2. 36 Theory and Practice of Corporate Governance

Theory and Practice of Corporate Governance

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The concept: Corporate Governance • The joint stock company known as the corporation is the nucleus of all business activities in modern economies. All corporations do not however enjoy equal share of power; they also do not have the same size and degree of operations. In India as well as countries like US, UK the









Definition • “The business corporation is an instrument through which capital is assembled for activities of producing and distributing goods and services and making investments. Accordingly, a basic premise of corporation law is that a business corporation should have as its objective the conduct of such activities with a view to









According to Chief Justice John Marshall (1801) • “A corporation is an artificial being, invisible, intangible, and existing only in the contemplation of the law. Being the mere creature of the law, it possesses only those properties which the charter of its creation confers on it, either expressly or as incidental to its very existence. These acts are supposedly









• Among the most important properties are immortality, immortality, and, if the expression ex pression be allowed, individually; which a perpetual succession of many persons are considered the same, and may act as a single individual.”









What is Corporate? •

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In the capitalist economy, capital accumulation takes place through development and growth of industries, trade and commerce, infrastructure and agriculture. The corporation of today has replaced the sole proprietor of old days and tries to maximize profits and generate wealth. But it differs on two counts: The The life life of the the corp corpor orat atio ion n is much much long longer er It is more more rati ration onal al in deci decisi sion on maki making ng as it is run run by by a board of directors and besides they take decisions











Characteristics of a corporation 1. 2.

Inco Incorp rpor orat ated ed or reg regis iste tere red d unde underr the the Comp Compan anie ies s Act Act of a country Artifi Artificia ciall lega legall exis existen tence ce-- equa equall to that that of of a natura naturall pers person on with with its own legal entity











Concept of governance • The concept of governance is as old as human civilization. Governance stands for decision











Theoretical basis for corporate governance A. Agency Theory

The fundamental theoretical basis of corporate governance is agency costs. costs. Adam Smith had identified the agency problem (managerial negligence and











•

Mechanisms that help reduce agency costs:











B.

Stewardship Th Theory The theory defines situations in which managers are not motivated by individual goals, but rather they are stewards whose motives are aligned with the













Basic behavioral differences between Agency &













Issues in Shareholder Shareholder Versus













Stakeholder theory













Corporate Governance





















































































































Values, Concerns , Duties, Responsibilities Society expects from Corporates • If a corporate has to survive, grow, and wants to be counted, its vision should focus on the ways and means of becoming a responsible and responsive corporate citizen.









Our Credo We believe that our first responsibility is to the doctors , nurses, and patients, to mothers and fathers and all others who use our products and services. In meeting their needs everything we do must be of high quality. We must consistently consistently strive to reduce costs in order order to maintain reasonable reasonable prices. Customers’ orders must be serviced promptly and accurately. Our suppliers and









We are responsible to our employees, the men and women who work with us throughout the world. Everyone must be considered as an individual. We must respect their dignity and recognize their merit. They must have a sense of security on their jobs. Compensation must be fair and adequate, and working conditions clean, orderly, and safe. We must be mindful of ways to help our employees fulfill their family responsibili responsibilities. ties. Employees must feel free to make suggestions and complaints.









We are responsible to the communities in which we live and work and to the world community as well. We must be good citizens – support good works and charities and bear out fair share of taxes. We must encourage civic improvements and better health and education. We must maintain in good order the property we are privileged to use, protecting the environment and natural resources.









Our final responsibility is to our stockholders. Business must make a sound profit. We must experiment with new ideas. Research must be carried on, innovative program developed and mistakes paid for. New equipment must be purchased, new facilities provided, and new products launched. Reserves must be created to provide for adverse times. When we operate according to these principles, the stockholders should realize a fair return.

2. 36 Theory and Practice of Corporate Governance

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