Role of regulators in corporate governance
Answers
Explanation:
Numerous research studies in the corporate governance (CG) field are based on a universal model outlined by principal-agent theory where central premise is that shareholders and managers have different objectives and different access to firm-specific information. Self-interested managers as agents of shareholders (principals) have the opportunity to take actions that benefit themselves, and shareholders are those that bear the costs of such actions (i.e. agency costs) [1, 2]. In many countries, not only managers but also controlling shareholders can expropriate minority shareholders and creditors [3, 4]. Several mechanisms are proposed to resolve principal-agent problems such as monitoring by boards of directors or large outside shareholders, equity-based managerial incentives or the market for corporate control [1, 2, 5]. These different types of control and monitoring in companies are referred to as corporate governance [2, 6].
Many cases of corporate fraud, accounting scandals and other organizational failures leading to lawsuits, resignations or even bankruptcy have made corporate governance as especially important and often discussed topic among professionals and scholars. The main feature of many of these cases is the assumption that the system of checks and balances designed to prevent potentially self-interested managers from engaging in activities detrimental to the welfare of shareholders and stakeholders failed [2]. Several formal regulations and informal guidelines, recommendations, codes and standards of corporate governance have been established or improved in order to determine good corporate governance. These efforts to improve corporate governance practices have raised an important dilemma within the corporate governance field, whether to develop hard law (i.e. mandatory requirements, hard regulations and regulatory approach) or soft law (i.e. voluntary recommendations, soft regulations and market-based approach) in order to improve corporate governance across countries [7, 8]. In this contribution, we explore governance codes that are a form of soft regulations (i.e. soft law) presenting a set of voluntary best governance practices without the force of law [7, 9, 10]. The issue of the Cadbury Report and the Code of Best Practices in the UK importantly affects the diffusion of codes around the world after 1992 [7], and similar effects on new codes’ creation or revision of the existing ones can be observed after 2008 due to the global financial crisis [10].
The number of research studies on codes of good governance has considerably expanded after 1992 and especially in the early 2000s [7, 10]. Because of the voluntary nature of the majority of codes, there has been a considerable debate in the literature on whether the code recommendations affect the corporate governance quality [7, 8]. Research studies demonstrate that the introduction of corporate governance standards in the form of a code has positive effects on the evolution of governance practices [10] and especially on transparency and disclosure [8, 11].
Explanation:
In this article, Arpit Srivastava discusses Regulatory framework on corporate governance in India.
We all are aware of Satyam scam which is the India’s Biggest corporate scam. The scam is all about corporate governance and it is regarded as the ‘Debacle of the Indian Financial System’. Ever since this scam the concern for good corporate governance has increased phenomenally. The Cadbury Committee defined Corporate Governance as “the system by which companies are directed and controlled” in its report called Financial Aspect of Corporate Governance published in the year 1992. In general words Corporate Governance means set of rules and regulations by which an organization is governed, controlled and directed. It is conducted by the Board of Directors or the concerned committee for the benefit of the company’s stakeholders.