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Issue of June 2005 

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The key to efficient business

What is Corporate Governance? focuses for the greater part on for-profit, publicly traded companies governed by the laws of the United States. It kicks off with a definition of corporate governance, a history of governance through the ages from the early days of the Robber Barons in the US to governance in public corporations today.

The authors then enunciate the principal legal duties of a board of directors, classifying them broadly under five heads—fiduciary, loyalty, care, not to entrench and supervision.

A point that is reiterated throughout the book is that without a competent board you cannot have an efficient organisation. That's why it is important to select the right candidate for the post of director. The right nominee should be willing to make commitments, be a person of integrity, and work effectively in a group. With a competent board in place, the next step for the board leadership is to organise its work in such a manner that it is efficient and effective. For this, it is essential to chalk out the roles of corporate officers such as the chairman and the CEO and put in place guiding principles for all committees.

Selecting the CEO is one of the most important responsibilities of a board. A new appointment may occur under three circumstances. It could be an ordinary appointment following the retirement of an existing CEO, an unexpected appointment when a strong CEO moves away from a weak business, and a termination, when a new CEO has to be appointed following the termination of an under-performing top executive. Each of these scenarios is discussed in detail in this book.

Another important function of a board is to evaluate the CEO's performance. This should be done in a candid and constructive way, giving the CEO sufficient time to respond to criticism.

An important issue is the question of compensation a CEO should receive. The authors believe that the CEO's compensation should be such that it rewards good performance and provides incentives for improvement. The determination of the pay package depends upon the CEO's value to the company, its fiscal performance, and how much the CEO's paid vis-à-vis his or her peers in comparable organisations.

The aim of effective corporate governance should be to create a business that can sustain success in the long haul. For this it is essential to have an effective group culture amongst board members. Opinions should not be imposed, all views must be heard and discussions moved efficiently towards the best possible resolution of an issue. Similarly, it is important for the board to possess a comprehensive understanding of the business, so that it can set goals for the organisation.

Title: What is Corporate Governance?
Authors: John L. Colley, JR
Jacqueline L. Doyle
George W. Logan
Wallace Stettinius
Publisher: Tata McGraw-Hill
Price: Rs 150

The Sarbanes-Oxley Act, which addresses perceived weaknesses in auditing, reporting, and corporate governance of US public companies is addressed. Besides a summary of the Act, there is a commentary on the important new and revised requirements for boards, committees and individual directors of publicly traded companies that have sprung up as a direct result of this Act being passed. The broad areas of discussion include governance and financial disclosures.

Finally, there is a discussion on how directors and boards get into trouble stemming from incompetence, ignorance, lack of independence, and dishonesty. Companies must have independent and competent boards, which should be effective instruments of sound governance.

Overall, the book is a concise, yet comprehensive, guide to governance. It's well organised and supplemented with explanatory diagrams making for an easy read.

- Newly Paul

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Indian Express - Business Publications Division

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