretary-General, Rajya Sabha, in the Parliament of India. He is currently Director General, Golden Peacock Secretariat at the Institute of Directors.
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