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Friday, February 25, 2011

Corporate Governance: An Introduction


Introduction
The history of incorporation of company has come from 13th century but present types of statutory provision of incorporation have come only from 17th century from UK. From the beginning to 1990s the corporation came running under managing model by which the world has faced so many corporate scandals. Large corporate failures have often stimulated debate about corporate governance, leading to regulatory action and other reforms. In the UK the collapse of the Maxwell publishing group at the end of the 1980s stimulated the Cadbury code of 1992, and cases through the 1990s such as Poly Peck, BCCI and recently Marconi stimulated a series of further enquiries and recommendations. Widespread distress among banks in Korea in 1997 was viewed as not only macroeconomic in origin but as also reflecting governance weaknesses. Large failures of both financial and non-financial institutions in Japan have also led to regulatory responses and to legal changes. Finally, the cases of Enron, World Com and Tyco have initiated major debate and legislation in the USA.

        All mentioned failures were cause of ‘managing’ model beyond the ‘governing’ If we see the traditional managing model , the CEOs held real power and have picked directors who served at their pleasure.     But 1990 onwards, company does not want to depend on managers. While the paid team of manager could not drive the company, as not being & owner they dose not have the feeling of loosing they always been ready to desert the company and goes elsewhere with handsome remuneration. Instead of that the new concept has been introduced as corporate governance in which the first step company’s governance the system is rethinking the role of directors.
Now in the world there are so many efforts going on to enhance corporate governance but the OECD (Organization of Economic Co-operation and Development) has been able to governance the world through benchmark guiding principles of corporate governance. The principles are being applied in OECD members and non member countries and the international agencies like World Bank, IMF, and IFC and so on are evaluating the national corporate governance mechanism at par of the OECD principles. So the OECD principles of corporate governance are being must important and have developed 6 steps of discipline as principles as bellow:
I. Ensure effective corporate governance framework:
This is based on the new principles of OECD added from 2004. This new principles has focused on the basis to the framework to ensure corporate governance. It requires adequate legal framework. The legal aspect of the corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities. The corporate governance framework should be developed with a view to its impact on overall economic performance, market integrity and the incentives it creates for market participants and the promotion of transparent and efficient markets. The legal and regulatory requirements that affect corporate governance practices should be consistent with the rule of law, transparent and enforceability. The division of responsibilities among different authorities should be clearly articulated and ensure that the public interest is served. Supervisory, regulatory and enforcement authorities should have the authority, integrity and resources to fulfill their duties in a professional and objective manner. Moreover, their rulings should be timely, transparent and fully explained.

II. Rights of shareholders:

          As a second steps it has dealt on the rights of shareholders. Shareholders are the owners of the company. They control the company by appointing the board of directors to act as their representatives. Shareholders are eligible to make decisions on any of significant corporate changes. Therefore, the company should encourage shareholders to exercise their rights. Basic shareholders rights are rights to:
          1) Buy, sell, or transfer shares
          2) Share in the profit of the company
          3) Obtain relevant and adequate information on the company in a timely manner and on a regular basis
          4) Participate and vote in the shareholder meetings to elect or remove members of the board, appoint the external auditor, and make decisions on any transactions that affect the company such as dividends payment, amendments to the company’s articles of association or the company’s bylaws, capital increases or decreases, and the approval of extraordinary transactions, etc.

                        III. Equitable Treatment of Shareholders:
Just and equal treatment is important to the shareholders. All shareholders, including those with management positions, non-executive shareholders and foreign shareholders should be treated in an equal way. Minority shareholders whose rights have been violated should be redressed. An important factor of shareholders who invest in a company is that they can trust that the company’s board of directors and management use their money appropriately. The board of directors should ensure that all shareholders rights are protected and that they all get fair treatment. The board of directors should ensure that all processes and procedures for shareholders meetings allow equitable treatment of all shareholders. There should be a clear procedure to allow minority shareholders to nominate candidates for director positions. Shareholders who cannot vote in person should be allowed to vote by proxy. The board should set procedures to prevent the use of inside information for abusive self dealing such as insider trading or related party transactions. All directors and executives should be requested to disclose to the board whether they and their related parties have any interest in any transaction or matter directly affecting the company. Directors and executives who have such interests should not participate in the decision making process on such issues.

IV. Role of Stakeholders
Stakeholders of a company should be treated fairly in accordance with their legal rights as specified in relevant laws. The board of directors should provide a mechanism to promote cooperation between the company and its stakeholders in order to create wealth, financial stability and sustainability of the firm. Stakeholders in corporate governance include, but are not limited to, customers, employees, suppliers, shareholders, investors, creditors, the community the company operates in, society, the government, competitors, external auditors, etc. The board of directors should set a clear policy on fair treatment for each and every stakeholder. The rights of stakeholders that are established by law or through mutual agreements are to be respected. Any actions that can be considered in violation of stakeholders’ legal rights should be prohibited. In order for stakeholders to participate effectively, all relevant information should be disclosed to them. There should be an effective way for stakeholders to communicate to the board any concerns about illegal or unethical practices, incorrect financial reporting, insufficient internal control, etc. The rights of any person who communicates such concerns should be protected. The board of directors should set clear policies on environmental and social issues.
V. Disclosure and Transparency
The board of directors should ensure that all important information relevant to the company, both financial and non-financial, is disclosed correctly, accurately, on a timely basis and transparently through easy-to-access channels that are fair and trustworthy. Important company information includes financial reports and non-financial information specified in the regulations of the Securities and Exchange Commission (SEC) and other relevant information such as the summary of the tasks of the board of directors and its committees during the year, corporate governance policy, environmental and social policies and the company’s compliance with the above-mentioned policies, etc. The quality of a company’s financial reports is vital for shareholders and outsiders to make investment decisions. The board of directors should be confident that all information presented in the financial reports is correct, in accordance with generally accepted accounting principles and standards, and has been audited by an independent external auditor. The chairman of the board and the managing director (MD or CEO) are in the best position to be spokespeople for the company. In addition, the board of directors should designate a person or a department to perform the “investor relations” function to communicate with outsiders such as shareholders, institutional investors, individual investors, analysts, the related government agencies, etc.



VI. Responsibilities of the Board
Ultimately corporate peace and prosperity upon the role and responsibility of the board. The board of directors plays an important role in corporate governance for the best interest of the company. The board is accountable to shareholders and independent of management. The board of directors should have leadership, vision, and independence in making decisions for the best interest of the company and all shareholders. The board should clearly separate its roles and responsibilities from those of management and monitor the company’s operations to ensure all activities are conducted in accordance with relevant laws and ethical standards. The structure of the board should consist of directors with various qualifications, which are skills, experience, and expertise that are useful to the company. Directors should commit to their responsibilities and put all efforts to create a strong board of directors. The director’s nomination process should be transparent, without any influence of controlling shareholders or management, and be credible to outsiders. For efficiency and effectiveness, the board of directors should set committees to study and screen special tasks on behalf of the board, especially issues that need unbiased opinions. Committees should have a clear scope of their work, roles and responsibilities as well as the working procedures such as meetings and reporting to the board. All directors should understand their roles and responsibilities and the nature of the company’s business. They should be ready to express their ideas independently and always update themselves.

Conclusion
 In Nepal the corporate governance thought has stimulated from the support of Asian Development Bank and World Bank from 2002.The world Bank has assess then company law provision and commented on the legal and regulatory mechanism. Recently new Nepalese Company Act 2006 and the Banking and Financial Institution Act 2006 has came into force and has contained sufficient provision towards corporate governance but all the actor’s function has not been accepted well and having some others discrepancies and ambiguity on the acts which can hope of descending as good in future.
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