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Corporate governance has gained importance both in academia and the corporate over the past
few years. Management, in the absence of sufficient supervision and accountability, leaves scope
for scandals, especially in companies with dispersed ownership (Siala et al., 2009). Recent
financial scandals pose the question whether public companies actually work for the owners,
i.e., the shareholders. One of the most important functions of corporate governance is to ensure
the quality of the financial reporting process (Pergola et al., 2009). The Sarbanes-Oxley Act,
2002 and the major stock exchanges require the boards to have a majority of external directors
and the audit committees to have three independent directors in order to limit the ability of
management to engage in fraudulent behavior. Fraud, mismanagement and board establishment
against shareholder control are considered to cause loss of capital. Increased corporate
governance performance is hence indicated by stronger investment protections given to
shareholders in order to ensure sustainable financial performance (Salo, 2008). Separation of
ownership and control, i. e., agency problem, is one of the major causes that increases the need
for corporate governance, which includes mechanisms to ensure prudent decision making and
the best interests of various stakeholders. Recognition of agency relationship between owners,
board members, insiders and stock owners may help in aligning the interests of the groups with
shareholders (Jensen and Meckling, 1976).
Factors like liberalization and globalization have also accentuated the importance of the
concept of corporate governance globally. Globalization has provided increased accessibility of
world market to the Indian corporate sector and intensified the competition in the home market
(with multinational firms). This magnifies the need for good governance as a factor for survival
as well as competitive advantage. It also acts as a determinant of the creditworthiness of a
company (Dwivedi and Jain, 2005).
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