MBA in International Finance
Semester IV Chapter 2 : Governance
Audit and Assurance
Course Code - OMBA(IF)402
Chapter 3: Governance
Objective and importance of corporate governance
Corporate governance is the means by which a company is operated and
controlled. It is defined by the “tone at the top.” If the tone at the top is one of
ethical and transparent behaviour, the degree of effectiveness of governance in
the organization shall be quite high. Corporate governance is the omni present
code of conduct that the company abides by. The aim of corporate governance
is:
b. To try to prevent company directors from
abusing their power which may adversely
a. To ensure that companies are run well in
affect any stakeholder group. Directors
the interests of their shareholders,
drawing mammoth salaries obviously leaves
employees and other key stakeholders b
behind a smaller sum to allocate ot the
middle and low level employees.
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Advantages of effective corporate governance are listed as
under:
. Greater transparency
Greater accountability
Efficiency of operations
Better ability to respond to risks
A higher degree amongst all classes of shareholders
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Corporate Governance Code
Corporate governance as a concept has immense importance in corporates today
however, definitive law overseeing regulation is yet to be pronounced in an iron clad
manner. International bodies have pronounced guidance on corporate governance
and various nations across the world draw reference from this guidance for
implementing corporate governance in their respective geographies.
One such international body is The Organization for Economic Co-operation and
Development (OECD). OECD has pronounced 6 principles of corporate governance.
These principles have listed as under
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Corporate Governance Code
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Corporate Governance Code
The UK corporate governance code is derived from the above
OECD principles. This code is split into 5 parts as under:
Board leadership and company purpose
Division of responsibilities
Composition, succession and evaluation
Audit, risk and internal control
Remuneration
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Corporate Governance Code
These 5 parts shall now be discussed in
greater depth as under:
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Corporate Governance Code
Board Leadership and Company purpose:
1. Purpose, value and strategy: The company’s purpose, value and strategy
should be established by the Board of Directors who leaders of the company.
They define the tone at the top and the purpose and design of an entity.
2. Long term sustainable success: The board of directors shall be considered to
be effective only when they create long term sustainable success for the
shareholders of the organization. The board that helps maximize the wealth of
the shareholders guides the company towards long term sustainable success.
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Corporate Governance Code
Board Leadership and Company purpose:
3. Internal controls and resource management: One of the primary
responsibilities of the Board is to establish a system of effective
internal control in the organization to insulate it from risk.
4. Building corporate culture: The workforce policies and practices
should be consistent with company’s values. Matters of concern,
escalations and whistle blowing should be sensitively handled.