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Corporate Governance - Basics

What is corporate governance?

Corporate governance in simple terms means the system by which companies are directed and managed. This actually influences how the objectives of the company are set and organized and results are achieved, how risk is assessed and monitored thus increased the performances.

A company that has good corporate governance has a much higher level of confidence amongst the shareholders . Active and independent directors contribute towards a positive outlook of the company in the financial market, positively influencing share prices. Corporate Governance is one of the important criteria for foreign institutional investors to decide on which company to invest in.

The corporate practices in India emphasize the functions of audit and finances that have legal, moral and ethical implications for the business and its impact on the shareholders. The Indian Companies Act of 2013 introduced innovative measures to appropriately balance legislative and regulatory reforms for the growth of the enterprise and to increase foreign investment, keeping in mind international practices. The rules and regulations are measures that increase the involvement of the shareholders in decision making and introduce transparency in corporate governance, which ultimately safeguards the interest of the society and shareholders.

Purpose of corporate governance

Corporate governance is intended to increase the accountability of the company and avoid big disasters before they occur. Poor corporate governance system listed as major reason for the failure of big corporates like Enron etc. Main grounds for corporate governance are as follows

  1. Corporate governance protects the shareholder democracy by implementing it through its code of conduct as most of the shareholders are of different attitudes towards investment and business.

  2. Earlier there were numerous small investors, but now there are large investors who are becoming a challenge to companies as they influence each and every decisions. Corporate governance help to survive in such situations.

  3. Corporate governance is necessary to build public confidence in the corporation which was shaken due to numerous corporate fraud in recent past.

  4. Corporate social responsibility is one of the area where every government is focussing. Corporate governance helps to fulfil these expectations.

  5. Globalization made the communication and transport between countries easy and frequent, so many Indian companies are listed with international stock exchange which also triggers the need for corporate governance in India.

  6. The huge flow of international capital in Indian companies are also affecting the management of Indian Corporates which require a code of corporate conduct.

There are three basic principles of corporate governance

Tansparency

Informations dissemination to the right people at the right time in the right format is very important. This helps the stake holders to understand their right and the way in which the corporate is being carried by the board.

Accountability

If there is no accountability for the actions, responsibility and results will be dreams. Corporate governance ensures the liability of the person who takes decision for the interest of the organisation.

Independence

Authority with responsibility is another thing which is very much important for the growth of organisation. A better corporate governance system helps the directors to work without much interference.

Corporate governance in India

India have a robust corporate governance system which is very much in sync with international standards. Following are the various steps taken Indian system towards a better corporate governance

  1. Companies Act 2013 has provided independent directors, board compositions and constitution, general meetings, board meetings, meeting processors, investment in other companies, related party transactions etc.

  2. SEBI Guidelines : various guidelines issued ensure investor awareness and investor protection and instilled a growing need of best practices in the management of companies.

  3. Accounting standards issued NFRA and ICAI: uniform accounting system and practices are ensured by the introduction of accounting standards.

  4. Secretarial standards issued by the ICSI: Secretarial standards work as guidelines for legal process for meeting and procedures under the Companies Act. Adherence to secretarial standards helps the company to follow a standard process and escape from untoward punishment.

  5. Listing agreements by SEBI helps the companies those are listed to follow and disclose a set of processes and information, it improves transparency and accountability.

PROBLEMS

  1. Women directors and independent directors: Even there is a compliance requirement on the this most of the companies are still lacking in practice. Recent example of fight between promoters of InterGlobe aviation is an example.

  2. Profit really is the motive of every entity but without the society subscribing to the products and services no corporates can survive. So every company should be accountable to the society as well. There is scope for more improvement.

  3. Awareness and adherence of cyber security and information protection is an area of concern.

It is right that most of the companies are following the rules and regulations, but for a better corporate governance that itself is not enough. We need a situation where the companies are acting more responsibly and proactive, they should not wait for law for things to be done. There requires a big role to be played by the stake holders rather than just silent investors.

A strong corporate governance system truly increases the strength of the company in the eyes of shareholders.  Independent directors and women director have a big role to play along with active directors. The new norms after the Companies Act 2013 are more balanced and innovative. They have helped and reformed the growth of companies making them compete with international standards.  Shareholders should be more involved in decision making and safeguards should be put into protect the interest of stake holders and the society, which is being achieved slowly. 


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