Corporate Governance: Meaning, Guidelines, Social Responsibility and Importance

What is Corporate Governance?

Corporate governance is the system by which business corporations are directed and controlled. The Corporate Governance structure specifies the distribution of rights and responsibilities among different members inside the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the guidelines and techniques for making decisions on corporate affairs.

By doing this, it also provides the structure through which the company objectives are set and the means of attaining those objectives and monitoring performance.

In other words, Corporate governance can be defined as a systematic process, practice and guidelines which make sure that an organisation is governed in the best interest of its stakeholders and the social groups.

Therefore the discipline of corporate governance is worth exploring because it includes various organisational aspects such as executive compensation, financial scandals, and shareholder activism.

Corporate governance deals with looking after complete governance of various organisations with respect to financial disclosures, transparency, legal practices, organisational structure and social welfare.

Corporate Governance Guidelines

The corporate governance guidelines are as follows:

  1. Clear Identification of Roles and Powers
  2. Laws should be Clear and Specific
  3. Code of Conduct
  4. Board Independence
  5. Board Skills
  6. Management Environment

Clear Identification of Roles and Powers

Proper and clear communication of powers, roles, responsibilities and accountability of the Board, CEO and the Chairman of the board is an important requirement of good corporate governance.

Laws should be Clear and Specific

All the rules and laws of the regulatory framework should be clearly specified. This is a must for effective corporate governance.

Code of Conduct

It is important that an organisation’s code of conduct is communicated to all stakeholders and is clearly understood by them.

Board Independence

For sound corporate governance, an independent board is essential. It means that the board is capable of analysing the performance of managers with an objective perspective. A complete independent board is needed for the organisation so the members of board members reflect their effectiveness in dealings with other organisations.

Board Skills

The board must possess the necessary blend of qualities, skills, knowledge and experience so as to make a quality contribution. It includes operational or technical expertise, financial skills, legal skills as well as knowledge of government and regulatory requirements.

Management Environment

A transparent, responsible, and objective-oriented framework should be established. This type of management environment implements robust business and operational planning, and establishes a clear communication system, making opportunities in a manner that the human resources engage with as per their skill-sets.

Corporate Social Responsibility of Business

The corporate social responsibility of business toward different sections are as follows:

  1. Towards Owners of Enterprise
  2. Towards Workers
  3. Towards Consumers
  4. Towards the Society
  5. Towards the Government
  6. Towards the Weaker Section of Society

Towards Owners of Enterprise

The responsibilities of business enterprises towards their owners are:

  • Payment should be on a regular basis at a fair rate of dividend
  • Increase the present net value of the organisation with the help of a production management system
  • Making the full participation of the owners in the operation of the organisation
  • Establishing an effective communication system to send a detailed and indiscriminate report on the operation of the organisation.
  • Financial doubts should be clarified in a manner so that there is no room for doubt.
  • Owners or chairman of the organisation are available for the directors or top management for discussing or getting information relating to the operation of the organisation.

Towards Workers

Some of the responsibilities of a business enterprise towards its workers are:

  • Fair salary process, security for the job, medical facility with the family of workers, bonus, etc. are to be maintained
  • The appraisal process is done in a trustworthy manner.
  • A fair-minded opportunity process should be set up within the organisation. This helps workers and employees to enhance their skills and qualifications.
  • Participative in management, decision making, etc., are to be promoted in the organisation.
  • Facilitating a better work environment and social security
  • Implementing occupational hazards policy in an effective manner
  • Trade union leadership policy should be encouraged
  • Management manages human resources so the attitude towards employees/ workers should be professional as well as human.

Towards Consumers

The responsibilities of a business enterprise towards consumers of its products are:

  • Charging reasonable prices for its products
  • Using correct measures
  • Providing good after-sales services
  • Avoiding restrictive trade practices and other undesirable methods to exploit the consumers
  • Encouraging the formation of associations of consumers and consumers’ advisory councils and maintaining close links with them
  • Developing appropriate products and services for satisfying the needs of the consumers
  • Taking such measures which would promote consumer satisfaction and welfare.

Towards the Society

The obligations of a business to society are:

  • Adopting a set of methods to use resources in an optimised manner.
  • Providing sustainability and economic growth for the society.
  • Facilitating opportunities and amenities such as sports events, eco-friendly goods and water sanitation programs for the society.
  • Maintaining natural resources through initiatives like waste management, air pollution control system, renewable energy system, etc.
  • Contributing to social welfare programmes by conducting sanitation programs in villages and urban slums, facilitating medical care for senior citizens, women and children, making awareness for skill development, etc.
  • Improving the quality of life of the people at large by capacity building, creating employment and providing an opportunity to make wealth.

Towards the Government

The obligations of business enterprise to the government are:

  • Strictly observing the provisions of the various laws and enactments
  • Paying taxes and other dues to the government regularly and honestly
  • Extending full support to the government in its efforts to solve national problems such as unemployment, food, inflation, regional imbalance in economic development, etc.

Towards the Weaker Section of Society

The obligations of business enterprise to the weaker section of the society are:

  • Providing vocational training like cookery, tailoring, and selling techniques for their economic growth
  • Donating funds to various voluntary agencies and NGOs, which are participated in population and family welfare, literacy and education, and development of women and children of the schedule caste and schedule tribes.

Importance of Corporate Social Responsibility

The importance of corporate social responsibility is as follows:

  1. Optimum Utilisation of Resources
  2. Producing Goods and Services
  3. Providing Public Amenities

Optimum Utilisation of Resources

Resources are limited in nature. By following social responsibilities, an organisation is expected to use resources in a justified way. Resources are to be used for the production of those goods and services which are not detrimental to the interest of the society.

An organisation is not expected to produce unnecessary and unwanted goods. Production of such goods not only reduces national resources but also encourages people to spend on unnecessary consumption.

Producing Goods and Services

Producing Goods and Services Efficiently and Contributing to the Economic Well-being of Society: Organisations are expected to produce goods without wastage. Organisations are expected to practice business process reengineering.

This helps the organisation to identify new and improved ways of doing improvement in the product. Product safety is also taken care of. All these factors contribute to the economic well-being of society.

Providing Public Amenities

Providing Public Amenities and Avoiding the Conditions of Slum and Congestion: Organisations are expected to protect the surrounding environment. It cannot hand over this responsibility to the government. If a healthy environment exists, the organisation takes initiative to avoid slums and congestion and pollution of the surroundings.

What is Corporate Governance?

Corporate governance is the system by which business corporations are directed and controlled. The Corporate Governance structure specifies the distribution of rights and responsibilities among different members inside the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the guidelines and techniques for making decisions on corporate affairs.

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