Corporate governance - Essay Example

The role of independent directors and non executive directors become significant as they are intended to serve as deterrent in the misuse and abuse of power by the vested interests, especially the senior management of the company. The paper would be broadly rationalizing the role of independent non executive directors within the broader parameter of corporate governance. Corporate governance is based on publicly acceptable values and code of behaviour for the higher echelons of corporate bodies (Haller & Shore, 2005).

It can primarily be described as a set of well defined policies, rules and regulations and customs that effectively control the various internal and external processes of the business enterprises. They are, thus intended to create an environment that improves productivity, economic efficiency and protects the interests of various stakeholders through ethically delivered goals (Solomon, 2007; Mueller, 1996). Since the good corporate governance is dependent on effective policies and laws, the role of CEO and board of directors becomes crucial ingredient for their efficient implementation.

In the various modalities and process that are incorporated within good corporate governance, the role of independent non executive directors in the company’s board has increasingly become key component of the success of the company. The recent cases of abuse of shareholders’ rights in the various countries have brought the role of corporate governance into the prominence. The increased risks to the interests of the various stakeholders have necessitated stringent code of conduct for the higher hierarchy of management.

Chief Executive of the firm and board of directors, therefore become intrinsic part of corporate governance. They are endowed with the primarily responsibility for good codes of corporate governance and best practices within the organization that promote accountability. Boritz, (1990) has defined risks as possible loss due to uncertainty and exposure of the firm from inappropriate investment decision or a commitment. Thus, risks and need for more effective transparency within the system become vital postulates of CG whose implementation is overseen and guided under the strict vigilance of independent non executive directors.

Independent non executive directors in the board provide the firm with independent, objective and creative inputs on the various processes and modalities of business operations. As they are basically from outside the organization, they are observed to be equipped with unbiased approach to the issues and factors that could have long lasting impact on the performance outcome of the company. Cadbury report (1992, p33) explicitly states that they bring in ‘independent judgment’ within the board.

Their presence on board therefore is designed to discourage the vested interests against financial malpractices and fraud. This is one of the most important criteria that reiterated the importance of inclusion of independent non executive directors on the boards of the companies. UK has been a leader in setting up a Combined Code of Corporate Governance. UK boasts of a highly developed business environment with a vast shareholders’ base. The various financial institutions, big corporate houses, institutional investors and individuals with