What
is Corporate Governance?
Corporate governance definition:
“Corporate
governance is the system by which the business corporations are directed and
controlled.
The corporate governance structure
specifies the distribution of rights and responsibilities among different
participants in the corporation, such as the board, managers, shareholders and
other stakeholders, and spells out the rules and procedures for making
decisions on corporate affairs.
By doing this, it also provides the
structure through which the company objectives are set, and the means of
attending those objectives and monitoring performance.” (Cadbury, OECD, 1999)
As a widely known fact, companies
are required to be abided by comprehensive set of rules and regulations.
However, despite that there has been a number of issues regarding the
operations of the companies, mainly involving the directors’ lack of effective
control. This had been the root cause for the large number of high-profile
scandals.
Therefore, the main reason for the
need of corporate governance is a result of the separation of ownership and
control of the company. Shareholders are those who own the company, but they do
not engage in the running of the company. Instead, they appoint directors, who
will act as agent, to run the company.
Board of directors are supposed to
make strategic decisions regarding the company, in order to maximize the
shareholder wealth. As in any other relationship where one party is anticipated
to act in another’s best interests, there will be a conflict of interest.
The conflict arises when directors
tend to behave in their self-interest, where it may differ from the interests
of the shareholders. This is known as the “principal-agent problem”
Therefore,
corporate governance is principally intended to remind directors of the
limitations of their power and to confirm that directors work on behalf of the
shareholders.
Today,
almost every company attempt to have a high level of corporate governance. This
is because, nowadays, a company should not only be profitable, it should also
possess good corporate citizenship through ethical behavior, sound corporate
governance practices and environmental awareness. This is crucial in order to
maintain the public confidence in companies.
The codes and practices of
corporate governance around the world may differ from each other but all of
them cover common areas such as the following:
·
The roles and responsibilities of the
board of directors
·
Executive remuneration and other
benefits
·
Reliability of the Financial reporting
and the effectiveness of the internal control system
· Relations with shareholders
·
Growth in the number of investments in
foreign countries as a result of increasing internationalization and
globalization.
·
Differential treatment among domestic
and foreign investors.
·
Too much power held with the majority
shareholders, diluting the influence of the minority shareholders.
·
Poor accounting practices leading to
loss of shareholders confidence in financial reporting.
·
Growth in the number of high profile
corporate scandals leading to the need of transparency of the companies
activities.
There are two approaches to
corporate governance:
‘’Principles-based” approach to
corporate governance is more flexible, where corporate governance is a set of
best practice guidelines. It adopts the “comply or explain” principle. This is
where the corporate governance principles should be complied with, but in the
case of non-adherence the reasons should be justified and made clear that good
corporate governance can still be attained.
However, according to this
approach, even though corporate governance is not legally required, it does not
mean that the companies have the freedom to choose. Companies will always make
“full compliance” in order to safeguard their market value and to strengthen
the investors’ confidence in the management. They only disclose temporary or
minor non-compliance.
This approach is adopted by many
Common Wealth countries and UK.
On the other hand, “rules-based”
approach to corporate governance is where corporate governance is a legal
requirement. This approach will provide a set of rules which must be followed
in all circumstances. Drawbacks of this method includes that the compliance of
certain rules may be expensive. However, non-compliance will be subjected to punishment.
This approach is reflected in USA’s
Sarbanes- Oxley Act.
The ownership structure has a great
influence in the level of corporate governance. All over the world, there are
two models of corporate governance systems. However, in practice most of the
corporate governance systems fall between these two.
Insider model
According to this model, a small
number of major shareholders own and control the country’s publicly listed
companies. These shareholders may be the founding family members of a company,
the government, lending banks and other companies. This model is also known as
relationship based system and found in countries such as UK.
Advantages
·
There is a close relationship between
the owners and managers, and hence the agency problem and its related costs can
be reduced.
·
The company can be operated with a long
term view rather than concentrating on making high profits each year.
·
The decision making process will be
effective and quick as there is an active communication between owners and
managers.
Disadvantages
·
There will be discrimination contrary to
the minority shareholders, such as the availability of information.
·
Succession planning may be a major issue
and these companies won’t like outsiders to hold executive
positions, hence may not like to have non-executive directors.
Outsider model
According to this model, the
company is owned by shareholders, who are widely dispersed, and they delegate
the controlling power to managers to run the day to day activities of the
company.
Advantages:
·
There will be little space for
discrimination among the shareholders, as there is no dominating party.
·
There will be no issues on succession planning
and the companies may definitely have outsiders in executive positions,
including NED’s.
Disadvantages:
·
There is no close relationship between
the owners and managers, and hence the agency issue will be there.
· The decision making will be slow as the
company will need to take approval from the shareholders for certain matters.
·
The company will operate with a short
term view because it will be a necessary to show profits each year.
Enron
Enron is an energy company based in
Houston, Texas, USA. It was formed by merging two companies; namely, Houston
Natural Gas and Inter North in 1985.
By 1992, Enron became the largest
natural gas seller in the North America. Moreover, its share prices increased
at a rate of 311% during the period of 1990-1998and by the end of year 2000, as
a result of further increment, Enron’s market capitalization surpassed $60
billion. Hence, according to Fortune’s
Most Admired Companies survey, it was ranked the Most Innovative Company in the USA.
However, it was declared bankrupt
in October, 2001, becoming the largest audit failure in the whole American
history and one of the main reasons for the development of corporate governance
rules and regulations in the USA.
Reasons for bankruptcy
·
Enron accelerated its revenue by
recognizing revenue streams that were not supposed to be. For instance, instead
of recognizing only the brokerage fees as revenue for the services they
provided as agents, Enron reported the total value of the transaction.
Hence, as a result, it experienced
an unusual expansion rate of 65 percent, where especially energy industry has a
usual growth rate of 2.3% per year.
·
Enron changes its accounting practices
to mark-to-market accounting. This model is difficult to be adopted by a
company like Enron, due to the difficulty to predict the viability and the
related costs of the contracts. Despite that, it continued to use this method
so that they can present income as the present value of future cash flows,
boosting revenue even though they didn’t ever get the money.
In order to raise funds or for the
management of risks of certain assets, Enron created more than hundreds of
“Special Purpose Entities (SPE)”. Hence,
Enron’s Statement of Financial Position overstated the assets and understated
the liabilities. This method was used to cover its poor leverage ratios and to
keep the company within satisfactory range.
Barings Bank is a very old merchant
bank in the UK founded in 1762. It was also the world’s 2nd oldest
merchant bank and one of the most reputable financial institutions, with the
Queen herself being one of its clients.
However, due to unauthorized
trading conducted by an employee named Nick Leeson in its Singapore branch,
Barings Bank collapsed in 1995 incurring a loss of 827 million sterling pounds.
Nick had conducted poor speculative investments in the price of futures
contracts listed on the Singapore International Monetary Exchange and the
Japanese, Osaka Securities Exchange.
Reasons for bankruptcy:
·
There was no segregation of duties. Nick
conducted both front office and back office operations and hence, he was able
to do what he wanted.
·
At first, Nick was able to make profits,
10% of the total bank’s profit at the end of 1993, and was able to gain
confidence and appraisal from his supervisors. This shows that the senior level
managers of the bank was not competent enough to identify subtle financial
markets and trading methods, which in turn failed to identify the risks.
·
There was a poor internal control and
external audit because even Nick hid losses and counterfeited documents, which was
not discovered.
·
Finally, had too much power and freedom,
mainly due to lack of supervision of his performance.
However, Barings Bank was bought by
a Dutch bank, ING, in March 1995 for a reported nominal sum of 1 sterling
pound. Moreover, Nick Leeson was found guilty for his acts and was condemned to
six and a half years in prison
Golden Key Credit Card Company Ltd
Golden Key Credit Card Company Ltd
is a subsidiary of the Ceylinco Consolidated, a large conglomerate in Sri Lanka
which is diversified into many industries including financial institutions,
insurance companies, employment agencies, home-nursing and many more.
It attracted public deposits by
promising to pay high interest rates between 24% -28.5% per year even though it
was not a licensed financial institution of the Central Bank of Sri Lanka. This
encouraged public to deposit millions and millions of rupees in the company.
However, the scam came into
limelight when the company were unable to pay interest to their depositors and
halting withdrawals (cheques started to bounce) in November 2008. And not after
few months, the company collapsed and was closed down because the panicked
investors continued to ask for their money. At the end, the company owed a
total sum of 26 billion rupees to its depositors.
Reasons for bankruptcy
·
Mismanagement of funds is one of the
major causes, where the top management is being accused for using the company
money for personal matters.
·
Credit card fraud is another major
reason. The company operated a Ponzi-style scheme where the interest paid to
the depositors were gradually increasing for the new deposits they make. These
schemes are usually illegal.
However, Dr. Lalith Kotelawala, the
Chairman, Mr. KhavanPerera, the CEO, and many other senior level management
members were arrested. The depositors were not paid their money to date.
Importance
of Corporate Governance
To the company
Enhance performance
There
will be clear accountability as the roles and responsibilities within the
organization is clearly defined. This will make sure that the employees are
fully aware of what is expected and not expected from them. Moreover, as there
is a link between the performance and rewards, the performance of the company
will increase.
Moreover,
in addition, good corporate governance will ensure that there is value adding
decisions are made, effective succession planning is carried out for the top
management and sustain the long term prosperity of the company.
Mitigation of risk
Good
corporate governance helps to mitigate or avoid risks. It will avoid corporate
scandals, civil/criminal liability of the company and even fraud, hence keep
out trouble. Moreover, it helps to gain trust from the stakeholders as the
company will deal ethically and with honesty.
The
identification of different roles within the company will help the employees to
make decisions that won’t have a negative effect on the company as a whole.
This will also allow to identify the offenders immediately and then to be
punished.
Brand image
Market
reputation is an essential factor for the long term success of the
organization. Good corporate governance will help to develop a strong
relationship with the customer which will lead to development of brand loyalty.
Moreover, the other stakeholders will also be pleased, as the company will be
self-policing itself.
However,
on the other, if the company have poor corporate governance practices, then the
brand image is at risk because there is a possibility for fraudulent activities
to take place.
Today
there are more expectations from a company rather than mere profits; they
should have good corporate governance. Therefore, in overall, good corporate
governance will reduce the reputational risk as a result of improved
transparency.
Access to capital markets
The
share price stability is one of the important factors for the investors when
predicting the future of the company. Corporate governance affects the stock
markets’ efficiency to a greater extent. Hence, having a good corporate
governance will lower the investment risk of the shareholders and make it
easier to raise equity finance for the company.
Financial
institutions will also have a high confidence in the company and therefore more
willing to provide debt finance for the company, even at a lower interest rate.
Moreover,
investors are willing to invest in companies that are governed well because
they are transparent, earn higher profits and financially accountable.
To the shareholders
Proper management
Good
corporate governance will ensure that the companies will achieve their
objectives, with proper incentives to the Board of Directors and the
management, altogether with proper monitoring.
Security
Good
corporate governance will ensure that the company is being properly managed and
hence, the shareholders will feel secured about their investment as the risk is
less.
Informed decision making
If
there is good corporate governance in place, then the shareholders will be
provided with adequate information, such as changes in statutes. Therefore,
they will be able to make more informed decisions regarding the company.
Attract Foreign Direct Investments
(FDIs)
A
country which has companies that has good corporate governance practices, will
be able to easily attract FDIs. This because the investors will have high
confidence in the companies. As a result, the country’s economic situation will
also improve.
Prevent Corporate Failures
Good
corporate governance will ensure that the corporate failures in the country is
minimized. This will benefit the country as it won’t have to face problems such
as unemployment due to bankruptcy. Therefore, this will add to the nation’s
competitiveness and hence facilitating its development.
Global Initiatives
European Union has taken
initiatives in relation to corporate governance and company law with the objective
of:
·
Enabling business to start anywhere in
the EU
·
Provide security for stakeholders
·
Promote efficiency and competitiveness
within organizations
·
Motivate organizations to co-operate
Developments over the past:
·
Action plan- the European Commission adopted
an Action Plan on December 2012 setting out the future initiatives in the areas
of company law and corporate governance. The main areas covered by the Action
Plan include:
Ø Improved
transparency
Ø Encourage
long term stakeholder engagement
Ø Initiatives
of company law to simplify cross-border operations
Informal company law expert group-
European Commission developed a group of experts to assist in the preparation
of new company law initiatives.
Others-
Ø Revision
of the Shareholder Rights Directive to remove the shortcomings
Ø Recommendation
on the quality of listed companies’ corporate governance reporting
Ø Propose
a Directive on single-member private liability companies.
Organization
for Economic Co-operation and Development (OECD)
The OECD is an international
economic organization, formed to encourage world trade and economic progress in
1961. It has 34 member countries and more than 70 non-member countries, closely
working together.
It developed the OECD Principles of Corporate Governance
setting the most influential guidelines, which was published in 1999, then
updated in 2004 and revised in 2015 to include other relevant issues and hence
improving the corporate governance. These guidelines are used by many countries
to develop their own local codes and guidelines.
Moreover, in 2006, the Methodology
for Assessing and Implementation of OECD Principles of Corporate Governance was
issued by OECD Steering Group on Corporate Governance.
Committee
of Sponsoring Organizations of the Treadway Commission (COSO)
COSO is a private sector initiative
which volunteers to enhance governance and organizational performance via
effective internal control, fraud deterrence and enterprise risk management.
Hence, it developed the Internal Control-
Integrated Framework in 1992 and then updated on 2013.
International
Corporate Governance Network (ICGN)
Established in 1995, the ICGN is a
not-for-profit organization devoted to improve the corporate governance
standards worldwide. Today it is present in more than 50 countries and it
provides membership to investors, business leaders, professional advisors,
policy makers and majority of institutional investors managing assets exceeding
US$26 billion. Being an investor-led organization, it concentrates on the
development of leadership and encourage best practice guidance.
The ICGN Global Governance Principles is issued with the objective to
encourage effective communication between directors and investors and to define
their roles and responsibilities. Its fourth edition was released in 2014.
Cadbury Report 1992
As a result of persistent concern
about the accountability and the level of standards of reporting financial
information, in May 1991, the Committee on Financial Aspects of Corporate
Governance, widely known as the Cadbury Committee, was formed. The committee
was headed by Sir Adrian Cadbury and created by the London Stock Exchange,
Financial Reporting Council and the accounting profession.
It issued the draft report on the Financial Aspects of Corporate Governance;
the Cadbury Report, in May 1992 and
its finalized version, which was subjected to revision, was published in
December 1992. The main areas covered under the report were:
·
Separation of the roles of the CEO and
the Chairman
·
Inclusion of independent Non-Executive Directors
(NEDs) to oversee the board’s activities
·
The terms of contract of the executive
directors should be no more than three years and they should be subjected to
reappointment with the consent of the shareholders.
·
The creation of committees to monitor
certain areas-
Ø Nomination
committee – to oversee the appointment of the executive directors
Ø Remuneration
committee- to oversee the remuneration packages of the executive directors
Ø Audit
committee- to oversee the company’s finances
The Study Group of Directors’
Remuneration was chaired by Sir Richard Greenbury and was formed by the
Confederation of British Industry (CBI) in January 1995.
It issued the finalized Greenbury Report on 17th
July, 1995 to establish good practice when determining the remuneration of
directors. The main areas covered under the report were:
·
Remuneration committee should take into
account, both the directors’ and shareholders’ interest, when forming the
directors’ remuneration package and it should also prepare and present a report
to shareholders as a part of the annual report.
·
Shareholders should approve any
long-term incentive scheme offered to the directors.
·
Discounted share options should not be
awarded to directors and annual bonuses should not be allowed to be
pensionable.
Hampel Report 1998
In order to review the
recommendations of the Cadbury and the Greenbury Committees, the Hampel
Committee, also known as the Committee on Corporate Governance, was formed in
November 1995. It was chaired by Sir Ronald Hampel.
It issued a preliminary report in
August 1997 and the finalized version in January 1998. The main areas covered
under this report is as follows:
·
The board should comprise of individuals
who has the necessary experience
·
The service contracts of the directors
should not be more than 12 months
·
The duties owed to the company by both
Executive and NEDs should be the same and the directors should be provided with
timely and necessary information to perform their responsibilities
·
Majority of the NEDs should be
independent and at least make up 1/3 of the board
·
There should be a clear division in the
roles of the Chairman and the CEO
·
A nomination committee should be formed
in every company and every three years directors should be re-elected
·
Remuneration packages of the directors
should not be too excessive and this should be the duty of the remuneration
committee.
Turnbull Report
The Turnbull Committee was chaired
by Nigell Turnbull. At first, the Turnbull
Report was published in 1999, setting out the best practice guidance for
internal control. Thereafter, a report named the “Internal Control: Guidance for Directors on the Combine Code” was
issued by the Financial Reporting Council (FRC) as the updated version of the
guidance, in October 2005. However, after a series of meetings held with
investors, advisors and companies in 2011, the FRC published the latest
version; the “Risk Guidance”, in 17th
September, 2014.
Higgs Report
Derek Higgs was appointed by the
Secretary of the State for Trade and Industry, to head a review on the
effectiveness of the NEDs. On 20th January, 2003, his Derek’s report
on “Review of the Role and Effectiveness
of Non-Executive Directors” was published.
However, in December 2009, the
Institute of Chartered Secretaries and Administrators were commissioned by the
Financial Reporting Council (FRC) to update the Higgs guidance, along with
assistance from a Steering Group. As a result, in March 2011, the finalized
guidance was published by the FRC.
Smith report
The FRC Group on Audit Committees
was established in 2002 and was chaired by Sir Robert Smith. It issued the Smith Report, also known as the Smith Guidance, in 20th
January, 2003 which codified the audit committee’s role.
However, it was revised and
published in September 2012 and known as the FRC Guidance on Audit Committees. Moreover, FRC published the “Audit Quality Practice Aid” in May 2015,
which will help the audit committees to assess the quality of external audit.
Development of Corporate Governance in Sri Lanka
Development
of corporate governance in Sri Lanka dates back from 1796 -1948 because it was
the time period when stock trading and the corporate structure was initially
introduced to Sri Lanka. As most of the companies listed in the Colombo Stock
Exchange (CSE) currently, was established from the era when Sri Lanka was under
British colony, most of the Sri Lankan corporate governance best practices is
closely aligned with those of the UK’s systems and models.
The
development of corporate governance codes began in the 1990s centered on the
developments in the UK.
In
1997, the Institute of Chartered Accountants of Sri Lanka (ICASL) introduced
the initial Sri Lankan corporate governance code to handle the financial
aspects of corporate governance of listed companies. This was a copy of the
Cadbury Code (1992). However, this was replaced in March 2003 by the ICASL Code of Best Practice on Corporate
Governance, which was based on the Hampel Report (1998).
Specific
codes were also developed in addition to ICASL Code to deal with certain
aspects of corporate governance. They are as follows:
·
ICASL
Code of Best Practice on Audit Committees -2002
·
Code
of Corporate Governance for Banks and Other Financial Institutions -2002
·
Guidelines
for Listed Companies In Respect of Audit and Audit Committees -2004
Initially,
the Sri Lankan codes were only voluntary and didn’t include a “comply or explain”
provision which requires justification for non-compliance. But, in 2007, the
rules of corporate governance have been incorporated into the CSE Listings
Rules and in effect from April 2008, it was made mandatory for listed
companies.
These
mandatory rules were developed in consultation with CSE, by ICASL and SEC
(Securities Exchange Commission) and were taken from the International
corporate governance codes, mainly the UK
Combined Code 2003. Because these rules initially provided the least
standards to be met by a listed company, the ICASL and SEC developed the Revised Code of Best Practice in October
2008. This can be abide by companies voluntarily in combination with mandatory
rules.
Current Corporate Governance Model of Sri Lanka
Presently,
the CSE Listing Rules govern corporate governance practices in Sri Lanka, which
provides the least standards to be complied. Moreover, ICASL Code of Best
Practice (2008) cover the areas which are not in the CSE Listing Rules.
Furthermore, the companies are also needed to be abided by the provisions of
the Companies Act No.7 of 2007.
Companies Act of Sri Lanka
For
twenty-five years in Sri Lanka, the most important regulation that governed the
companies, which are registered in the country, was the Companies Act, No: 17
of 1982, which was developed mainly based on the English Companies Act of 1982.
However,
in order to account the increment of economic and commercial activities, as
well as changes in the capital market between 1980s and 1990s, it was replaced
by the Companies Act, No: 7 of 2007. This new Act included features not only
from the UK laws, but also from New Zealand, Australia and Canada. Moreover, it
grants the shareholders with wider power unlike previously.
The
Companies Act, No: 7 of 2007 includes statutory provisions to strengthen
corporate governance, some of they are as follows:
Duties of Directors
According
to the Section 187 of the Act, the directors are required to act in good faith
and in the best interest of the company.
Section
188, necessitates a director to comply with all the relevant provisions of the
Act and in the company’s Articles.
Section
189, prohibits directors from acting recklessly and also require the directors
to exercise the level of skill and care which is expected from an individual
who has similar experience and knowledge.
Section
190, allows the directors of a company to rely on information in the form of
any financial data, statements, reports, or any other means, provided by an
employee, professional advisor or any other director(s). However, this is
applicant only if the director acts in good faith, makes appropriate inquiry
when needed and is not aware that such reliance is unwarranted.
Interests of Directors
Section
191, sets out the criteria for a director to have an “interest” in a company
transaction. Hence according to the Act, a director has an interest, if he:
i. Has s a material financial gain
ii. Has a material financial interest in
another party of the transaction
iii. Holds a position of a trustee or
officer, or a directorship of a party who gains material financial gain,
excluding any subsidiary.
iv.
Is the spouse, child or a parent of any
one who gains a material financial benefit
v.
Is has a direct or indirect interest in
the transaction
Section
192, mandates the director to enter the cause of the interest to the interest
register and to disclose to the Board, in the case the company has more than
one director.
According
to Section 193 and Section 194, if a director has an interest in a transaction,
it should be avoided, provided that the company has not received “fair value”,
while safeguarding any 3rd party interests, only if a “valuable
consideration” has been there and that party acted in good faith, without
knowledge of any circumstances to avoid the transaction
Section
196, provide an “interested” director to vote, attend a board meeting, sign a
document or do anything a director can in relation to the transaction,
subjected to any provisions in the Articles
Section
197, prohibits directors from disclosing any information unless for company’s
purposes, if required by law, approved by the Board or if the Articles allows
to do so.
Likewise,
in Section 198, Section 199 and in Section 200, regarding the shares of the
company, the directors are required to record in the interest register and
disclose it to other Board members if they have any direct or indirect
interest.
Minority Shareholders
Section
224 to Section 233, sets out the remedies available to minority shareholders,
those who hold no more than five percent of a company’s shareholding. These
minority shareholders can take legal action to prevent oppression and mismanagement.
Oppression
is where the company’s affairs are conducted in such a manner, which is
oppressive to any shareholder(s).
Mismanagement
is where:
i. The company’s affairs are conducted in a
way that is prejudicial to the interests of the company, or
ii. In the management or control of the
company, a material change has taken place and hence, as a result, the affairs
of that company are conducted in a prejudicial manner to the interest of
itself.
If
the court is of opinion that the company’s affairs are conducted in an
oppressive manner to any shareholder or in a manner which is likely to cause
prejudice to the company, it can make an order which it thinks fit, in order to
remedy or prevent the complained matters. This is briefed under Section 228.
Moreover,
the court may make restraining orders in such circumstances, under Section 233.
“Derivative
actions” is a mode of procedure where any shareholder has the right to take
legal action in the right and on behalf of the company, provided that it is in
the best interest and for the benefit of the company. This is included in
Section 234.
Such
action initiated by any shareholder, should show that the company is controlled
by illegal wrongdoers and hence the company itself is unable to bring properly
constituted actions.
Moreover,
the derivative actions can only be proceeded if the court provides a “grant of
leave”. This will prevent any abusive action.
Section
235, sets out the costs that the company should bear in relation to the derivative
action.
Section
236, outlines the powers that the court possess in the case if the leave is
granted.
Section
237, states that any “derivative action” taken should not be compromised/
settled/ discontinued without the court approval.
Minority
Buy-outs
Under
Section 93, any shareholder who is voting against a Special Resolution, can
require the company to purchase his shares.
Section
94, mandates the notice that is needed to be provided by such shareholder to
the company. If such notice is received by the Board, then within twenty
working days, it should:
i .Decide to purchase the shares by
the company
ii. Arrange some other person to do so
iii. Apply for an court order which
will exempt the company’s obligation to buy the shares
iv. Arrange the resolution to be
cancelled
Hence,
accordingly, Section 95 sets out the process to be followed if the company is
purchasing the shares. Whereas, Section 96, sets out the process to be followed
if a 3rd party is purchasing the shares. Section 97 and Section 98,
provide the criteria and the process to be followed if the company is applying
for an exemption order.
Section
99, prohibits the company to take any action that alter the rights to
shareholders, unless approved by a Special Resolution. In the case, if the
resolution is passed, then the shareholders who are against the action, can
require the company to purchase its shares under Section 100
Conclusion
Today,
corporate governance has become a very important aspect of the companies.
Despite the various restraining forces to the practice of good corporate
governance, almost every company tries to cope up with at least the minimum
standards.
The
public expects the companies to be fair in their dealings, be accountable for
the management actions, be independent, as well as the financial reporting to
be transparent. This will make sure that the companies use their resources in
an efficient manner, which will enhance the long term shareholder value.
The
government of respective countries has also taken active measures to ensure
good corporate governance is in place. Moreover, many international
organizations has also initiated codes of best practice to standardize
corporate governance.
These
actions will restore the investor confidence in the market, which has been lost
due to high-profile corporate scandals such as Enron, Parmalat, and Lehman
Brothers.
Last
but not the least, a company should always act in the best interest of the
shareholders as well as the other stakeholders. This is the only way to survive
in the market.
