Introduction to Corporate Governance
Corporate governance is referred to as mechanisms, processes as well as relations that assist in controlling and directing organizations. It is defined as a set of systems, principles as well as procedures that make sure that an organization is governed in the best interest of stakeholders (Larcker, Richardson, and Tuna, 2007). It is related to the promotion of fairness, transparency, and accountability. Thus, sound corporate governance is that which ensures sufficient disclosure as well as effective decision making in order to attain corporate objectives. In the present essay, two companies: one from a high-income country that is UK and another from low low-income country have been chosen. The organization from the high-income country is Sainsbury and from that of the low low-income country is Reliance Retail Limited.
The Indian company Reliance Retail Limited is a subsidiary firm of Reliance Industries that is located in Mumbai and was founded in 2006. In terms of revenue, it is the largest retailer in the country. Its retail outlets provide food, lifestyle, groceries, footwear apparel, home products, lifestyle as well as electronic goods. The outlet of the company also offers vegetables, fruits and flowers. It possesses 2000 stores. The focus of the company is on consumer goods, consumer durables, travel services, energy, leisure, health products, educational products and services. Further, the firm has 45 subsidiaries and divisions of Reliance Retail. The major divisions include Reliance Fresh, Reliance Digital, Reliance Jewels, Reliance Trends, footprint, and Living plus Reliance Market. This company has been selected because it has recorded its growth through effective governance. At Reliance Retail, corporate governance is based on various principles. This includes disclosure of entire material information on time that concerned the firm to all stakeholders (Calder, 2008). Further, it involves fair and equitable treatment of all stakeholders including employees, customers, investors, and shareholders. It also makes sure that the flow of information to the board and its committees is on time which enables discharging the functions effectively.
Sainsbury is UK UK-based retailer. It is the largest chain of supermarkets. The company has split into three major divisions including Sainsbury Convenience Stores Ltd., Sainsbury Supermarkets Ltd., and Sainsbury Bank. Since 2014, it has become the second-largest supermarket chain in the UK (J Sainsbury Plc, 2015). It lays major emphasis on the deliverance of high-quality groceries in comparison to its rivalries. The firm deals in two main store formats. This involves regular Sainsbury supermarkets as well as Sainsbury Local convenience stores. The vision of the company is to become the most trusted brand that is liked by people for working and shopping. The goal of the company is to make the lives of customers easier and provide them with high-quality products and services at reasonable prices. In addition to this, they are likely to serve the customers whenever and wherever they need. The firm has a strategy to know customers effectively and make them offer accordingly. Sainsbury is committed to high standards of corporate governance within the organization (Bebchuk, Cohen, and Ferrell, 2009). It makes application of supporting principles of UK corporate governance code. The company maintains sound communication with investors. This ensures that it is fulfilling its responsibility appropriately. The company is one of the largest retailers in the UK thus it has been taken for study as in order to accomplish its corporate objectives it has to comply with principles of corporate governance.
The stakeholder theory of corporate governance focuses on the dependency of various groups on the business and its management. This approach to corporate governance reflects that a firm can be run by a loosely defined group of people that possess varied needs from the organization. Stakeholders theory of corporate governance includes those who have a stake in the functioning of the business (Black, Jang, and Kim, 2006). It consists of large and diverse groups. Stakeholders are those that have certain benefits from the business. The stakeholder goal is to gain benefit from the firm in an effective manner. The theory demonstrates that the different interests of stakeholders in a way control the operations of the organization in a specific manner. This model states that a firm is not established merely to earn profit but it is essential for the business to become a social institution that serves the needs of stakeholders.
There are various reasons for failure of of corporate governance in both the cases. This includes management incompetency, insufficient attention paid to risk management, inconsistent distribution of duties and responsibilities, inefficiency of internal audits, ignorance demonstrated to signals granted through external audit. All such factors can result in failure of corporate governance in both the companies whether from low or high income country. Because of such reasons there is failure of corporate governance that results in affecting the image of business to a significant level (Corporate governance in India and the UK: A comparative analysis, 2015). Errors in accounting methods and failure to comply with the regulations of accounts leads to failure of corporate governance. When there is default carried in disclosing of vital information to shareholders then such can result in failure of corporate governance that can cause various issues that can prove to be brutal for the firm in future course of time. As per the stakeholder theory it is reflected that organization need to consider the interest of the stakeholders so that it can attain its corporate objectives in an effective manner. For firm like Reliance Retail it is essential to make offering as per the requirements of shareholders in order to minimize the effect of corporate governance. When the internal audit system within the business in not efficient then such can result in failure to comply with rules and regulations that have been established by on international level (Sison, 2008). Further lack of attention to risk management can also influence the organization's ability to control the risk within specific time duration. With this corporate governance fails that affects the working the business at a significant level. Lack of transparency in accounts and adoption of technique such as smart accounting can be major reason that can cause failure of governance. Because of audit failure organization can face major serious issues that can result in failure of corporate governance. This diminishes the confidence of the investors in the business.
Corporate governance systems are categorized into two. This includes dispersed and concentrated systems. The two countries India and UK follow such types of governance system in order to control and manage the business in an effective manner. A dispersed corporate governance system outline the particular responsibilities of each individual within the firm. Such responsibility assist shareholder to possess well stated role that advances the organization's mission and helps in generating financial returns (Bhagat and Bolton, 2008). The organizations that makes use of concentrated governance system may not be publicly held. But are owned privately. In case of private firm there is minimal intervention of board of directors as well as shareholders. Thus such allows companies to carry out operations as per their own convenience. This creates open environment in order to accomplish activities of business.
The corporate governance in India and UK can be compared in the following manner. In UK the duty of the director is codified by Companies Act 2006. In contrast to this in India directors duty is proposed by Companies Bill 2009. Audit committee in UK is categorized on the basis of large and small companies. Thus 3 members are required for audit of large companies whereas 2 in case of smaller companies. But in India the corporate governance system is different as the committee for audit required is 3 for both large and small companies. The issues related to corporate governance are not unique in Indian context but Indian firms acquire or carry out operations outside India or access in international market. The issues related to corporate governance are greatly increasing for Indian companies. Even the firms that are carrying out business at local level needs to comply with the procedures and rules of corporate governance so as to attain corporate objectives.
The corporate governance in UK is comprised of various rules and regulations that controls and manages the operations of the organization. The major strength of UK corporate governance is that it includes various laws that can govern the actions of the firm in an effective manner. But in India such is at developmental stage thus immense development needs to made so as to gain position at international level (Farber, 2005). It is essential for the business to consider corporate governance norms for different jurisdictions. The major weakness of corporate governance in India is that it does not includes the norms that assist in growth in Indian financial market. In UK the corporate governance evolves norms that facilities growth of financial market. Indian firms can implement norms in an effective manner so as to gain effective position in the market. There is existence of less transparency within business that has to be improved in order to enhance the competence of firm to significant level.
Various recommendation can be provided in order enhance the effectiveness of corporate governance. For this it is essential to clarify the role of board in the strategy. The role of board is significant in formulation and adoption of organization's strategic direction. It is recommended to board to clarify the role in appropriate manner so as to undertake as well as clarify understanding with management (Agrawal and Chadha, 2005). Further it is essential to monitor organizational performance. It is essential to monitor the performance. This is important to ensure compliance of major aspect of board for monitoring role. This is effective in makes sure that corporate decision making is carried out in consistent manner as per the expectation of owner. It is essential to establish an agreed format for the reports. This is essential to ensure that all the facts and matters are reported in an effective manner. Further it is suggested for the directors to possess the information as per the requirements. By offering better information appropriate decisions can be taken by the business.
It is suggested to business to build skills based board. This is essential for the effective performance of corporate governance. The role of assessing the qualities is significantly important as this assist in carrying out the operations in an effective and appropriate manner (Top Ten Steps to Improving Corporate Governance, 2015). Thus this results in transparency of the information that might not leads to failure of the company's survival in long run course of time. In addition to this there is greater role of recognizing the board's responsibility in governance of risk. By introduction of effective system for risk oversight and management as well as internal control the firm can operate in effective way (Dittmar and Mahrt-Smith, 2007). With effectiveness in management of risk better decisions can be taken that can helps in development of deeper insight to the assessment of risk. Another suggestion can be in relation to building of effective governance infrastructure. As the board is responsible for entire business affairs thus there needs to be requirement for particular polices that guide behavior of firm.
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It can be concluded from the study that role of corporate governance is important in ensuring that interest of stakeholders are served in the best manner. Good corporate governance ensures adequate disclosures and sound decision making in order to attain organizational goal. In involves transparency in business transactions. It involves protections of shareholders interest. Further includes commitment to values and ethical conduct of the organization. The role of corporate governance is effective in gaining the trust of investors in the business. Both the countries India and UK possess varied corporate governance system as the two comes in the category of low and high income country. Thus it is important to bring development in norms for the proper performance of the organizational operations. Various recommendations have been provided to this such as recognizing the governance of risk as responsibility of board. In addition to this it involves building skill based board so as to improve the functioning within the organization.
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