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Corporate Governance: An Overview

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Corporate Governance and Corporate Social Responsibility of Indian Companies

Part of the book series: CSR, Sustainability, Ethics & Governance ((CSEG))

Abstract

This chapter presents the background in the concepts and mechanisms of corporate governance and provides the state of corporate governance mechanisms in India.Further the chapter presents the argument that the concept of corporate governance is embedded into the process of resource allocation which ultimately affects the organisational behaviour in general, under the shareholder value maximisation paradigm corporate governance will have an impact on the decision of CSR spending as it is a management decision of resource allocation after the shareholder value is being realized.

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Notes

  1. 1.

    This theory of ownership structure in the modern corporation was developed by Jensen and Meckling (1976). These economists formalized the basic idea of conflicts of interest between managers and owners that dates back to Smith (1776): “The directors of such [joint-stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private co-partnery frequently watch over their own.” Since then, other theories of corporate governance are developed in other subjects of economics. See Hart (1980) for transaction cost economics and Tirole (2001) for law and economics frameworks.

  2. 2.

    A survey of the literature on corporate governance reveals a wide array of definitions of corporate governance. From a corporate finance perspective, corporate governance deals with the ways in which suppliers of finance to corporations, i.e., debt-holders and equity-holders, exercise control and ensure accountability of company management so as to assure themselves of getting the best possible return on their investment (Shleifer and Vishny 1997). From a law and economics perspective, corporate governance refers to the defense of shareholders’ interests (Tirole 2001). A policy perspective is that, corporate governance is the system by which companies are directed and controlled (Cadbury 1992). In other words, corporate governance refers to the legal rules, institutional arrangements and practices that determine who controls business corporations, and who gets the benefits that flow from them (Blair 1995).

  3. 3.

    See Claessens (2006) for the most recent survey of literature on corporate governance and development. The literature that establishes the link between effective corporate governance and economic development includes two types of studies: (1) first type of studies show that country level governance characteristics like investor protection, enforcement etc. are associated with various development variables, (2) second type of studies find a relationship between country-based governance elements and financial performance of firms after controlling for cross country differences. Seminal works of LaPorta et al. (1997, 1998, 2000) show that higher investor protection at country level is associated with greater access to finance, more capital market development and higher company valuation. Claessens (2006)—shows that effective corporate governance system irrespective of type of external financing—bank or equity—promote development of strong financial systems which in turn lead to economic growth and well being.

  4. 4.

    There are numerous surveys written addressing these mechanisms. To name a few See John and Senbet (1998) and Hermalin and Weisbach (2002) on boards of directors, Core et al. (2003) and Murphy (1999) on executive compensation, Holderness (2002) on blockholders, Holmstrom and Kaplan (2001) on merger activity, and Karpoff (1998) on shareholder activism, Harris and Raviv (1988) on capital structure.

  5. 5.

    See Claessens et al. (2000) for East-Asian firms, Faccio and Lang (2002) for Western Europe, Dennis and McConnell (2003) on survey of international corporate governance, and the papers cited in there.

  6. 6.

    According to LaPorta et al. (1999), a firm’s ownership structure is a pyramid if it has an ultimate owner and there is at least one publicly traded company between it and the ultimate owner.

  7. 7.

    Sarkar and Sarkar (2000) provide an informative study on India’s financial and banking sector development. Goswami (2002), Chakrabarti et al. (2008) presents the state of corporate governance pre- and post-reforms.

  8. 8.

    For more details on concentrated ownership and firm performance see Chap. 4 in Sarkar and Sarkar (2012).

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Authors and Affiliations

  1. Madras School of Economics, Chennai, Tamil Nadu, India

    Saumitra N. Bhaduri & Ekta Selarka

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  1. Saumitra N. Bhaduri
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  2. Ekta Selarka
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Correspondence to Saumitra N. Bhaduri .

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Bhaduri, S.N., Selarka, E. (2016). Corporate Governance: An Overview. In: Corporate Governance and Corporate Social Responsibility of Indian Companies. CSR, Sustainability, Ethics & Governance. Springer, Singapore. https://doi.org/10.1007/978-981-10-0925-9_5

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