Concept of Corporate Governance

Corporate governance is a mechanism to operate or govern a business more transparently and fairly. It is a set of processes, rules, regulations, or laws used to operate, regulate and control businesses. It is related to all internal and external factors that affect the interest of business stakeholders including shareholders, customers, suppliers, government regulatory bodies, employees and management.

Corporate governance facilitates in effective management of enterprises to ensure the long-term success of the organization. It is governing an organization in a more socially viable, legally compliant, financially sound, operationally efficient and technologically advanced manner.

The concept of corporate governance is based on the following three pillars:

• Transparency and openness in operation of every aspect of business
• Accountability towards shareholders and consideration of their interests while making company decisions
• Fairness in dealings with no use of unfair practices in any business transaction

Corporate governance refers to processes,  mechanisms and relations by which corporations are governed, directed and controlled. It is structuring and distributing rights and responsibilities of different participants of the corporation including shareholders, board of directors, managers, customers, suppliers and regulators. It also includes procedures and related rules to take decisions on different corporate affairs. It also includes the processes used to set and work accordingly for corporate objectives. It is an approach used to mitigate the different interests of different stakeholders and establishing an equilibrium that fosters organizational goal accomplishment.

Key Definitions

Defined By	Definition
ASX Corporate Governance Council	“Corporate governance is the system of rules, relationships and practices that determine the direction and control of an organization”
Organization for Economic Co-operation and Development (OECD)	“Corporate governance is a key element in improving economic efficiency and growth as well as enhancing investor confidence”

From the above discussions and definitions:

• Corporate governance is the set of rules, laws, acts, policies and strategies through which a business is operated.
• It consists of processes and systems of taking corporate decisions to determine the direction and destination of the business in the current and future business environment.
• It is a mechanism that fairly treats the interests of all internal and external stakeholders with mitigation and harmony.
• Corporate governance is a practice that focuses on the operation of a business with the economy, efficiency and transparency.
• It is a framework ensuring smooth, fair and profitable operation of the business managing challenges posted by a different internal and external environmental factors. 
• Corporate governance is the process and mechanism that determines the direction and control of the organization to achieve its goals enhancing its goodwill and reputation.

Elements or Dimensions of Corporate Governance

There are different elements or dimensions to corporate governance. Such elements have been discussed below:

1. Transparency: Transparency means the openness of all activities to stakeholders in an understandable and visible form. It is making actions and activities known to stakeholders of the business. The business has to be transparent in different aspects concerned with employees, customers, suppliers, regulators, management and the board of directors. Transparency is required in different aspects such as budgeting and accounting, product development and pricing, procurement, investment and lending, quality assurance in products and services, employee recruitment and selection, reward and punishment system etc.
2. Accountability: A corporation should be accountable for all the decisions, plans and policies undertaken. It is the answerability to what, why and how things are done in the corporation. Accountability should be in all the functions undertaken including planning, organizing, staffing, leading and controlling. A corporation should be accountable to all internal and external stakeholders including employees, shareholders, board of directors, customers, suppliers, government, society and competitors.
3. Responsibility: Responsibility is realizing duty and obligation towards organizational stakeholders. It is the act of conducting tasks and duties to complete the given work in order to achieve success in the accomplishment of organizational goals. It is being responsible to organizational stakeholders including shareholders, board of directors, employees, customers, suppliers and other internal or external parties concerned with the organization. Sense of responsibility towards these parties regarding their interest is a key element of corporate governance.
4. Efficiency and Effectiveness: Efficiency is the way of performing an activity in the best possible manner with the least time, resource and effort. It is the process by which output is maximized with an optimum level of inputs. Effectiveness means producing desired results to accomplish pre-determined purposes or goals. Efficiency is the process and effectiveness is the end result related to a course of action in an organization. Both these are vital dimensions of corporate governance in any type of organization.
5. Rule of Law: All the activities performed in an organization should comply with prevailing internal and external laws, acts and rules. The organization should follow rules and legal provisions related to human rights, labor, taxation, customer protection, justice, procurement, corporate social responsibility (CSR) and others. No corporate governance can be good and transparent without the practice of rule of law.
6. Farsighted: Another crucial element of corporate governance is farsighted management and leadership. It is concerned with the long-term vision and visualization ability of managers or leaders of the organization. It is being innovative in ideas, proactive in future scenarios and creative in any given current or future situation. Only farsighted management or leadership can make corporate governance reliably good.
7. Participation: Another element of corporate governance is participation. It is the involvement of members of the organization from planning to controlling and recruitment to the retirement process. It is the engagement of people in decision-making related to planning, allocation of resources, execution of plans, quality and cost controls etc. With participation, members of the organization feel more motivated and have higher ownership of decisions taken and implemented in an organization.
8. Discipline and Commitment: No corporate governance can be imagined without discipline and commitment. All the concerned parties of the organization including directors, executives, employees, auditors and lawyers must remain in the discipline. These parties have to be discipline concerning finance, ethics, trust, fairness and equity, use of authority and power, empowerment of the minority and organizational obedience. Along with such discipline, organizational stakeholders have to be focused on goals and should commit to achieving results. Only with such discipline and commitment, corporate governance can be effective and realized.

Importance of Corporate Governance

Corporate governance is key for all types of businesses. It is needed for successful operation as well as goodwill enhancement of any business. Thus, it is important to Businesses in the following ways:

1. Reliability: Corporate governance is highly required in Businesses for obtaining reliability from its stakeholders. A shareholder purchases shares of Businesses in expectation of fair and transparent return in the form of cash or stock dividend. A customer buys product or service of the business to fulfill desired need or want.  Similarly, other stakeholders have other interests and expectations from such Businesses. Hence, to be a reliable institution for concerned stakeholders, a good corporate governance mechanism is key for Businesses.
2. Stability: Generally, businesses  are established to operate for the long term. They have to ensure they fulfill all the responsibilities within legal and social acceptance. For this, a good system of transparency, accountability, efficiency, effectiveness, rule of law, discipline and commitment, participation, coordination and visionary leadership is required. Businesses  can survive for the long term only if such elements are initiated, improved and continued. Such prevalence and persistence of these elements can be guaranteed only through good corporate governance.
3. The interest of Stakeholders: There are various stakeholders concerned and connected with businesses. They are shareholders, directors, management, customers,  employees, regulatory authorities, government and the general public. Each of these stakeholders has their own interest from these business  institutions. The interest of all of these stakeholders has to be fulfilled with an equilibrium ensuring each one of them gets something without hampering others’ interest. Such fulfillment of stakeholders’ interest with organizational benefit can be guaranteed through the practice of good corporate governance in such Businesses.
4. Goodwill Enhancement: Proper corporate governance means fair treatment of customers by the operating businesses. This means no delays in service with economy and promptness  in responding to all customers.  It is also about providing quality in delivered goods and services. All these activities create a good image and a good message about such Businesses goes to the general public. This enhances the goodwill of such  business institutions. This enhanced goodwill means better customer trust and loyalty with growth in revenue and profit.
5. Implementation of Government Policies: Businesses play a key role in the implementation of government trade and other economic policies. The policies of privatization, liberalization, industrialization, export promotion, import substitution etc. are implemented through the businesses in operation and establishment in the country. So, to ensure the effectiveness of such policies, good corporate governance of Businesses plays a vital role.