Underlying Concepts Behind Corporate Governance:

There are several concepts of ggod governance.In an organization,these concepts should be used between the shareholders and the board of directors.Some of these underlying concepts should also be used to the company's dealing with its employees,customers,suppliers and the public.

some of th concepts are discussed below:

 

1. Fairness:

In corporate governance,fairness refers to the principle that every shareholder should be treated fairly from the directors.In a company where all the equity shareholders should be treated equally,such as one vote per share at general meetings of the company and the right to the same dividend per share.

In UK, the concept of fair treatment for shareholders is supported by the law(the law give some protection to the minority shareholders against unjust treatment by the directors or the majority shareholders).In some countries,the law provide no protection or little protection to the minority shareholders.For example, in an acquisition or takeover bid for a company,the law might permit a higher price to be offered to large shareholders than the price offered to small shareholders.

 

2.Openness/Transparency:

Openness or transparency mean clear or 'not hiding anything'.Intention should be clear and information should be available to individuals and stakeholders who have a right to receive it.In corporate governance,it should refer to the ability of shareholder and other outsider 'Potential investor' to see what the director are trying to achieve.Transparency therefore mean providing useful information about the company to stakeholders,what it will gain in near future, and what risks company are facing.

• In public sector organization and government,openness mean that all the decision should be made clearly and not in the locked door.

• In listed companies openness includes matters such as:

      -requiring major shareholders to declare the size of their shareholding in the company and

      -It is require that the board of directors should annouce to the stock markets about major new development in the company's affairs, so that all shareholers and other investors are kept informed.

 

3.Independence:

Independence mean freedom.In good corporate governance is that a company have a number of directors that should be independent which mean that  they are able to make judgements and opinions that are in the best interest of the company and shareholders,it should not be bias or pre-conceived ideas.Similarly other professional actors such as external auditors and legal adviser of the company should give fair and honest professional opinions and advice.All those in a position of monitoring should be independent of those/what they are monitoring:

• Non-executive directors should be independent of the executives,and of company operations.

• External auditors should be independent of the company,especially its accounting department and processes.

• Internal auditors should be independent of the company,as they are likely to be involved in monitoring systems throughout the company's operations.

 

4.Honesty and Integrity:

Honesty is not just telling the truth but it also mean finding out/investigating the truth not ignoring it(not "turning a blind eye").In companies point of view the directors and other advisers should have a quality to be honest.If a person is honest everyone believe and trusted on him/her.

Integrity mean honesty,fair dealing,presenting information without any attempt to bias opinion and in general sense"doing the right thing".It also links with words such as reliability,consistency,trust and therefore integrity applies not just to people such as directors and auditors but also to systems,financial reporting etc.Integrity is similar to honesty,but it also mean behaving in accordance with high standards of behaviour and a strict moral or ethical code of conduct.Professional accountants,for example are expected to act with integrity by giving honest and acting with their professional code of ethics.If shareholders suspect that the directors are not acting honestly or with integrity,there might a chance that there can be no trust and good corporate governance is impossible.

 

5.Responsibility and Accountability:

Directors should understand and accept their responsibility to shareholders and other stakeholders,and act in their best interests and be willing to accept the consequences if they fail in this responsibility.Most of the power are given to the directors to run the business.Many of these powers are given to executive managers,but the directors remain responsible for the way in which these powers are used.

• An important role of the board of directors is to monitor the decisions of executive management,and to satisfy themselves that the decisions taken by management are in the best interest of business and its shareholders.

• Board of directors also retain the responsibilities for certain key decisions such as setting strategic objectives for their company and approving major capital investments.

A board of directors should not ignore their responsibilities by giving to many powers to executive management and letting management team get on with the jobs.The board of director should accept its responsibilities.

With responsibility,there should be accountability.Directors must be willing to be held to account(i.e. judged) for their actions-and whilst responsibilities can be delegated down through the management structure,accountability comes with the job and cann't be passed to others.In a company,the board of directors should be accoutable to the shareholders.Shareholders should be able to consider reports from the directors about what they have done and how the company has performed under their stewardship,and give their approval or show their disapproval.Some of the way by which the board are accountable are as follows:

• Presenting the annual reports to the shareholders,for the shareholders to consider and discuss with the board in the UK,this happen at the AGM(annual general meeting) of the company.

•  If the shareholders donot approve the directors,they may remove him from office.Individual directors may be required to submit themselves for re-election by the shareholders at regular intervals.In the UK for example,it is common practice for directors to be requires to retire every three years and stand for re-election at the company's annual general meeting.

In the UK,it is recognized that individual directors should be made accountablt for the way in which they have acted as a director.The UK Corporate Governance Code (combined code) include the provison which is performance reviews for all directors and should be accountable to the chairman of the company for the way in which they have carried out thier duties in the previous year.

 

6.Reputation:

Directors must protect their own reputation,and that of the company they run,as damage to either is likely to lead to more widespread damage to the company.This raises an interesting debate about whether a directors private life is in fact private-since a bad reputation is likely to affect their business reputation is likely to affect their business reputaion and hence that of the company.A large company is known for its goodwill or reputation.A reputation may be good or bad.Reputation of a company is based on several qualities including commercial success and management competence.However a good reputation can be earned with investors,employees,customers and suppliers in other ways.As concerns for the environment have grown,companies have recognized the importance of being environment-friendly or eco-fiendly.Reputation of a company is also baased on honesty,fair trade and on being a good employer.

•  Most investors might be more inclined to buy shares and bonds in a company they respect and trust.Some investment institutions are 'ethical funds' that are required to invest only in 'ethical companies'.

• Employees are more likely to want to work for an employer that treats its employees well aand fairly.As a result,companies with a high reputation can often choose better-quality employees because they have more applicants to choose from.

• Consumers are more likely to buy goods or services from a company they respect,and that has a reputaion for good quality and fair prices, and for being consumer-friendly or environmental-friendly.

 

7.Judgement:

Directors must ensure they have all the necessary information and understanding in order to be able to make sensible business decisions that improve the prosperity of the company.All directors are expected to have sound judgement and to be objective in making their judgements(avoiding bias and conflicts of interest). In its principles of corporate governace, for example the OECD states that:'the board should be able to exercise objective judgement on corporate affairs independent,in particular from management.Non-executive directors are expected to show judgment that is both sound and independent. Rolls Royce, for example, in an annual report on its corporate governance, stated that: ‘The Board applies a rigorous process in order to satisfy itself that its non-executive directors remain independent. Having undertaken this review in [Year], the Board confirms that all the non-executive directors are considered to be independent in character and judgment.’