The Honourable Union Finance Minister, Shri Yashwant Sinha, while inaugurating the 17th Annual Session of FICCI Ladies Organization (FLO), stressed the need to formulate and adhere to a set of strong corporate governance practices. He was addressing the august audience of leading businesswomen of FICCI on "The Emerging Need for Corporate Governance".
He said : "Today we need a pragmatic approach rather than a narrow doctrinaire approach to serve our needs. It is essential that we have high ethical standards of corporate governance, followed voluntarily, having community sanctions which will have much more effectiveness. Only then our endeavour at economic reforms and liberalization will fructify".
Finance Minister exhorted the business leaders to set up examples in corporate governance of high ethical standards, which will create better value for all the stakeholders and will lead to growth, which in effect will help the country to fight poverty and debilitating diseases. This alone, he felt, will enable the Government to justify the efforts at liberalization and bringing in economic reforms.
Enron, they say, is an example of the ethics of corporations and the free market. Commentators have told repeatedly that Enron's executives were motivated by "greed" and "selfishness."
Philosopher Harry Binswanger points out, the premise behind this statement is that lying, cheating and stealing is the best way to make money and be selfish -- and the fear of prison is the only disincentive for wholesale fraud and looting. Professor Binswanger goes on to point out that this statement reflects a whole approach to morality.
To be principled and moral, in this view, means to sacrifice one's interests by, say, going into social work or taking a vow of poverty. The logical flip-side is that to be self-interested, to pursue wealth and happiness -- well, that requires no principles or morality at all, just a random, range-of-the-moment grab for whatever one can get one's hands on.
This is the predominant moral outlook today, especially on the left. Ironically, Enron seems to have implemented this view of morality to a T. To enrich themselves, Enron's executives lied to shareholders and cooked the books to produce fake profits, ignoring the company's long-term financial problems. The joke was on them, though, because it didn't work. They didn't make money; instead, they bankrupted their company and destroyed their own reputations. And they don't seem to have profited even in the short term.
A social institution, including a corporate entity, derives its legitimacy from its ability and desire to fulfill social needs. It is therefore, accountable to the society. No institution, however high and mighty it is, can ignore its responsibility towards the society from which it derives its strength and sustenance.
The recurring financial crises and the scams that rocked the nation in the recent past call for a sharper focus on corporate governance. The only way we can protect our interest and also those of the public at large is to build "firewalls" by putting in place the practices of good corporate governance.Corporate Governance has succeeded in attracting a good deal of public interest because of its importance for the economic health of corporations and the welfare of society.
According the Economist and Noble laureate Milton Friedman, Corporate Governance is to conduct the business in accordance with owner or shareholders’ desires, which generally will be to make as much money as possible, while conforming to the basic rules of the society embodied in law and local customs.
This definition is based on the economic concept of market value maximization that underpins shareholder capitalism. Over a period of time the definition of Corporate Governance has been widened. It now encompasses the interests of not only the shareholders but also many stakeholders. J. Wolfensohn, President, World Bank as saying that "Corporate Governance is about promoting corporate fairness, transparency and accountability".
Corporate governance also includes in its ambit, the manner in which their boards of directors govern the business and affairs of individual institutions and their functional relationship with senior management.
Corporate governance is determined by how Organizations:
•Set corporate objectives (including generating economic returns to owners);
•Run the day-to-day operations of the business and;
•Consider the interests of recognised stakeholders i.e. employees, customers, suppliers, supervisors, governments and the community and
•Align corporate activities and behaviours with the expectation that organizations will operate in a safe and sound manner, and in compliance with applicable laws and regulations.
Sound corporate governance should have, as its basis, the following strategies and techniques:
•The corporate values, codes of conduct and other standards of appropriate behaviour and the system used to ensure compliance with them;
•A well-articulated corporate strategy against which the success of the overall enterprise and the contribution of individuals can be measured;
•The clear assignment of responsibilities and decision-making authorities, incorporating an hierarchy of required approvals from individuals to the board of directors;
•Establishment of a mechanism for the interaction and cooperation among the board of directors, senior management and the auditors;
•Strong internal control systems, including internal and external audit functions, risk management functions independent of business lines, and other checks and balances;
•Special monitoring of risk exposures where conflicts of interest are likely to be particularly great, including business relationships with borrowers affiliated with the bank, large shareholders, senior management, or key decision-makers within the firm (e.g. traders);
•The financial and managerial incentives to act in an appropriate manner offered to senior management, business line management and employees in the form of compensation, promotion and other recognition; and
•Appropriate information flows internally and to the public.
For ensuring good corporate governance, the importance of overseeing the various aspects of the corporate functioning needs to be properly understood, appreciated and implemented.
Ethics and values in corporate governance
No discussion on public affairs will be complete without a reference to Ethics and Values. The quality of corporate governance is also determined by the manner in which top management, particularly the Board of Directors, allocates the financial resources of the company as between themselves and other interest groups such as employees, customers, government etc. The basic qualities invariably expected in this regard are trust, honesty, integrity, transparency and compliance with the laws of the land. There is an increasing body of public opinion that would expect a business enterprise not only to be a mere economic unit but also to be a good corporate citizen. For this, its corporate governance must be based on a genuine respect for Business Ethics and Values.
To quote the words of Benjamin Franklin
" A little neglect may breed great mischief… for the want of a nail, the shoe was lost; for the want of a shoe, the horse was lost and for want of a horse, the rider was lost and for want of a rider the war was lost"
Little drops of water make the mighty ocean. Little acts of neglect might cause major scams. It takes only a small hole to drown a big ship. Therein lies the secret of good corporate governance and the key to Corporate Excellence.
He said : "Today we need a pragmatic approach rather than a narrow doctrinaire approach to serve our needs. It is essential that we have high ethical standards of corporate governance, followed voluntarily, having community sanctions which will have much more effectiveness. Only then our endeavour at economic reforms and liberalization will fructify".
Finance Minister exhorted the business leaders to set up examples in corporate governance of high ethical standards, which will create better value for all the stakeholders and will lead to growth, which in effect will help the country to fight poverty and debilitating diseases. This alone, he felt, will enable the Government to justify the efforts at liberalization and bringing in economic reforms.
Enron, they say, is an example of the ethics of corporations and the free market. Commentators have told repeatedly that Enron's executives were motivated by "greed" and "selfishness."
Philosopher Harry Binswanger points out, the premise behind this statement is that lying, cheating and stealing is the best way to make money and be selfish -- and the fear of prison is the only disincentive for wholesale fraud and looting. Professor Binswanger goes on to point out that this statement reflects a whole approach to morality.
To be principled and moral, in this view, means to sacrifice one's interests by, say, going into social work or taking a vow of poverty. The logical flip-side is that to be self-interested, to pursue wealth and happiness -- well, that requires no principles or morality at all, just a random, range-of-the-moment grab for whatever one can get one's hands on.
This is the predominant moral outlook today, especially on the left. Ironically, Enron seems to have implemented this view of morality to a T. To enrich themselves, Enron's executives lied to shareholders and cooked the books to produce fake profits, ignoring the company's long-term financial problems. The joke was on them, though, because it didn't work. They didn't make money; instead, they bankrupted their company and destroyed their own reputations. And they don't seem to have profited even in the short term.
A social institution, including a corporate entity, derives its legitimacy from its ability and desire to fulfill social needs. It is therefore, accountable to the society. No institution, however high and mighty it is, can ignore its responsibility towards the society from which it derives its strength and sustenance.
The recurring financial crises and the scams that rocked the nation in the recent past call for a sharper focus on corporate governance. The only way we can protect our interest and also those of the public at large is to build "firewalls" by putting in place the practices of good corporate governance.Corporate Governance has succeeded in attracting a good deal of public interest because of its importance for the economic health of corporations and the welfare of society.
According the Economist and Noble laureate Milton Friedman, Corporate Governance is to conduct the business in accordance with owner or shareholders’ desires, which generally will be to make as much money as possible, while conforming to the basic rules of the society embodied in law and local customs.
This definition is based on the economic concept of market value maximization that underpins shareholder capitalism. Over a period of time the definition of Corporate Governance has been widened. It now encompasses the interests of not only the shareholders but also many stakeholders. J. Wolfensohn, President, World Bank as saying that "Corporate Governance is about promoting corporate fairness, transparency and accountability".
Corporate governance also includes in its ambit, the manner in which their boards of directors govern the business and affairs of individual institutions and their functional relationship with senior management.
Corporate governance is determined by how Organizations:
•Set corporate objectives (including generating economic returns to owners);
•Run the day-to-day operations of the business and;
•Consider the interests of recognised stakeholders i.e. employees, customers, suppliers, supervisors, governments and the community and
•Align corporate activities and behaviours with the expectation that organizations will operate in a safe and sound manner, and in compliance with applicable laws and regulations.
Sound corporate governance should have, as its basis, the following strategies and techniques:
•The corporate values, codes of conduct and other standards of appropriate behaviour and the system used to ensure compliance with them;
•A well-articulated corporate strategy against which the success of the overall enterprise and the contribution of individuals can be measured;
•The clear assignment of responsibilities and decision-making authorities, incorporating an hierarchy of required approvals from individuals to the board of directors;
•Establishment of a mechanism for the interaction and cooperation among the board of directors, senior management and the auditors;
•Strong internal control systems, including internal and external audit functions, risk management functions independent of business lines, and other checks and balances;
•Special monitoring of risk exposures where conflicts of interest are likely to be particularly great, including business relationships with borrowers affiliated with the bank, large shareholders, senior management, or key decision-makers within the firm (e.g. traders);
•The financial and managerial incentives to act in an appropriate manner offered to senior management, business line management and employees in the form of compensation, promotion and other recognition; and
•Appropriate information flows internally and to the public.
For ensuring good corporate governance, the importance of overseeing the various aspects of the corporate functioning needs to be properly understood, appreciated and implemented.
Ethics and values in corporate governance
No discussion on public affairs will be complete without a reference to Ethics and Values. The quality of corporate governance is also determined by the manner in which top management, particularly the Board of Directors, allocates the financial resources of the company as between themselves and other interest groups such as employees, customers, government etc. The basic qualities invariably expected in this regard are trust, honesty, integrity, transparency and compliance with the laws of the land. There is an increasing body of public opinion that would expect a business enterprise not only to be a mere economic unit but also to be a good corporate citizen. For this, its corporate governance must be based on a genuine respect for Business Ethics and Values.
To quote the words of Benjamin Franklin
" A little neglect may breed great mischief… for the want of a nail, the shoe was lost; for the want of a shoe, the horse was lost and for want of a horse, the rider was lost and for want of a rider the war was lost"
Little drops of water make the mighty ocean. Little acts of neglect might cause major scams. It takes only a small hole to drown a big ship. Therein lies the secret of good corporate governance and the key to Corporate Excellence.