Corporate Governance. Quite a fancy word. Isn't it?
A lot of trouble was brewing in the landscape when I started my tryst with the stock markets. Lehman had just declared bankruptcy and the global economy was in dire straits. I had no clue what was going on. Yes, housing prices ran up way too much, so what? What does Corporate Governance have to do with something like housing prices?
Turns out, it had quite a lot of muscle. I realized the vigor behind these two words only after going through a full-blown crisis period. The bankruptcy of a single firm sent nerves chilling in all parts of the world. And it was nowhere like the fall in early 2020. The Lehman Crisis was a byproduct of lax corporate governance standards. It was entirely man-made in nature and had much to do with more fancy terms like risk controls, subprime lending, over-leveraging, Collateralized Debt Obligations (CDO’s), Credit Default Swaps (CDS), Mortgage Backed Securities (MBS) and others.
“Corporate governance involves a set of relationships between a company’s management, its board, its shareholders, and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.”
- G20/OECD Principles of corporate governance
Jaiprakash Associates, Suzlon Energy, Unitech, Satyam, Kingfisher Airlines, Jet Airways, Inox Wind, Punjab National Bank, Cafe Coffee Day, Vakrangee, Yes Bank, DHFL, Indiabulls Housing Finance, IL&FS, and so on. The list of Corporate Governance failures in India is extensive & endless.
Frankly speaking, Corporate Governance is a comprehensive term. It can be interpreted in several ways according to one's level of expertise. It is amorphous, i.e., it is not clearly defined. There are no fixed parameters for us to measure the quality and quantity of Corporate Governance. Neither is it possible for us to explain this term in a single phrase. One can informally think of Corporate Governance as a unifying force that allies the interests of the management with the shareholders. We will try to analyze a lot of aspects in this module to get a better understanding of how and why Good Corporate Governance is so vital to the success of any organization.