What is Corporate Governance?
The accountability of the board of directors to all stakeholders of the corporation is referred to as corporate governance. The board of directors works towards giving a corporation fair, efficient, and transparent administration.
Corporate Governance in India
The main objective of the corporate governance is to make sure that the administration of the organization acts in the interest of the organization and its stakeholders. To accomplish the objective, the Government of India has put a statuary framework in place.
The Indian statuary framework of corporate governance is in concurrence with the international best practices. The corporate governance mechanism for companies in India is enumerated in the following enactments/ regulations/ guidelines/ listing agreement:
- The Companies Act, 2013: It contains arrangements identifying with board constitution, executive gatherings, board forms, autonomous chiefs, general gatherings, review advisory groups, related gathering exchanges, exposure necessities in money related proclamations etc.
- Securities and Exchange Board of India (SEBI) Guidelines: SEBI is a regulatory authority having jurisdiction over listed companies and which issues regulations, rules, and guidelines to companies to ensure the protection of investors.
- Standard Listing Agreement of Stock Exchanges: For organizations whose shares are recorded on the stock trades.
- Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI): ICAI is an autonomous body, which issues accounting standards providing guidelines for disclosures of financial information.
- Secretarial Standards issued by the Institute of Company Secretaries of India (ICSI): ICSI is a self-ruling body, which issues secretarial norms regarding the arrangements of the New Companies Act. Up until now, the ICSI has issued Secretarial Standard on “Meetings of the Board of Directors” (SS-1) and Secretarial Standards on “General Meetings” (SS-2). These Secretarial Standards have come into force w.e.f. July 1, 2015.
Section 118(10) of the New Companies Act provide that every company (other than one person company) shall observe Secretarial Standards specified as such by the ICSI with respect to general and board meetings.
Principals of Corporate Governance
The key features of corporate governance are as follows:
- Transparency:
Transparency means the truth lay bare in front of us. In the context of corporate governance, it implies a satisfactory, precise, and opportune divulgence of information in front of the stakeholders. - Accountability:
Accountability alludes to the responsibility of the higher authorities for the use of the company’s resources in the interest of the organization and its stakeholders. - Independence:
It is important that the top management of the company has the independence to take decisions based on business prudence.
What is the need for Corporate Governance?
With the changing times, the need for greater accountability of companies came into play. Corporate governance can very well provide that much-needed accountability. Corporate Governance takes care of the following factors:
Widespread shareholders
Businesses now have a large number of shareholders spread across the globe. These shareholders at times have a detached disposition towards the corporate undertakings. The idea of shareholders democracy thus requires a practical implementation through a code of conduct of corporate governance.
The ownership structure
With institutional investors and mutual funds becoming the largest shareholders, it is important for the corporate managements to abide by some established code of corporate governance to build up its image in society.
Managing the corporate scams
Corporate governance makes sure that there are no scams in the company. It helps in reviving investor’s confidence in the corporate sector.
Expectations of the society
Society expects a lot from companies in terms of reasonable pricing, better quality, proper utilization of resources, and pollution control. To meet these expectations of the society there is a need for the code of corporate governance.
Huge increase in the top management compensation
Sometimes there is no justification regarding the exorbitant payments to top ranking managers, out of corporate funds, which are a property of shareholders. This factor necessitates corporate governance to contain the ill practices of top managements of companies.
Globalization
The international capital market recognizes companies, which are well managed according to the terms of corporate governance. Due to globalization, more and more companies want to be a part of the international market and hence are focusing on the corporate governance