The earliest definition of Corporate Governance is from the Economist and Noble laureate Milton Friedman. According to him 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. Apparently, in the present day context, Friedman's definition is narrower in scope. 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.
Modern Definition of Corporate Governance
A recent definition stressing the value-contents of Corporate Governance says "Corporate Governance means doing everything better, to improve relations between companies and their shareholders; to improve the quality of outside Directors; to encourage people to think long-term; to ensure that information needs of all stakeholders are met and to ensure that executive management is monitored properly in the interest of shareholders."
Experts of the OECD have defined Corporate governance as the system by which business corporations are directed and controlled. According to them the corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the Board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it provides the structure through which the company objectives are set, and also provides the means of attaining those objectives and monitoring performance.
An article published in the June 21, 1999 issue of the Financial Times quoted J. Wolfensohn, President, World Bank as saying that "Corporate Governance is about promoting corporate fairness, transparency and accountability"
"Corporate governance is ... holding the balance between economic and social goals and between individual and community goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society. The incentive to corporations is to achieve their corporate aims and to attract investment. The incentive for states is to strengthen their economics and discourage fraud and mismanagement."
( Sir Adrian Cadbury from the preface to the World Bank Publication, Corporate Governance: A Framework for Implementation)
Cadbury Committee - Recommendations
The Cadbury Code of Best Practices had 19 recommendations. The recommendations are in the nature of guidelines relating to the Board of Directors, Non-executive Directors, Executive Directors and those on Reporting & Control.
Relating to the Board of Directors these are:
The Board should meet regularly, retain full and effective control over the company and monitor the executive management.
There should be a clearly accepted division of responsibilities at the head of a company, which will ensure balance of power and authority, such that no individual has unfettered powers of decision. In companies where the Chairman is also the Chief Executive, it is essential that there should be a strong and independent element on the Board, with a recognized senior member
The Board should include non-executive Directors of sufficient caliber and number for their views to carry significant weight in the Board's decisions.
The Board should have a formal schedule of matters specifically reserved to it for decisions to ensure that the direction and control of the company is firmly in its hands.
There should be an agreed procedure for Directors in the furtherance of their duties to take independent professional advice if necessary, at the company's expense.
Directors should have access to the advice and services of the Company Secretary, who is responsible to the Board for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. Any question of the removal of Company Secretary should be a matter for the Board as a whole.
Relating to the Non-executive Directors the recommendations are :
Non-executive Directors should bring an independent judgement to bear on issues of strategy, performance, resources, including key appointments, and standards of conduct
The majority should be independent of the management and free from any business or other relationship, which could materially interfere with the exercise of their independent judgement, apart from their fees and shareholding. Their fees should reflect the time, which they commit to the company.
Non-executive Directors should be appointed for specified terms and reappointment should not be automatic.
Non-executive Directors should be selected through a formal process and both, this process and their appointment, should be a matter for the Board as a whole.
For the Executive Directors the recommendations in the Cadbury Code of Best Practices are:
Directors' service contracts should not exceed three years without shareholders' approval.
There should be full and clear disclosure of their total emoluments and those of the Chairman and the highest-paid UK Directors, including pension contributions and stock options. Separate figures should be given for salary and performance-related elements and the basis on which performance is measured should be explained.
Executive Directors' pay should be subject to the recommendations of a Remuneration Committee made up wholly or mainly of Non-Executive Directors.
And on Reporting and Controls the Cadbury Code of Best Practices stipulate that :
It is the Board's duty to present a balanced and understandable assessment of the company's position.
The Board should ensure that an objective and professional relationship is maintained with the Auditors.
The Board should establish an Audit Committee of at least 3 Non-Executive Directors with written terms of reference, which deal clearly with its authority and duties.
The Directors should explain their responsibility for preparing the accounts next to a statement by the Auditors about their reporting responsibilities.
The Directors should report on the effectiveness of the company's system of internal control.
The Directors should report that the business is a going concern, with supporting assumptions or qualifications as necessary.
