Making corporate governance properly functional

Corporate governance (CG) is a process and structure that is used to: direct and manage business, enhance shareholders' value and ensure financial viability. In a word, the very purpose of 'governance' is to build and strengthen: accountability, credibility, transparency, integrity and, of course, trust. That is why appropriate governance practices protect: shareholders, customers, public in general, supervisors and the very employees.
Organisation for Economic Co-operation and Development (OECD) has nicely offered the definition: corporate governance relates to the internal means by which corporations are operated and controlled. Cadbury Report, 1992, describes the same as the system by which companies are directed and controlled. That is why it is accepted universally as a system whereby shareholders, who own the company, appoint or elect directors to monitor and protect their interests in the company and these directors, in turn, retain independent auditors to validate the financial results produced by the company wherein these results serve as a report card on the very performance of the directors as well as management.
In order to function effectively, all of the parts must not only work but all of the parts must also be in a position to work together. The circle becomes a complete one when: independent auditors validate financial results, shareholders evaluate financial results and board's performance, and then the board evaluates management performance and issues financial results.
The very mechanism, as detailed by the Financial Stability Institute (Bank For International Settlements), entail: assignment of decision making powers, articulating corporate strategy, providing checks and balances, monitoring potential conflicts of interest, developing an incentive structure, fostering interaction between board and senior management, providing an audit structure and setting corporate values and standards. The question remains: to what extent it is followed in our case! Examples are not far to seek.
Basically, CG means steering of a ship. It also stands for the art of governing a state. In fact, a government refers to the sum of state institutions and laws, and thus can be described as the 'complex' of political institutions, laws and customs through which the functioning of the governing is carried out in a specific political event, whereas the governance has a wider focus. In other words, this has reference to what is done by a government plus the manner in which power is exercised in the management of a country's economic and social resources for development.
Whether it is called corporate governance or IT governance, urban governance or global governance, the same refers to informal means of the execution of power plus the decision making process, taking place outside state institutions, by business corporations or civil society. Governance occurs in a limited economic sector, at various levels as well as for the whole globe. That is why it essentially recognises the power, which exists inside and outside the formal authority and institutions of the government, and emphasises the process of decisions made on complex relationship between many actors with different priorities -and is thus a reconciliation of these competing priorities which is at the heart of the very concept of governance.
The art of good governance thus calls for devising strategies, through which the various actors/stakeholders come together to solve problems, each taking on those issues for which they are well equipped and thus contributing in a constructive way to the very governance of the institution.
Corporate governance can be effectively and positively influenced by the government (through laws and regulations), industry associations, market players, supervisors, securities regulators/stock exchanges and, of course, the auditors. There are also instances where the employees' unions have also contributed towards the growth of institutions through positive suggestions or unearthing the hidden dusts below the carpet and the like. In fact, the better functioning of any institution is simply impossible in the absence of cordial employer-employee relations.
The structures, functions, processes and organisational traditions which a board or other decision-making body uses must ensure that the mission of the organisation is accomplished. The CG may be termed as a set of rules and procedures that enable an organisation to meet its objectives, which, in turn, calls for both efficiency in the matter of allocation of resources and legitimacy in the arena of exercise of the authority. Shareholders' models tend to better efficiency and increase legitimacy. However, problems of collective action surface when the number of stakeholders is large, and the cost of organising diverse interests to pursue a common goal is higher compared to the expected gain (benefits).
The functions of governance are, thus, far from being small. The governing body must exercise strategic directions. Oversight of the management unit that is responsible for day-to-day programme management is to be located. Evaluation and audit in the true sense of the term helps ensure well-developed governance function.
Consultation with other stakeholders (formal and informal) is a must. The proper coordination should not be 'a laggard'. One common formal method in such a vital context is carried out through a technical, scientific or professional advisory body. Risk management exercise is the most crucial aspect. Most of the areas like reputation risks, fiduciary risks, conflict of interest risks, unfair advantage risks, and non-performance risks pave the way for governance risks.
The significance of CG has thus been felt in the recent past by most of the countries and is being focused to address various issues to enhance the returns through increased accountability. The CG has actually become the focal point of corporate culture i.e. the process of day-to-day management.
Governance is to promote strong, viable and competitive corporations in an increasingly fierce and competitive globalised world economy.
Dr B K Mukhopadhyay, a Management Economist and a commentator                  on economic and business                         affairs, is attached to the                      West Bengal State University.              m.bibhas@gmail.com