This article has been written by Ms. Saina Parveen, a CS Executive level Student from the Institute of Company Secretary of India (ICSI)

INTRODUCTION

Corporate governance is the framework of rules, regulations, processes, procedures, customs, systems, policies, laws, and institutions that direct the ways within and by which an organization is act and is controlled within the corporations. The basic desired direction by which an organization’s goal is achieved and check the accountability of individuals through a mechanism.

Fairness, Transparency, Accountability, and Responsibility are the four pillars by which corporate governance is governed.

Various stakeholders are affected by the governance practices of the company such as:

1. a) Government
2. b) Society
3. c) Customers

d)Vendors and

1. e) Employees

The basic advantages of corporate governance are:

1. Corporate success and economic growth are ensured by good corporate governance.
2. Investors’ confidence enhanced with the strong implementation of corporate governance, raises the capital of the organization.
3. It helps in balancing the ethics of the company which create a massive impact on the share price of the organization.
4. It helps in brand formation and development.
5. It ensures the organization is managed to fit the best of all.
6. It reduces cost and sustains the organization in the long run and better access to the global market.

The role of the board of directors was summarized by the King Report:

1. To define the purpose of the company;
2. To define the values by which the company will perform its daily duties; 
3. To identify the stakeholders relevant to the company;
4. To develop a strategy combining these factors;
5. To ensure the implementation of this strategy;

 

 Corporate Governance Evolution:

The following theories elucidate the basis of the evolution of corporate governance:

• Agency theory

In agency theory, the owners are the principals but may not have the knowledge or skill for getting the objectives of a corporation executed.

In modern corporations, the management (the agent) is directly or indirectly selected by the shareholders (the principals). The agent or the management pursues the objectives set out by the shareholders because it is quite difficult for the shareholders to be part of the day-to-day operations, supervise it on a regular basis and count the other different problems associated within the organization, perhaps a proper mechanism is set in place as regards timely disclosures, monitoring, and oversight. 

This all be possible by putting corporate governance in the organization. 

• Stakeholder Theory:

According to this theory, the corporation is considering the property of the shareholders and they always want to maximize the property and want to gain investment from their invested property.

The directors in the organization are authorized to make necessary measures, compliance with ethics and with legal standards set by the government. The goal of the manager is to maximize the wealth of the shareholders by exercising due diligence, care, and avoiding conflicts, and should not violate the confidence of the shareholder and be faithful to them.

• Stakeholder Theory:

According to this theory, along with shareholders other interested groups in the organization also considers such as:

1. Creditors;
2. Employees;
3. Customers;
4. Suppliers;
5. Local -community and 
6. Government

Different stakeholder has different self-interests, and because of this different interest at times creates conflicts in the organization. The managers(directors) are responsible to mediate between these different stakeholder’s interests. The managers play an important role here by which stakeholders are capable to negotiate and bargain on another.

• Stewardship Theory:

Stewardship means a person who manages another’s property or estate. The managers (directors) and employees are entrusted with the owner’s property and ensure proper safeguarding of the resources of the corporation in the absence of the shareholders.

 

ROOTS OF CORPORATE GOVERNANCE IN INDIAN THOS:

From ancient times the concept of corporate governance is followed and connected with us. The structure of corporate governance is formed through ancient kingdoms like Vedas, and Manu and the Epic Kavyas like Mahabharata, Ramayana, and Bhagwat Gita. All religious teachings or philosophical writing contain some directives on governance.

CONCEPTS IN DETAIL

The initiatives taken by the Government of India in 1991, aimed at economic liberalization, privatization, and globalization of the domestic economy, which led India to reforms in order to suitably respond to all such development taking place over the world.

The interest generated by the Cadbury Committee Report, the Confederation of Indian Industry (CII), the Associated Chambers of Commerce and Industry (ASSOCHAM), and the Securities Exchange Board of India (SEBI) constituted Committees to recommend initiatives in Corporate Governance.

1998: Desirable Corporate Governance: A Code

The first institution initiative in Indian Industry taken by CII on Corporate Governance. The idea was to formulate a framework or code of governance which will be followed by all the Indian companies, whether the Private Sector, the Public Sector, Banks, or Financial Institutions, all of which are corporate entities and they should promote corporate governance. The said Code was drafted and widely circulated in 1997 and in April 1998 the Code was Released and named as Desirable Corporate Governance: A Code.

1999: Kumar Mangalam Birla Committee: 

A Committee was set up by the Securities Exchange Board of India (SEBI) on May 7, 1999 under the Chairmanship of Kumar Mangalam Birla to raise and promote standards of corporate governance. The Committee report comprehensively attempt to evolve a Code of Corporate Governance, context in prevailing conditions of the capital markets and matters related with and led to inclusion of Clause 49 in the Listing Agreement in the year 2000.

2000: Task Force on Corporate Excellence through Governance:

In May 2000, the Department of Company Affairs [Now Ministry of Corporate Affairs (MCA)] formed a broad -based study groups under the chairmanship of Dr. P.L. Sanjeev Reddy, Secretary, DCA. The group examining “operationalize the concept of corporate excellence on a sustained basis”, so as to “sharpen India’s global competitive edge and to further develop corporate culture in the country’. 

The group in its report containing a range of recommendations for raising governance standards among all companies in India. This group also gives suggestion upon setting up a Centre for Corporate Excellence.

Many others committees form for formulations and giving effect to the corporate governance not only in a corporation but also in others sectors, other committees are:

1. 2003: N. R. Narayana Murthy Committee;
2. 2004: Dr. J. J. Irani Committee on Company Law;
3. 2009: CII’s Task Force on Corporate Governance;
4. 2009: Corporate Governance Voluntary Guidelines;
5. 2010: NASSCOM Recommendations
6. 2013: Companies Act;
7. 2015: SEBI (Listing Obligations and Disclosure Requirements) Regulations;
8. 2017: Uday Kotak Committee;

 

Effect of Corporate Governance on different sectors of companies in India:

In the above discussion we at present having a strong mechanism which govern companies, all listed entities, banks, NBFCs and insurance companies.

In India companies are governed by the Companies Act, 2013 and if companies are listed then in that case SEBI Regulations attracted to such companies.

 

Some of the Provisions of Companies Act,2013 related to Corporate Governance are:

• Minimum and maximum number of members in the company. Public company shall have minimum 7 members and maximum no limit; Private company shall have minimum 2 members and maximum 200 members and one person company shall have one person (1 person) as member.
• Appointment of Independent director;
• Appointment of women director in the company;
• Appointment of whole time Key Managerial Personnel;
• Provision related to Related Party Transaction;
• Constitution of Audit Committee;
• Constitution of Nomination and Remuneration Committee, Stakeholder Committee;
• Constitution of Risk Management Committee (applied to top 1000 listed entities);
•  Constitution of CSR committee;
• Constitution of Vigil Mechanism; 
• Secretarial Audit;
• Constitution of NFRA;

                       

Regulation 4 of SEBI (LODR) Regulation,2015:

The SEBI (LODR) Regulations 2015 covers obligations of listed entities such as:

• Board Composition Requirements;
• Constitution of Board Committee;
• Stock Exchange related obligations and requirements;
• Website requirements;
• Advertisement disclosure and obligations;
• Corporate Policies requirements;

 

Reserve Bank of India (RBI) Rules:

Companies which carry business of lending and borrowing, financing, leasing etc. are comply with RBI guidelines along with company law.

Those companies which govern with Banking Regulations such companies are subject comply with banking Regulations also.

CONCLUSION

Corporate Governance is required to balance government rules with the interested individual associated with any companies.

 It’s bound the particular sectors around the supervision of Act, Rules and Regulations, which increases the confidents in the interested groups, give courage to them to take risk in the company. 

It is corporate governance which make accountable to all sectors and access the reliability of compliances and make India compliance Country which again attract foreign investors in India. Hence Corporate Governance is utmost important.