The article has been written by Mr. Rishi Kumar Yadav, is a law graduate from University college of Law (MLSU), Udaipur, Rajasthan.
Abstract:
Corporate Governance is the new golden term coined in the corporate sector in the late 1990’s by the Industry Association On Confederation of Indian Institute which was the first initiative in India as a voluntary measure to be adopted by Indian companies. It has outlined a series of voluntary recommendations to integrate best-in-class practices of corporate governance in listed companies which touches the four cornerstones of fairness, transparency, accountability and responsibility in managing the affairs of the company.
Introduction:
Corporate Governance is a multi-faceted subject and difficult to comprehend in a concise definition. The main theme of corporate governance is to integrate sound management policies in the corporate framework in such a manner to bring economic efficiency in the organization in order to achieve twin goals of profit maximization and shareholder welfare. Few comprehensive definition on Corporate Governance are discussed below. There has been a sea change in companies Act, 2013 which has waved its way from principle of corporate governance practices as the new key change in the act. The Companies Act, 2013 has taken a foot forward from SEBI’s Clause 49 of listing agreement by introducing provisions in the companies act 2013 which promotes corporate governorship code in such a manner that it will no longer be restricted to only listed public companies but also unlisted public companies. Companies Act, 2013 lays greater emphasis on corporate governance as it clearly provides the rules and regulations for the same.
Need of Corporate governance:
The collapse of international giants like Eronf, Worlcom, Tyco, AOL and financial scams like Satyam have been big eye-openers in the corporate arena to make realise the company’s management, ownership and stakeholders the emergent need to comply with Corporate Governance principles in order to prevent themselves from paying huge corporate criminal liabilities in the future. These huge corporate giants paid the cost for lack of good corporate governance practices and corrupt policies adopted by management of these companies and their financial consulting firms
The significance of good corporate governance solutions has widened because of the increasing conflict between ownership and management disciplines, the non-compliance of financial reporting by auditors which inflicts heavy losses on investors and lack of fair and transparent culture in the company which shook’s investor trust in the financial viability of the company and its ethical standards.
Scope of Corporate Governance:
Corporate governance instils ethical standards in the company. It creates space for open dialogue by incorporating transparency and fair play in strategic operations of the corporate management. The significance of corporate governance lies in:
- Accountability of Management to shareholders and other stakeholders.
- Transparency in basic operations of the company and integrity in financial reports produced by the company.
- Component Board comprising of Executive and Independent Directors.
- Checks & balances is an integral part of good corporate governance.
- Adherence to the rules of company in law and spirit.
- Code of responsibility for Directors and Employees of the company.
- Open Dialogue between management and stakeholders of the company.
- Investor Loyalty is a guarantor of good corporate governance practices.
A Component board comprising of experienced professionals and active directorship who brings rich experience and intellectual vision on the board resulting in a greater economic efficiency of the company and enjoys the indispensable trust of the shareholders and key stakeholders of the company and they turn into trusted market players in the corporate sector enjoying everlasting market repute.
Core Principles of Corporate Governance:
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Transparency
The stakeholders should be informed about the company’s activities, financial statements, and the organization’s performance and also at the same time it is very important to give accurate and precise information to the shareholders. Poor transparency reduces the ability to raise more capital as the investors will be unaware of vital information. It also leads to less trust among the investors as a company that is financially stable and doing well will not have anything to hide. Moreover, companies that are doing well will like to make the financial statements public to promote themselves. Transparency in financial reporting increases the confidence of the shareholders will help them. The policies must be formulated in a manner which ensures transparency.
Transparency should also be maintained between directors and employees. The directors should be easily accessible by the employees and directors should be open to ideas of the management and employees. This makes employees more committed to the vision of the company. Lack of transparency will always lead to confusion and it will hinder the productivity of the management and employees.
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Accountability
To achieve the goals and objectives of the company, people should be held accountable at all levels. Employees should be accountable to the management, management should be accountable to the board of directors and the board of directors should be accountable to investors and shareholders. Employees, management staff and directors will learn from the mistakes if they are made accountable and it leads to better utilization of the available resources. In this way the organization will grow faster as the scope for mistakes will reduced considerably. It is the duty of directors to encourage accountability in the organization.
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Responsibility
The directors of the company are primarily responsible to the shareholders, employees and the whole society. The directors of the company should work in the best interests of the company and its employees. It is the duty of the directors to determine the responsibility of the management and employees. Also, management and employees should be held accountable to make sure that responsibilities are carried out properly. Shareholders want directors to be responsible to their needs and maximize the value of the firm.
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Fairness
Fairness principle not only enhances corporate value but it also leads to efficiency in resource allocation. All shareholders and investors should receive equal treatment by the company and the directors should try to prevent conflict of interests. It is very important to ensure fairness in transactions which are entered by the company. For e.g. a company should not enter into related party transactions without getting the approval of the shareholder. Effective communication mechanisms should be adopted by the company to make sure policies and financial statements are informed to the shareholders.
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Shareholder Engagement
Shareholders should not be kept in the dark and must be informed of the financial position and organizational objectives. Minority and majority shareholders should be treated equally. All transactions must be avoided which might lead to conflicts with the shareholders.
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Leadership
Board of directors is the brain of any company and it is under their leadership and guidance that any company expands and prospers. The directors should be committed to fulfilling the vision and mission of the company which is mentioned the constitution documents. Leadership also includes motivating the employees so that they reach the maximum potential. It also includes effective decision making and capitalize on opportunities to benefit the firm. Poor leadership by the board can create problems for the company and which may eventually end in bankruptcy or shutting down.
The Key Participants are as following
Shareholders
The shareholders are the principal owners of the company who provide capital to the company in lieu of return received by them in form of dividends on the earnings of the company. The individual shareholders participate in corporate governance procedures by exercising their voting rights on the key decisions of the company in in the interest of all stakeholders. The other institutional shareholders of the company like, insurance companies, trusts, investment banks, etc. who have greater shareholding than other shareholders actively have a greater role in monitoring corporate governance activities of the company as they are interested in market viability of the company in form of large market shares.
Directors
The Board of Directors are key constitute players for formulating and implementing corporate governance practices in the heart of the company machinery by making key decisions pertaining to setting long term corporate strategy of the company, sharing high responsibility to run the company on good governance structure, bringing effective board leadership to tackle the company’s operations at all levels and monitoring its performance in a fair and transparent manner.
Officers and key managerial personnel
Key Managerial Personnel (KMP) and other officers of the company who serve the top – management level under the Companies Act, 2013 includes the Chief Executive Officer, Managing Director or Manager; Whole Time Director; Company Secretary.
The Key Managerial Personnel would advise the Boards to achieve the corporate goals and by adhering to Good Corporate Governance practices. KMP would also have to report to the Sectoral Regulators for the non-compliances made by the company.
The new law bestows upon KMP’s a significant role to run the company’s operations in such a manner by adhering to laws in true letter and spirit in order to spell out the will of directors and other stakeholders effectively and efficiently in achieving company’s twin objective of profit maximization and maximization of wealth.
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Board of Directors
Board of directors is the decision making body of any company. It is the duty of the board to comply with all legal rules and regulations. So it is very important that a company constitutes a board of directors as per the provisions of Companies Act, 2103.
Composition of Board- Section 149 of the Companies Act, 2013 provides for appointment company. A board can have a maximum of fifteen directors but can appoint more directors subject to special approval.
Women Director- It is mandatory to appoint a women director in the following classes of company:
- Listed company;
- Public unlisted company having paid-up share capital of one hundred crore rupees or more, or having a turnover of 300 crore or more.
Resident Director- Section 149(3) mandates that every company will have one director who has stayed in India for a period of not less than 182 days.
of minimum three directors in a public company and two directors in a private
Independent Director- Independent directors are impartial and bring expertise to the board. They play an important role in resolving conflicts among shareholders and the company. Section 149(6) provides for the qualifications for appointing an independent director in a public company. As per Companies Act, 2013 public listed company shall have at least one-third of directors as independent directors and public unlisted company will have two directors if they meet the following criteria:
- Public companies having a share capital of 10 crore or more;
- Public companies having a turnover of 100 crore or more;
- Public companies having outstanding loans, debentures and deposits of more than 50 crores.
According to section 134 of Companies Act, 2013 the director has to give a detailed financial report which includes the director’s responsibility statement. This provision has been enacted to make directors accountable for their actions.
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Stakeholder Relationship Committee
As per section 178(6) of Companies Act, 2013 if a company has more than one thousand shareholders, debenture-holders, deposit-holders or any other security holders in a financial year then it is mandatory to constitute a stakeholder relationship committee. The main of the committee is to resolve the conflicts between the shareholders and the board of directors and address their grievances. The chairperson of the board shall be a non-executive director.
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Audit Committee
The Audit Committee looks after the financial reports and disclosures of a company. It is one of the most important components of a corporate governance structure. Under section 177 of Companies Act, 2013 the following class of companies are required to constitute audit committee and they are as follows:
- Listed company
- Public company having a share capital of more than 10 crores;
- Public company having a turnover of Rs. 100 crores;
- Public companies having deposits, outstanding loans or debentures more than 50 crores.
An audit committee will consist of a minimum of 3 directors and independent directors will form the majority. Section 177(4) provides duties of the audit committee and it has to act in accordance with the same.
Internal Audit
Companies Act, 2013 has mandated the internal audit for certain classes of companies as specified under Section 138 of the Companies Act, 2013.
Serious Fraud Investigation Offence (SFIO):
Section 211 (1) of the Companies Act, 2013 shall establish an office called the Serious Fraud Investigation office to investigate fraud relating to Company. The powers are given to SFIO under the act as mentioned that he can investigate into the affairs of the company or on receipt of report of Registrar or inspector or in the public interest or request from any Department of Central Government or State Government.
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Nomination and Remuneration Committee
The nomination and remuneration committee decides the selection criteria for the key managerial personnel (KMP) and determines the remuneration of the KMP’s and directors. Section 178 of Companies Act, 2013 mandates the constitution of committee for the following class of companies:
- Listed company;
- Public company having a share capital of more than Rs. 10 crores;
- Public company having a turnover of Rs. 100 crores;
- Public company having deposits, outstanding loans or debentures more than Rs.50 crores.
The nomination and remuneration committee will consist of a minimum of 3 directors and independent directors will form the majority.
Conclusion:
The Companies Act, 2013 empowers independent directors with proper checks and balances so that such extensive powers are not exercised in an unauthorized manner but in a rational and accountable way. The changes are a step forward in the right direction to smoothly run the management and affairs of the companies in the interest of stakeholders. These are all welcome changes in the globalised corporate world of today and they will strengthen the core corporate machinery by instilling strong corporate governance norms in a company leading to economic efficiency and higher ethical standards which will always inspire the company’s management to work in the direction to uphold its goals of maximization of wealth of stakeholders backed with good corporate repute.
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