Role Of Corporate Governance In The Performance Of Organisation

INTRODUCTION

Corporate Governance is formed by merging two words “Corporate” and“Governance”. Corporate is derived from the word corporation which means a separate legal entity distinct from its members, simply referred to as a company. Whereas governance means a set of rules, policies, and procedures required to manage and run any company. Thus, corporate governance refers to the framework of those rules, regulations processes, and procedures through which a company is directed, managed, and controlled. It is a process by which the corporate behavior of any organization is dictated.

Corporate Governance

The idea and the concept of corporate governance are way too complex for a common man to understand at first instance, even the practicing professionals who have built their careers in this field for years are not able to understand it completely. Therefore, the whole idea of corporate governance can be studied in terms of the 4 Ps. The 4 Ps of corporate governance are-

  • People
  • Process
  • Performance
  • Purpose

PEOPLE: It is one of the most important and of course the first P of Corporate Governance. People are the building block for any organization to function. An organization is formed from stakeholders that include founders, managers, suppliers, distributors, shareholders, consumers, directors, or mere critics A company/ corporation is an artificial entity managed by people in the form of a Board of Directors. Corporate Governance is greatly influenced by the board of directors of the company. The Board of directors are none other than the people themselves, they are the brain of any company.

PURPOSE: It is the next important P of Corporate Governance. There has to be a purpose behind practicing corporate governance norms in each organization. No company will spend a huge portion of its profits in enhancing its corporate governance without any motive or purpose. Even their mission and vision statements state the purpose and objectives to be achieved by such corporate governance practices.

PROCESS: The third P is the process. Corporate Governance is also a process to manage and direct the company through pre-established rules and regulations. It is a process by which the objective of the organization is met through analyzing the performance of each individual. Processes are also refined over time and again so as to admit space for innovation and creation because it is always advised to work smartly rather than working hard.

PERFORMANCE: The 4th and the last P is performance. The main purpose behind this particular blog and corporate governance is analyzing and working towards improving the performance of an organization. Analysis of performance is a key skill in any industry. The vision to see through the results of the organization, determine the success of the entity on the basis of the results and finally apply the findings to achieve the organization’s goal is what is considered as the main aim behind good corporate governance.

IMPACT OF CORPORATE GOVERNANCE ON ORGANISATIONAL’S PERFORMANCE

The impact that corporate governance has on the performance of any organization can be studied by way of Corporate Governance Principles

PRINCIPLES OF CORPORATE GOVERNANCE

The companies which follow and apply these four core principles of corporate governance are proven to usually perform drastically well as compared to the ones that pay little or no importance to the implementation of these principles. Not only performing better but they are observed to attract a larger audience in the form of investors whose support helps the organization to grow further. The four principles include-

FAIRNESS: To be treated fairly means to be treated just and equally under all scenarios. Good corporate governance exists in an organization where all its stakeholders (employees, suppliers, distributors, public relations, media, consumers) are treated equally without any limitations. Fairness not only amounts to improving the image of the organization but also improves its worthiness in the eyes of outsiders and helps in building a good market image.

ACCOUNTABILITY: In terms of corporate governance, accountability refers to answerability, responsibility, liability for one’s actions, the sense of holding someone accountable. It is a mere obligation on the part of the board of directors to give an explanation or reason for any action taken or conduct of the company. In governance, accountability has been defined broader than the mere definition of “being called to account for one’s actions”.

RESPONSIBILITY: Directors are considered as the brain of the company. That is why they assume full responsibility on behalf of the company. They exercise their power and authority for the benefit of the company. It is the responsibility of the board of directors to appoint appropriate secretaries, management officers, pass board resolutions, taking important decisions on behalf and for the company’s benefit. They also take charge of overseeing the management of the company with full honesty.

TRANSPARENCY: It means openness to information. The company must make all the policies, plans by communicating the same to its stakeholders. It must be willing to share such information for the benefit of its stakeholders. Transparency ensures and boosts confidence in its stakeholders while making any decision and trusting the management process of the company. It is the duty of the organization to clarify and publicly know the roles and responsibilities of its board and management so as to provide shareholders with a level of accountability.

CONCLUSION

In a growing scenario like today, Corporate Governance is emerging as one of the most adopted concepts in every organization. Its importance is emerging in the field of management. It plays a vital role in preventing unfair and restrictive trade practices. This leads to sustainable development in the current scenario. It has developed as a separate area of practice. Because of the improvement in the functioning of organizations, the demand for corporate governance practitioners is increasing day by day.

Organizations are spending a huge part of their profits on improving corporate governance practices. In days to come in the future, we shall be witnessing corporate governance occupying a major portion in any organization as compared to corporate social responsibility activities. They will be treated at par with CSR activities. Just like CSR, every organization will necessarily have to set aside some percentage of their profits for meeting corporate governance obligations.

Author: Isha Agarwal –  a Student of  Amity Law School (Amity University) an intern at Khurana & Khurana, Advocates and IP Attorney, in case of any queries please contact/write back to us via email vidushi@khuranaandkhurana.com .

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