Recent Advances in Corporate Governance: A Global View

*J. Kiranmai and R.K. Mishra*

#### **Abstract**

Corporate governance is a system of legal approach by which corporates are directed and controlled. The basic focus is on structures of corporate entities, monitoring and directing them for mitigating risks that have been raised due to misdeeds of various factors. The corporate failures such as those of Enron, Xerox, WorldCom, Satyam, and the ones that followed suit, among other things, highlight shortcomings about internal controls, the institution of boards, functioning of board committees disclosures, transparency, reporting standards, and enhancing stakeholder's confidence. Since 2001, emphasis has been laid down on the governance mechanism to be reinforced to retrieve accuracy and reliability. Over the years, several initiatives have been undertaken by the policymakers, governments, regulators, and the private sector to reform corporate governance. The global business model of geopolitical affairs, social and regulatory compliance, and cyber security are some of the key elements that have radically transformed corporate governance's thrust in the present-day corporate context. This paper aims to study the advances in corporate governance practices in terms of its nuances related to board diversity and its evaluation; shareholder activism; environment, social and governance (ESG), and enterprise risk management (ERM).

**Keywords:** board quality, composition, evaluation, corporate social responsibility, risk management

#### **1. Introduction**

Global Financial Crisis (GFC) has amplified corporate governance (CG) issues across the globe. GFC led to the emergence of new corporate governance. Further, the innovations towards new governance system were strengthened by the dot.com bubble in 2000, which was due to the failure of global giants such as Enron, Tycone, Worldcom followed by the downfall of Satyam Computers Ltd., leading to conflict between micro and macro market structure, stakeholders, regulators, and markets. Since then, many countries started working on governance, managing and controlling ethics in business, and benchmarking the best practices of good corporate governance to protect stakeholders' interests [1]. The four important dimensions of good corporate governance are ownership structure, board level governance and accountability and transparency.

Many global institutions such as OECD, WB, Harvard University, ., also actively contributed to strengthening the new corporate governance framework for the third-millennium corporates by releasing guidelines/principles from time to time, enabling corporates to become stable, follow due diligence mechanisms. Sarbanes

Oxley Act, 2002 [2] was an initiative towards new corporate governance regulation by the United States of America. The act emphasized how boards are built, legal framework to raise standards, ethical code, etc.

It is evident that corporate governance strives to strike a balance between the social and economic goals of the corporate entity. The governance framework encourages the effective use of internal and external resources, creates a transparent mechanism, makes stakeholders accountable. The aim of corporate governance is to align the interest of individuals with that of the corporate and the society.

### **2. Meaning and Definition**

Corporate governance is classified as a discipline that is legal in nature. The word is derived from the word "gubernare" which in Latin means to steer, which means corporate governance supports steering the Company. The governance function is to oversee the performance of the board in delivering the corporate objectives. The OECD provides a functional definition of CG as a system by which corporations are directed and controlled. CG is defined as "a system of law by which corporations are directed and controlled focusing on the structures to monitor the actions of management and directors thereby mitigating risks [3, 4].

CG tries to strike a balance between economic and social goals among individuals as well as the community. The effective use of resources ensures accountability for all resources responsible for corporates, stakeholders, and society [5]. CG tries to manage the conflicting and diverse interests of all stakeholders. It deals with conducting the affairs of the company with fairness to benefit all its stakeholders. CG is a key element to improve the economic efficiency of a firm. According to Lim, corporate governance reforms are an ongoing process as long as corporations depend on markets and markets are following the rules and compliances governance reforms are continuous.

Corporate governance has become a dynamic aspect of a business. Corporate governance involves the functions of direction and controls. The recent massive corporate failures resulted due to weak corporate governance systems. Corporate failures such as Enron, Xerox, Worldcom, etc., have highlighted the various issues about reporting standards, enhancing stakeholders' confidence, etc. Since 2001 emphasis was laid down on the governance mechanism to be reinforced to retrieve accuracy and reliability. Over the last two decades, there has been a transformational shift in the various initiatives of governance systems worldwide. CG has become one of the strongest regulatory mechanisms by the governments to enhance transparency and accountability to its stakeholders. The roles and responsibilities of the directors have been well defined to ensure that they are bonded with the legal requirements.

CG is an umbrella term covering the concept and theory. The governance establishes the relationship between boards, regulators, stockholders, auditors including creditors, suppliers, and other interested groups [6]. CG tries to safeguard the interest of investors by making the Board of directors accountable. Good governance is the broader view focusing on the relationship between a company and a range of stakeholders.

Reforming a governance system is a continuous process. These reforms are important and are worth pursuing by the policymakers, corporates, and stakeholders. The new initiations of separating the role of chairman and CEO, introducing non-executive directors, improved corporate disclosures mechanisms, bringing transparency in remuneration, and selection of directors have been highly appreciated by the investors. (**Table 1**) [7].


#### **Table 1.**

*Summary of theories affecting corporate governance development.*

The new-age business has wiped off the trade barriers across the global markets. Corporates need to adopt result-oriented approaches to keep their organizations in line with the global competition meeting to access capital pool, attract and retain the best talent. Corporations should accept and understand that their growth requires the cooperation of all the stakeholders. Hence, stakeholders enhance the best corporate governance practices. Corporates need to demonstrate ethical codes in business with strong value systems and principles, accounting and transparency, disclosure and compliance, etc. The only tool that would discuss all these aspects is corporate governance. It not only regulates the market but also tries to improve the economic efficiency of the firm. As this process of improving corporate governance is continuous, policymakers and regulators are always updating the framework to develop new governance trends. Evidence indicates that the institutional investments [8] by the company welcome regular governance reforms. The studies reveal that the investor views this continuous reform process as a help rather than a hindrance [9].

#### **3. Parties to corporate governance**

There are many parties involved in reforming the corporate governance codes [10]. These include regulatory bodies, policymakers, research institutions, activists groups, consultants, etc. Shareholders, employees, and customers play an important role. The increase in market capitalization, equity holding of investors has made a significant dent in the concept of separation of ownerships. Boards play a pivotal role in implementing the organizational strategies, developing directional policy framework, supervising and governing the functioning, and ensuring accountability and responsibility. The corporate performance depends directly and indirectly upon the involvement of the board and the governance codes. Every stakeholder is responsible for the business's success while the employees and directors receive remuneration, shareholders receive the capital return.

The new corporate governance has been understood with various important parameters such as ownership and business landscape, governance framework, rights of shareholders, and boards independence. It is evident from various research studies that corporate governance impacts the stakeholders such as employees,

creditors, shareholders, etc. [11], reducing the business and operational risk [12]. Corporate entities with good corporate governance result in trading, strengthen financial markets, and create value. Proper implementation of governance rules/ codes makes institutions less corrupt [13]. The standards and methods have to be implemented while working on the accounting policies and legal systems [14, 15].

According to the PWC1 ', the shift in the global landscape in which companies operate is expected to change in the next few decades considerably. The research shows a projection of 46% by 2025' and this shift brings a change in the investment pattern to improve regulatory framework add an effective governance system among the cooperates. Effective governance system both at the board and senior level strategizes on the objectivity of corporate success. As investors and companies are equally responsible for corporate governance, companies are required to demonstrate that they are acting in the best interests of the shareholders, while the investors should demonstrate that they are acting in the interests of stakeholders.

The economic and the global environment play a critical role in forcing the corporates to change the existing business models. The competitive nature of global capital markets made CEOs believe they are prepared to handle high volatile and complex business requirements. The success of an organization depends on the attitudes and mentality of its leaders. Organizational changes occur when leaders remain calm and focused with a clear understanding of the organizational goals. The expansion of economic boundaries has diversified the global marketplaces to exploit the opportunities and remain competitive, resulting in technological up-gradation and cultural diversity. The number of global alliances through mergers and acquisitions increased, improving the skilling and communication methods. The corporates follow a flexible operating strategy with the right mix to succeed to meet global competition. According to a study of the CG practices of BRICS economies, cross-border mergers and acquisitions led to a cultural shift and improved corporate entities' performance [16]. Research by PWC<sup>2</sup> projects that by 2050, the E7 economies could reach 50 percent of the share in the world GDP. It is reported that China would have 20 percent of the world GDP and would become the largest economy, followed by India in second place.

#### **4. Corporate scandals**

The occurrence of corporate scandals was known to the world with less frequency and magnitude. However, due to the open economic conditions and competition in the markets, the magnitude of fraud increased tremendously, leading to trauma situations among stakeholders. These scandals were not confined to the enterprise alone but were impacting the economic conditions beyond borders. During the 1980s and 1990s, due to unethical practices, many corporate giants failed to leave many questions on the governance framework. These corporate failures have given a new role for corporate governance. The entities' legal and regulatory framework made the entities do due diligence and compliance, ensuring transparency and accountability. A few of the classic frauds that led to revolutionary changes in corporate governance are detailed in **Box 1**.

In the context of developing countries, there is a linkage between governance and corruption. If the level of corruption in the country is high, the country's

<sup>1</sup> https://www.pwc.com/gx/en/world-2050/assets/pwc-the-world-in-2050-full-report-feb-2017.pdf

<sup>2</sup> https://www.pwc.com/gx/en/issues/the-economy/assets/world-in-2050-february-2015.pdf


corporate governance would be weak. Transparency International<sup>3</sup> , a nonprofit organization, aims to stop corruption in various societies by promoting transparency. The corruption perception index (CPI) provides the ranking of countries having low corruption. In 2020, New Zealand ranked first, followed by Denmark, Finland, Switzerland, and Singapore. All five countries have very strong corporate governance codes [10]. In New Zeland, the corporate governance standards are high by international standards, while Singapore promotes high standards of disclosures relating to level, the structure of ownership and compensation [17], Nordic model of governance give priority to shareholders to control and take long-term responsibility for creating value for shareholders [18].
