The root of the word governance is from ‘gubernate’, which means to steer. Corporate governance would mean to steer an organisation in the desired direction. The responsibility to steer lies with the board of directors/governing boards. Governance is concerned with the intrinsic nature, purpose, integrity and identity of an organisation with primary focus on the entity’s relevance, continuity and fiduciary aspects.
Contrary to popular misconception about corporate governance in modern times, the roots of corporate governance are not besmirched in negative trail. That is to say, corporate governance did not have its raison d’être in the negative happenings in the corporate world. Looking at corporate governance from that perspective is to undermine its creative, positive, regenerative and prosperous aspects. Good governance has been an eternal source of inspired thinking and dedicated action.
Evidence of corporate governance from the arthashastra (economics)
Kautilya’s arthashastra maintains that for good governance, all administrators, including the kings were considered the servants of people. Good governance and stability were completely linked. There is stability if leaders are responsive, accountable and removable. Theses tenets hold good even today.
Kautilya elaborates on the four fold duty of a king as-
- Raksha (to protect)
- Vridhi (to grow)
- Palana (to follow)
The substitution of the state with the corporation, the king with the CEO or the board of corporation, and the subjects with the shareholders, bring out the quintessence of corporate governance, because central of the corporate governance is the belief that public good should be ahead of private good and that the corporation’s resources cannot be used for personal benefit.
- Raksha – literally means protection, in the corporate scenario it can be equated with the risk management aspect.
- Vridhi- literally means growth, in the present day context can be related to stakeholder value enhancement.
- Palana-literally means maintenance/compliance, in the present day context it can be equated to compliance to the law in letter and spirit.
- Yogakshema-literally means well-being and is used in context of a social security system. In the present day context it can be equated to corporate social responsibility.
Arthashastra talks self-discipline for a king and the six enemies which a king must overcome- lust, anger, greed, conceit, arrogance and foolhardiness. In the present day context, this addresses the ethics aspect of business and the personal ethics of the corporate leaders
There is no universal definition of corporate governance. Some definitions are as follows:
CADBURY COMMITTEE, U.K. (1992)
“(it is) the system by which companies are directed and controlled”
Corporate governance is a system of structuring, operating and controlling a company with the following specific aims:-
- Fulfilling long-term strategic goals of owners;
- Taking care of interests of employees;
- A consideration for the environment and local community;
- Maintaining excellent relations with customers and suppliers;
- Proper compliance with all the applicable legal and regulatory requirements.
SHLEIFER AND VISHNY (1997) define corporate governance as “the way in which suppliers of finance to corporations ensure themselves on getting return on their investment. “
SEBI has defined CG as “the way in which companies run themselves, in particular the way in which they are accountable to those who have a vested interest in their performance, especially their shareholders.”