Meaning of Corporate Governance
Corporate governance is a collection of rules and procedures which a corporation adheres to in order to protect the stakeholders’ basic interests. These systemic rules and regulations are guidelines which pave the way for a company to achieve its goals. It affects every aspect of the business, shaping it for successful functioning from every nuance. Corporate governance is applicable not only to large corporations but also to other small and non-profit organizations in order to facilitate proper management and control. But still, corporate governance by public limited companies that trade on the national capital market is given priority.
According to the Cadbury Committee, 1992, corporate governance means “system by which companies are directed and controlled”.
According to the OECD Principles of corporate governance “Corporate governance includes a series of relationships between the management of a corporation, its board of directors, its shareholders and all parties concerned. Corporate governance also includes the mechanism by which the company’s targets are set and the means for achieving those goals and tracking the results”.
The World Bank (1999) defines the word corporate governance as “corporate governance is about maximizing value subject to meeting the company’s financial, legal and contractual obligations. From a public perspective, corporate governance is about nurturing an enterprise while ensuring accountability in the exercise of power and patronage by firms. The bank stated further that the role of public policy is to provide firm with the incentives and discipline to maximize the divergence between private and social returns and to protect the interests of stakeholders.”[1]
Regulations Pertaining to Corporate Governance in India
- Companies Act, 2013
It contains various provisions related to the board meetings, directors, audit committee, related party transactions, Whistle blower mechanism, Independent Directors, Subsidiary Company, Nomination and remuneration Committee etc.
- Securities Exchange Board of India (SEBI)
It was established in 1988. It is a regulatory body. Its main object is to protect the interest of the investors as it has the jurisdiction over all the listed companies and stabilize the investment market. It can also provide rules, regulations and guidelines for the smooth running of the market.
- Institute of Company Secretaries of India (ICSI)
It is a statutory body which issues secretarial standards with regards to the new companies act provisions. Until now, the ICIS has released standards on Meeting of Board of Director and General Meetings. According to section 118(10) of the companies act these standards must be obeyed as stated by the ICSI.
- Standard Listing Agreement of Stock Exchanges
These, rules and regulations are for registered companies which are listed on the stock exchange. These companies should abide all the rules established in the agreement.
- Institute of Chartered Accountants of India (ICAI)
This body was established by the parliament through the Chartered Accountants Act, 1949 so as to promote the profession of Chartered Accountants in India. It closely works with the RBI, SEBI, etc. According to Section 129 and 133 of the companies act the financial statements provided by the companies must be true and fair as per the accounting and financial standards prescribed by the Institute of Chartered Accountants of India.
Prior to the implementation of the companies act 2013 corporate governance was governed by Clause 49 of the Listing Agreement. Such changes took effect as of 1st October, 2014.
Principles of Corporate Governance
The principles were developed and supported by OECD member ministers to assist OECD and non-OECD governments in their efforts to establish legal and regulatory corporate governance structures in their countries.
The various Principles of Corporate Governance are as follows:
- Certain the basis for an efficient corporate governance system.
- Shareholder rights and main ownership functions.
- Treatment of shareholders equally.
- The responsibility of the corporate governance stakeholders.
- Transparency and Openness.
- The Board’s obligations.
Components of Corporate Governance
- Board of Directors
The Board of Directors hold a very important position in the management of the business activities of the company. They have great responsibilities and are appointed on the grounds of election through casting of votes by the existing company’s shareholders. The chairman of the board is also elected by the members of the board and he generally leads the board and serves as the spokesman responsible for the productivity and efficiency of the company.
- Independent Directors
An independent director is the one who does not have any monetary relationship with the organization, its owners, subsidiary, affiliate firm, promoters or directors during 2 financial years immediately preceding it or during the current financial year. They safeguard the interest of stakeholders, harmonize the conflictions, analyze the performance, etc.
- Employees
The employee’s prime objective is to listen to the instructions granted to them by management at the upper level. They shall be expected to work within the framework of the job assigned to them. Employees are the company’s human assets, since they form an important part of the implementation of the upper level management plans.
- Financial Institutions and Creditors
Financial institutions and other investors are main driving forces of corporate governance. Corporate governance would be unlikely if the corporation’s financial demands are not met on time.
- Suppliers and Customers
Strong suppliers will instigate price hikes, reducing product quality. So, the role of supplier is very important in the competitive market to establish a strong position.
Another major element shaping corporate governance is client. Big decision taking, the formulation and execution of the plan or, in short, the entire functioning of the business relies on the customers.
Importance of Corporate Governance
- Better access to the financial statements
- Reducing risks, scams and scandals
- Independence of decision making
- Fairness of practices
- Provides effective penalties for violation
- Management information system for containing information of various members of the company
- High quality reports
- Development of moral ethics and reputation
- Sustainable development of all stakeholders
[1] Vasudha Joshi, Corporate Governance: The Indian Scenario, published by Foundation Books Pvt. Ltd., New Delhi
Author: Bahaar,
Amity Law School, Noida 3rd Year student