Consentia on Law

Corporate Governance – A Much Factor in the Present-World Economic Scenario

In the present century of emerging corporate sectors in the emerging economies and the rise of market economy has paved the way of corporate governance and thereby we can no longer stand going beyond globalisation. The further approach in order to carry on with a pace in the world of modern business progress as with the globalisation, the need of a proper model and practise of corporate governance round the corner and in the present scenario the interests of the board of directors, business partners, shareholders, employees, and the alike personnel cannot be ignored in the name of organisational value. Such ignorance may lead to internal conflicts among the business societies which may create a downfall in the present world economic progress and in the individual minds related to the business activities. Turmoil may occur where a negative activity may prevail instead of cooperation in the groups who are going to achieve their earnest goals as their achievements and to create a prosperous globalisation and market economy thereon. In order to maintain a lively responsibility among the personnel in a society from the very top level to the lower level with a very my-dear relationship and in order to achieve the prosperity which is the bird’s eye at any viewpoint, a better managerial activity is very necessary and which can only be adopted through a proper practise of a corporate governance model.

Hereby we are going to make a comparative study regarding the corporate governance in the present global scenario an analyzing it through various viewpoints in order to give it a proper sense that how can it be adapted and applied in the present economic culture broadly where the corporate sectors are showing the dawn to the modern economic times. However philosophy cannot provide us the better solution of the burning issue, till we give an effect to its proper utilisation.


‘Corporate governance is, “the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations.” It encompasses the mechanisms by which companies, and those in control, are held to account.’

–          Owen, J.; HIH Royal Commission.[i]

“Corporate governance is a dynamic force that keeps evolving.”

–          Eric Mayne, Chair, ASX Corporate Governance Council.[ii]

“Corporate governance describes the structure of rights and responsibilities among the parties that have a stake in a firm.”

–          Aguilera, R.V. & Jackson, G.[iii]

Corporate governance may be termed as to the system which effects the direction and control of the corporations. The corporate governance brings a harmonious relationship in the structure of a corporation regarding the rights and the responsibilities among the different personnel in a corporation and specifies the rules and procedures that how the managers of the different levels, the board of directors, shareholders, creditors, auditors, regulators, and other stakeholders shall make decisions and help themselves to cooperate in the following corporate affairs. At the certain levels, it seeks the structure in which the power and the responsibilities should be distributed among the different personnel. In the modern times the term governance is used which is describing the concept of action taken in what way and various factors of decision and control can be balanced so that the organisation can implement the meaning of capital in the most forthcoming event which is used as the main motive and the most common goal in the present scenario of business entity in order to make a progress and keep a pace in the modern market economy in the market of globalisation in the twenty-first century. The present managerial activities as concerned with an entity are a very much factor to maintain the harmony in order to maintain the level in the modern business environment and to cope up with the other competitive authorities in the system of the corporate sectors.[iv][v]

Corporate governance provides the rules and regulations and appropriate control mechanism through which creates a systematic obligation to maintain the propositions in the entities and supervise the total materialistic issues from one level to another hand to hand within a modern scope of business environment which helps in the initiation and development of the activities, building a social scope, and modelling of the entities according to the modern systems which provide a lot of market development in the developing nations with a sustainable development and a continuous involvement in restructuring the main branches of the economy or social sector reforms.[vi]

The traditional market system hence belonged to a traditional family oriented basic structure of the business whereby the total concept of the entity was determined by the owner of the business and thereby the owner of the family; thus the autocratic leadership in so many ways used to fluctuate the mind of the employees of the different levels and a sudden breakage to the socio-cultural pattern in the existing firm due to excessive need of proper managerial activities which needs proper managers and determination of a proper leadership. Thus the modern system evolved which is providing an enthusiasm to build a proper relationship among the human society in order to achieve the ultimate goal with a very positive effect in every stream of leadership and to develop a proper model of corporate governance and to utilise it with a very effective practise.

Corporate governance has also been defined as “a system of law and sound approaches by which corporations are directed and controlled focusing on the internal and external corporate structures with the intention of monitoring the actions of management and directors and thereby mitigating agency risks which may stem from the misdeeds of corporate officers.”[vii] The term “corporate governance” denotes the entire process by which corporations are managed and controlled. J. Wolfensohn, president of the World Bank has opined that corporate governance is about promoting corporate fairness, transparency and accountability.[viii]

The main motive of corporate governance lies with the motion that to strengthen the economic efficiency through a strong emphasis on the stakeholders’ welfare and thereby one of its importance arises out is the nature and extent of corporate accountability. Most of the interest in corporate governance is concerned with that of the mitigation of the conflicts arising out of the interests between the stakeholders.


The history of corporate governance arrangements, understood as the constitutive processes shaping the relationship between ownership and management of enterprises, is a relatively new field of inquiry for business historians. A few decades ago, the term corporate governance was not common to us in the practical stage of business operation; but in the present situation, it is just like a climate change and private equity, corporate governance is a staple of everyday business language and capital markets are better for it. Among the black days of the World War Period, the world saw the crash of the Wall Street on 1929 and the pass away of many business tycoons at the same time as many of the legal scholars namely Adolf Augustus Berle, Edwin Dodd and Gardiner C. pondered on the basic change of the of the modern corporation of the-then system in the US and the role that has been taken into action in order to cope up with the certain policies and regulations to pass a good meaning in the world of business.[ix]

After the end of the World War II, the expansion in the US superpower, the emergence of the capitalist society also encouraged with a boom through the emergence of multinational corporations which did a lot for the establishment of the managerial class in the modern business society.

In the 1980s, Eugene Fama and Michael Jensen established the principal-agent problem as the way how to understand corporate governance very efficiently along with a series of contracts. Over the past three decades, corporate directors’ duties in the U.S. have expanded beyond their traditional legal responsibility of duty of loyalty to the corporation and its shareholders.[x]

In the first half of the 1990s the issue of corporate governance in the U.S. received considerable press attention due to the wave of CEO dismissals e.g.: IBM, Kodak, Honeywell by their boards. The California Public Employees’ Retirement System (CalPERS) led a wave of institutional shareholder activism (something only very rarely seen before), as a way of ensuring that corporate value would not be destroyed by the now traditionally cosy relationships between the CEO and the board of directors e.g., by the unrestrained issuance of stock options, not infrequently back dated. Then the 1990s paved the way for the 1991, a historic year in the calendar of the business and economic world which saw the liberalisation, globalisation and privatisation of different sectors and the booming of the large corporate sectors in the world from the developing countries to the highly developed countries. Moreover the period of 1989-1991 saw the downfall of the socialistic and the communistic pattern of economy in many of the 29 communist states of the world including the major superpower USSR and though the Cold War between the US and the USSR also terminated with the victory of the capitalist society and the existing communist states wherever as less as 4 in number somehow adopted the mixed economy system to survive in the modern world of competition and capital based economy. The period also faced a severe economic crisis which was duly managed by the globalisation in the period among different nations as they adopted such in order to survive their economic models and the total system repair. Many of the nations adopted mixed economic system; especially the developing nations and the highly developed countries remained capitalistic in nature after the 1991. Thus the booms in the corporate sectors find a very easy way in the modern market economy to go through and thereby captured the modern economic system with a very high demand. We can take example of many of the Asian countries where socialistic pattern prevailed before the 1990s but the post 1991 saw the mixed economic system in those nations which thereby gave a high rise in the growth of the corporate sectors, such as India; one of the very burning example; such resulted many of the scams, scandals and alike nature of prospective in the corporate sectors and the rise of the such also paved the way in such mal activities in many of the developing nations which along with paved the way for the corporate governance very easily. In 1997, the East Asian Financial Crisis severely affected the economies of Thailand, Indonesia, South Korea, Malaysia, and the Philippines through the exit of foreign capital after property assets collapsed. The lack of corporate governance mechanisms in these countries highlighted the weaknesses of the institutions in their economies.

In the early 2000s, the massive bankruptcies and criminal malfeasance of Enron and Worldcom, as well as lesser corporate scandals, such as Adelphia Communications, AOL, Arthur Andersen, Global Crossing, Tyco, led to increased political interest in corporate governance. This is reflected in the passage of the Sarbanes-Oxley Act of 2002. Other triggers for continued interest in the corporate governance of organizations included the financial crisis of 2008-09 and the level of CEO pay.[xi]


The 1990 report regarding the three documents along with the discussions of refers to principles of corporate governance which are the Cadbury Report, 1992 of UK; OECD Principles of Corporate Governance 1998 and revised on 2004 of OECD; and the Sarbanes-Oxley Act, 2002, of US. The Cadbury and OECD reports gives the general principles regarding which businesses are expected to operate and assure proper governance. The Sarbanes-Oxley Act, informally referred to as Sarbox or Sox, is an attempt by the federal government in the United States to legislate several principles recommended in the Cadbury and OECD reports.

  • Rights and equitable treatment of shareholders: Hereby the organisations are compelled to respect the rights of the shareholders and help them to exercise their rights and the entities are responsible thereon to help the shareholders in exercising their rights by openly an effectively communication and basic information and by encouraging them to participate in the general meetings.[xiv]
  • Interests of other shareholders: Organizations should recognize that they have legal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers.[xv]
  • Role and responsibilities of the board: The board needs sufficient relevant skills and understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment.
  • Integrity and ethical behaviour: Integrity should be a fundamental requirement in choosing corporate officers and board members. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making.[xvi][xvii]
  • Disclosure and transparency: Hereby accountability is a major factor which is a major mode to be abided in any form of entity according to the rules and regulations. Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company’s financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.[xviii][xix]


Rules and Regulations:

The total corporate governance is regulated through certain factors as there has been renewed interest in the corporate governance practices of modern corporations, particularly in relation to accountability, since the 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 Australian companies of HIH and OneTel 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.

In September 2008 the World Council for Corporate Governance honoured the now-beleaguered Indian outsourcer Satyam with a “Golden Peacock Award” for global excellence in corporate governance. Satyam computers in January culminating into the historic confession letter of former chairman B. Ramalinga Raju, admitting a fraud of Rs 78 billion has caused the regulators and the investors everywhere to re-examine corporate governance standards. The scandal occurred in December 2008 and January 2009 provides two such clean and major corporate governance events, with effects on firms across the board in India. So these events clearly can be viewed as “corporate governance” events.[xx]

So in order to get rid from such increasing scams and scandals in the world’s major corporate sectors day by day, it has been taken into action that there should prevail the following regulations which has a legal background and are prevailed from legal acts and procedures. Thereby the following major regulations are taken into the scene as these are the highest point among the strictness and the point of view in the regulatory process.

  • Legal provisions: Corporations are regarded as the juristic persons and thereby coming under the purview of legal persons according to the laws and regulations of a particular jurisdiction and it comes within the fundamental purview of any nation may it vary from one State to another but the status of a corporation remains the same and it comes within the purview of legal person in any of the jurisdiction of the world and it is conferred by statute. This bears a right towards any of the entities regarding corporations to hold properties in its own right without reference to any particular real person. It also results in the perpetual existence that characterizes the modern corporation. The statutory granting of corporate existence may arise from general purpose legislation which is the general case or from a statute to create a specific corporation, which was the only method prior to the 19th century.

Corporations being the parties to statutory laws are often coming within the jurisdiction of common laws in many of the countries of common law and also among various laws and regulations which affect business practises. In most jurisdictions, a corporation also consists of a constitution that provides individual rules that govern the corporation and authorize or constrain its decision-makers. This constitution is identified by a variety of terms; in English-speaking jurisdictions, it is usually known as the Corporate Charter or the Memorandum and Articles of Association. The capacity of shareholders to modify the constitution of their corporation can vary substantially.

The U.S. passed the Foreign Corrupt Practices Act (FCPA) in 1977, with subsequent modifications. This law made it illegal to bribe government officials and required corporations to maintain adequate accounting controls. It is enforced by the U.S. Department of Justice and the Securities and Exchange Commission (SEC). Substantial civil and criminal penalties have been levied on corporations and executives convicted of bribery.[xxi]

The UK has also passed the Bribery Act in 2010. This law made it illegal to bribe either government or private citizens or make facilitating payments i.e., payment to a government official to perform their routine duties more quickly. It also required corporations to establish controls to prevent bribery.

  • Sarbanes-Oxley Act, 2002:[xxii] The Sarbanes-Oxley Act of 2002 was enacted in the wake of a series of high profile corporate scandals. It established a series of requirements that affect corporate governance in the U.S. and influenced similar laws in many other countries. The law required, along with many other elements are as follows-

ü  The Public Company Accounting Oversight Board (PCAOB) be established to regulate the auditing profession, which had been self-regulated prior to the law. Auditors are responsible for reviewing the financial statements of corporations and issuing an opinion as to their reliability.

ü  The Chief Executive Officer (CEO) and Chief Financial Officer (CFO) attest to the financial statements. Prior to the law, CEO’s had claimed in court they hadn’t reviewed the information as part of their defence.

ü  Board audit committees have members that are independent and disclose whether or not at least one is a financial expert, or reasons why no such expert is on the audit committee.

ü  External audit firms not provide certain types of consulting services and must rotate their lead partner every 5 years. Further, an audit firm cannot audit a company if those in specified senior management roles worked for the auditor in the past year. Prior to the law, there was the real or perceived conflict of interest between providing an independent opinion on the accuracy and reliability of financial statements when the same firm was also providing lucrative consulting services.[xxiii]



If we go through the models of the corporate governance, we can find three proper kinds of models which derive from different parts of the world and being used by different nation in order to bring corporate governance in their respective systems. If India is taken into account it is found that 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 & corporate funds in the management of a company.”[xxv] It has been suggested that the Indian approach is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution, but this conceptualization of corporate objectives is also prevalent in Anglo-American and most other jurisdictions. Thereby it is very easy matter to understand that there is a very much relationship with the Anglo-American corporate governance model with that of the Indian system. In certain cases we find that different nations follow different models where there is a prevalent dominance of any of the one model we are going to discuss and these models are taken as the main and major models of corporate governance in the modern economic system which is followed or conceptualized by different States.

(1)   Anglo-Saxon Model: This is the model which is characterised by the dominance in the company of independent persons and individual shareholders and which is based upon entrepreneurship and private property. It relies on a single-tiered Board of Directors that is normally dominated by non-executive directors elected by shareholders; which is also known as the “unitary system”.[xxvi][xxvii] Hereby, the manager is responsible to the Board of Directors and shareholders, the latter being especially interested in profitable activities and received dividends. It ensures the mobility of investments and their placement from the inefficient to the developed areas, but it however feels a lack of strategic development.

However, the United States and the United Kingdom differ in one critical respect with regard to corporate governance: In the United Kingdom, the CEO generally does not also serve as Chairman of the Board, whereas in the US having the dual role is the norm, despite major misgivings regarding the impact on corporate governance. In the U.S., financial markets activities dominate the allocation of ownership and control rights into organizations. Legislation always appeared hostile to concentration, especially in the banking industry, but in the recent years there have been notice new regulations development, more forced by the new economic trends: the increasing influence of boards, investors are increasingly demanding and cautious and managers give more importance to key business issues. The governance model takes place in organizations at three levels: – shareholders-directors-managers, since managers authority derives from the administrators. Legislation limits the rights of shareholders to intervene on the current activities of the entity, for example they can only decide the elected members of the Board. However, they can influence changes in the managers’ attitude and manner of leading; they may decide to liquidate holdings or refuse to increase its capital contribution of the entity, thus stopping the funding. Financial support of shareholders is the most important weapon they have in front of managers. In the United States, corporations are directly governed by state laws, while the exchange regarding offering and trading of securities in corporations (including shares) is governed by federal legislation. Many US states have adopted the Model Business Corporation Act, but the dominant state law for publicly traded corporations is Delaware, which continues to be the place of incorporation for the majority of publicly traded corporations.[xxviii]

The Securities and Exchange Commission (SEC) has reduced its strict rules on collective activities of shareholders, proposing various regulations to encourage investment relationship that allows managers and owners to discuss possible advantages and disadvantages of business strategy. Institutional investors play an ever important in Anglo-Saxon systems as they are already in a dominant position regarding the UK structure, which is holding even two-thirds of the equity of the companies. As to this, the investment relationship – a feature of the UK governance system is gaining more of the grounds in the US relating the relations between the company management and the institutional investors.

One of the most important characteristics of the Anglo-Saxon countries is that the emergence of financial markets and strong banking restrictions, especially regarding the holding of shares in companies outside the banking sector. Great Britain can be perceived as a special presence in Europe, having recognized the importance of the financial market in London, where many national companies are listed. The banking system does not have a central role in governance structures, banks being considered merely “credit providers”. In the economic entities, capital structure is dispersed and shareholder power is stable compared with that of managers. Here, the Governance model is dominated by the influence of external capital markets, through merger and acquisitions, but also through the control exercised over securities trading. Regulatory institutions act to protect investors by implementing specific policies and practices of corporate governance system. Such a system requires an independent Board, responsible for monitoring and control of management, to improve its organizational performance and recovery. Not only in UK, but also in other Anglo-Saxon countries, where market economy has significantly developed through sustained economic growth, there is a high degree of dispersion of capital and shareholder structure. Population can directly intervene to the economic development through holding shares, making of its own availabilities investment on capital market.

(2)   Continental-European Model: The Continental – European Model is highly concentrated upon shareholders’ common interests with that of the organisation and participation in its management and control.[xxix] In the two-tiered board, the Executive Board, made up of company executives, generally runs day-to-day operations while the supervisory board, made up entirely of non-executive directors who represent shareholders and employees, hires and fires the members of the executive board, determines their compensation, and reviews major business decisions.[xxx]

Hereby, a two – tiered board of directors is required in case of improving the corporate governance which is in the countries like German and Netherlands. Here, the enterprise is seen as the combination of various interest groups aimed to coordinate the national interest objectives. If we go to the history, we find that the German banks played a vital and important role in the corporate decisions where only one among four companies in an average can create public transaction, whereby most of the companies have to take financial assistance from the banks. And a great importance has been provided regarding the protection of creditors, even to the point where a bank might dominate a firm. Unlike the U.S., German banks may hold only actions of their own clients. This ensures the depositary voting rights to control the decisions and votes in a company. In Germany, the corporate governance system is a dual one, aiming at the same time a national policy to provide employees access to information and participation in various activities of the enterprise and industrial democracy.

The Italian corporatism showed two levels: – the Catholic and the Fascist. Catholic inspired corporatism appeared in 1891 and has grown to early-twentieth century represented by Giuseppe Toniolo, economist and sociologist, who has always promoted solidarity, rejecting individualism and liberal doctrines. Later on Fascist corporatism developed during the black days of the Wars in the world which was between the period of 1920-1940, and its general principles were set out in the Charter of Labour in 1927 and were institutionalized with the advent of new corporations, bringing together different categories of entrepreneurs and workers. 1939 was the crucial step by establishing Chamber Fascia which was thereby abolished and the procedure was duly removed.

Later during the 1980s a new approach arose which came through a debated attention and was named as neo-corporatism. Currently, market and companies management regulation is prevalent public in a less receptive environment and exposed to adverse conditions. Socio-economic reality generated some different structures of distribution and control management, each specific to the reference market and with special characteristics. Ownership and control of listed companies are significantly concentrated, shareholders having the opportunity of intervention in the management process.

France can be compared in many ways regarding the greatest contrast with the US and British cases, due to the strong role of the state. During the nineteenth and early twentieth century, there were very few large corporations in France. In large part, these firms financed investment from earnings and engaged with banks only for short-term loans. Relational banking in the sense of banks holding equity stakes in firms was rare. Like the British, French banks maintained a specialized divide between commercial and investment functions. Similarly, the securities market was used, particularly in the 1920s, but it was not a significant factor in corporate finance.[xxxi]

The most distinctive feature in France was that it gave an extra power towards encouraging the development of “national champions” in industrial sectors after the World Wars since 1945; thereby especially channelling capital to firms and acting as their major customers. It was again a very important matter of view that after the Second World War France started to nationalise the banking sectors and various business firms where public influence was exercised both directly and indirectly on the composition of boards and corporate investment strategies. In this context, however, the number of public corporate enterprises proliferated and state’s prominent influence came into the outlook where corporate managers directed their enterprises towards stakeholder rather than stockholder interests. Despite the proliferation of large corporations in the post-World War period, ownership remained concentrated, not only because of the importance of public enterprises, but also because managers engaged in significant cross-shareholding.

Since the mid-1980s, following important financial system reforms, the downfall of USSR and thereby the end of communist and socialist rule in the lions part of the world; the rise of the new superpower US; a series of major self-dealing scandals involving prominent managers and state officials, and pressures from the European Union to reduce the economic role of the state, French corporations have become more exposed to market pressures and since then, size and role of the stock market has increased and shareholding has gradually become more dispersed.[xxxii]

(3)   Japanese Model: This model brings a specification regarding an oriented control over governance system which designates industrial groups consisting of companies with common interests and similar strategies. Here managers’ responsibility manifests itself in relations with shareholders and keiretsu which is a network of loyal suppliers and customers. Keiretsu represents a complex pattern of cooperation and also competition relationships, characterized by the adoption of defensive tactics in hostile takeovers, reducing the degree of opportunism of parties involved and keeping long term business relationships. Most Japanese companies are affiliated with this group of trading partners. The governance pattern is dominated by two types of legal relationships; one of co-determination between shareholders and unions, customers, suppliers, creditors, government and the other is regarding ratio between administrators and those stakeholders, including managers. The necessity of the model results from the fact that the activity of a company should not be upset by the relations between all these people, relationships that generate risks. Management decisions pursue improving the income and power of an enterprise, in particular by specific corporate governance practices, although sometimes the shareholders’ control on the management can be hampered. Therefore, the Japanese model often called similar to the German model is based on internal control; it does not focus on the influence of strong capital markets, but on the existence of those strategic shareholders such as banks. As in Germany, major shareholders are actively involved in the management process, to stimulate economic efficiency and to penalize its absence. It also aims in harmonising the interests of social partners and employees of the entity and also facilitates the monitoring and flexible financing of enterprises, effective communication between them and the banks, as the main source of financing consists in bank loans. Moreover the Central Bank and Ministry of Finance are monitoring the supervision and control within the company, in its relations with its strategic partners. Government structures have created an informal negotiation system to implement certain policies and corporate strategies also known as gyosei shido. In the 1980s, the governmental influence manifested itself indirectly through appointments to the board of directors and managers of some functionaries out of system also called amakudari.

Corporate governance oriented to control is easily achieved in Japan due to a concentrated shareholder structures, unlike the United States. Banks and other institutional investors have usually a minor role in terms of corporate governance discipline. Their main responsibility is to provide debt financing, the existence of equity and bank directors should occupy top management positions because the main motive is that if an entity is profitable, the banks shall be limited to monitor and protect the interests of foreign investors.


There are several rules and guidelines following the corporate governance principles and codes which have been developed from different countries and issued from stock exchanges, corporations, institutional investors, or associations of directors and managers along with the government and international organisation supports. Of which the following two are the main major and most important guidelines followed by the corporate sectors that are running on the track of the modern corporate business economies also known as the modern corporate principles.

(1)   OECD Principles:[xxxiv][xxxv] OECD also known as Organisation for Economic Cooperation and Development is one of the most influential guidelines which has been published in 1999 and revised in 2004 and are often referenced as the developing local codes or guidelines used by different countries.[xxxvi] To carry on the motives of OECD in a proper way and to achieve the oriented goals, other international organizations, private sector associations and more than 20 national corporate governance codes formed the United Nations Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting also known as ISAR to produce their Guidance on Good Practices in Corporate Governance Disclosure.[xxxvii] This internationally agreed[xxxviii] benchmark consists of more than fifty distinct disclosure items across five broad categories:[xxxix]

  • The Board of Directors
  • Responsibility of Board Members
  • Senior Management
  • Board Structure and Operations
  • Size of Board
  • The Organisational Structure of the Board
  • Board Meetings
  • Auditing Committee
  • Governance of Affiliates
  • Corporate Responsibility and Compliance
  • Financial Transparency and Information Disclosure
  • Ownership Structure and Control Rights Exercise

(2)   Stock Exchange Listing Standards:[xl] Companies listed on the New York Stock Exchange (NYSE) and other stock exchanges are required to meet certain governance standards. For example, the NYSE Listed Company Manual requires, among many other elements:

  • Independent directors: “Listed companies must have a majority of independent directors. Effective boards of directors exercise independent judgment in carrying out their responsibilities. Requiring a majority of independent directors will increase the quality of board oversight and lessen the possibility of damaging conflicts of interest” – Section 303A.01. An independent director is not part of management and has no “material financial relationship” with the company.
  • Board meetings that exclude management: “To empower non-management directors to serve as a more effective check on management, the non-management directors of each listed company must meet at regularly scheduled executive sessions without management” – Section 303A.03.
  • Boards organize their members into committees with specific responsibilities per defined charters. “Listed companies must have a nominating/corporate governance committee composed entirely of independent directors.” This committee is responsible for nominating new members for the board of directors. Compensation and Audit Committees are also specified, with the latter subject to a variety of listing standards as well as outside regulations – Section 303A.04 and others.

 Systematic Problems:[xli]

  • Demand for information: In order to influence the directors, the shareholders must combine with others to form a voting group which can pose a real threat of carrying resolutions or appointing directors at a general meeting.
  • Monitoring costs: A barrier to shareholders using good information is the cost of processing it, especially to a small shareholder. The traditional answer to this problem is the efficient market hypothesis in finance, the efficient market hypothesis (EMH) asserts that financial markets are efficient, which suggests that the small shareholder will free ride on the judgments of larger professional investors.
  • Supply of accounting information: Financial accounts form a crucial link in enabling providers of finance to monitor directors. Imperfections in the financial reporting process will cause imperfections in the effectiveness of corporate governance. This should, ideally, be corrected by the working of the external auditing process.



The subject of corporate governance has attracted increasing attention in recent years for good reasons. Every country wants the firms that operate within its borders to flourish and grow in such a way as to provide employment, wealth and satisfaction, not only to improve standards of living materially but also to enhance social cohesion. These aspirations cannot be met unless those firms are competitive internationally in a sustained way, and it is this medium and long term perspective that makes good corporate governance so vital.

Corporate Governance is looked upon with utmost importance by the legal systems and company regulatory regimes all around the world. India is not an exception to it. In India too, various committees set up by the industry, SEBI and the Ministry of Corporate Affairs have made reports and recommendations covering every subject of importance to corporate governance. The government has also introduced a comprehensive bill[xlv] in the Parliament for amending the various provisions of the companies Act 1956 and the related provisions contained in other Acts. Corporate governance is still in an evolving situation in India and that substantial work still remains to be done for finalizing a comprehensive code of corporate governance in India. In India, less than 10% of the companies are listed. That means, if we strictly follow SEBI guidelines, 90% of corporate India doesn’t need to adhere to corporate governance requirements. Since the structure of companies and groups are layered with listed, unlisted and private limited companies, it becomes difficult to assess the actual level of corporate governance in any of the groups.

An important step to ensure that the business community is trustworthy is to improve practices in relations between shareholders, boards of directors and managing directors. During the summer of 2003 Iceland Chamber of Commerce started work on a set of recommendations regarding good corporate governance, the purpose of which was to clarify the role and work of the board of directors and managers of Icelandic enterprises and thus make it easier for them to fulfil their duties. The goal was to assemble guidelines for corporate governance working methods, hereafter named guidelines for good corporate governance. In the autumn of 2003 the Iceland Stock Exchange joined the work of the Chamber as did The Confederation of Icelandic Employers at year´s end. The reason for this co-operation was to create a broad front on good corporate governance.

It is still a very difficult foreclosure to build or make an outcome for good governance; organizations carrying out such assessments need more representative criteria so that entities must notify their management processes in an efficient manner. It turned out that no model of governance is perfect and even better, their existence over time showing that each one is effective in its own way, and corporate governance structure specific to a country is difficult to transfer to another country. The implemented model essentially depends on the firm’s theory of voluntary or mandatory approach, but also on the boundaries between markets, entrepreneurs and civil society. The literature and philosophy in the modern times will fail to provide a general method regarding which a base would be prepared for a comparative study because the measurement techniques of social responsibility performance are not rigorously founded.

[i] Justice Owen in the HIH Royal Commission, “The Failure of HIH Insurance”, Volume 1: A Corporate Collapse and Its Lessons, Commonwealth of Australia, April 2003 at page xxxiii and Justice Owen, “Corporate Governance-Level upon Layer”, Speech to the 13th Commonwealth Law Conference 2003, Melbourne 13-17 April 2003 at page 2.

[ii] Eric Mayne, Chair, ASX Corporate Governance Council, August 2007, “Corporate Governance Principles and Recommendations With 2010 Amendments”, 2nd Edition, © 2007, ASX Corporate Governance Council, Australian Securities Exchange, ISBN 1-875-26242-3, All Rights Reserved,

 [iii] Aguilera, R. V. & Jackson, G. (2003), “The cross-national diversity of corporate governance: Dimensions and determinant”s, Academy of Management Review, 28(3), 447−465.

 [v] Tricker, Adrian, Essentials for Board Directors: An A–Z Guide, Bloomberg Press, New York, 2009, ISBN 978-1-57660-354-3.

 [vi] Rezaee, Zabihollah, Financial Statement Fraud, John Wiley & Sons, (2002), ISBN 0-471-09216-9.

 [vii] Sifuna, Anazett Pacy (2012), “Disclose or Abstain: The Prohibition of Insider Trading on Trial”, Journal of International Banking Law and Regulation 27 (9).

 [viii] J. Wolfensohn, Corporate Governance, FINANCIAL TIMES (London), June 21, 1999.

 [ix] Berle and Means’, The Modern Corporation and Private Property, (1932, Macmillan).

 [x] Crawford, Curtis J. (2007), “The Reform of Corporate Governance: Major Trends in the U.S. Corporate Boardroom”, 1977–1997, doctoral dissertation, Capella University, [2],,

 [xi] Steven N. Kaplan, “Executive Compensation and Corporate Governance in the U.S.: Perceptions, Facts and Challenges”, Chicago Booth Paper No. 12-42, Fama-Miller Center for Research in Finance, Chicago, July 2012.

 [xii] Cadbury, Adrian, Report of the Committee on the Financial Aspects of Corporate Governance, Gee, London, December 1992, Sections 3 and 4.

 [xiii] Sarbanes-Oxley Act of 2002, US Congress, Title VIII.

 [xvi]  Cadbury, Adrian, Report of the Committee on the Financial Aspects of Corporate Governance, Gee, London, December, 1992, Sections 3.2, 3.3, 4.33, 4.51 and 7.4.

 [xvii]Sarbanes-Oxley Act of 2002, US Congress, Title I, 101(c)(1), Title VIII, and Title IX, 406.

 [xix] Cadbury, Adrian, Report of the Committee on the Financial Aspects of Corporate Governance, Gee, London, December, 1992, Section 3.2.

 [xx] Rajesh Chakrabarti & Subrata Sarkar, “CORPORATE GOVERNANCE IN AN EMERGING MARKET

 [xxv]  “Report of the SEBI Committee on Corporate Governance, February 2003”, SEBI, Committee on Corporate Governance, Retrieved 2011-07-20.

[xxvi] Mallin, Christine A., “Corporate Governance Developments in the UK” in Mallin, Christine A (ed), Handbook on International Corporate Governance: Country Analyses, Second Edition, Edward Elgar Publishing, 2011, ISBN 978-1-84980-123-2.

[xxvii] Cadbury, Adrian, Report of the Committee on the Financial Aspects of Corporate Governance, Gee, London, December, 1992.

 [xxviii] Bebchuck LA., (2004),The Case for Increasing Shareholder Power, Harvard Law Review.

 [xxix] Tricker, Bob, Essentials for Board Directors: An A–Z Guide, Second Edition, Bloomberg Press, New York, 2009, ISBN 978-1-57660-354-3.

 [xxx] Hopt, Klaus J., “The German Two-Tier Board (Aufsichtsrat), A German View on Corporate Governance” in Hopt, Klaus J. and Wymeersch, Eddy (eds), Comparative Corporate Governance: Essays and Materials, de Gruyter, Berlin & New York, ISBN 3-11-015765-9.

 [xxxi] Fridenson 1997, Levy-Leboyer 1978, Fohlen 1978, Murphy 2004.

 [xxxii] Hancke 2002, MacClean 1999, Fanto 1995, O’Sullivan 2003.

 [xxxiii]Guidelines on Corporate Governance”,

 [xxxiv] CORPORATE GOVERNANCE GUIDELINE: 2006:02, Bank Supervision Department, CENTRAL BANK OF BARBADOS; OCTOBER 2006,,

 [xxxv] Corporate Governance Guideline, Central Bank of Trinidad and Tobago, May 2006(Final);

 [xl]  “New York Stock Exchange Listing Manual”, NYSE Listing Manual, Retrieved 2013-05-18.

 [xlii] Mihaela Ungureanu, Alexandru Ioan Cuza University of Iași, Romania;, “MODELS AND PRACTICES OF CORPORATE GOVERNANCE WORLDWIDE”;


 [xliv] Neelima Sawarkar, “The critical study of corporate governance provisions in India”,

 [xlv] A Companies Bill, 2008 was introduced in the Lok Sabha on 23rd of October 2008,


2 thoughts on “Corporate Governance – A Much Factor in the Present-World Economic Scenario”

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