Kaustubh Verma
Research Paper On “A Comparative Analysis Of Corporate Governance Policies And Practices In The Developed And Developing Economies Especially Emphasizing India
ABSTRACT
Despite the extensive growth of management theory, professions, and education throughout the 20th century, corporate governance has often been overlooked. Yet, it stands as a defining aspect of the contemporary economic landscape, spanning from the previous century into the current one. With numerous high-profile corporate scandals, the term “corporate governance” has become entrenched in business regulations aimed at safeguarding the economy’s long-term stability. Different economies adopt various corporate governance models, each reflecting its unique cultural and environmental factors. However, when profit maximization becomes the primary driver for business decisions, the risk of disregarding or exploiting regulatory boundaries escalates. Corporate governance now plays a pivotal role globally, influencing economic realities in numerous countries. This paper aims to delve into corporate governance concepts through comprehensive literature review and framework analysis. Furthermore, it seeks to assess the status of corporate governance across developed and developing nations worldwide
INTRODUCTION
Corporate governance has emerged as a significant focus in both practical and scholarly realms. It plays a crucial role in enhancing competitiveness, facilitating capital acquisition, ensuring sustainability, and combating corruption, especially in developing nations where the integrity of institutions is vital. The manner in which a company is governed directly impacts its economic fate, particularly concerning its ability to secure funding. Companies lacking sufficient capital risk not only their own survival but also pose a threat to the broader economy by potentially missing out on opportunities for international market engagement amidst globalization trends. Investors are drawn to firms with robust corporate governance practices due to the delineation of rights and responsibilities among stakeholders as outlined by organizations like the OECD. Effective corporate governance establishes clear objectives, strategies for achieving them, and mechanisms for oversight, thereby promoting financial stability and preventing crises. Strong corporate governance offers several advantages, including improved access to capital, enhanced accountability and transparency, heightened performance, and protection of shareholder interests, while also reducing corruption and bolstering market competitiveness. However, implementing good governance practices in developing countries is challenged by inadequate institutional infrastructure, necessitating a cautious approach to governance reform. Weak or absent corporate governance can lead to adverse outcomes such as financial instability and hindered economic development.
Weak corporate governance diminishes the ability to attract adequate capital, curtails competitiveness, and hampers job creation. It adversely affects employee dedication and increases the risk of bankruptcy due to a lack of coherent company strategy and effective leadership from the board of directors. Furthermore, it enables company managers and directors to prioritize their personal interests over those of shareholders, creditors, and other stakeholders. Additionally, excessive regulation can stifle private sector growth.
However, some academics contend that the unique cultural, societal, and economic contexts of developing nations necessitate tailored approaches to corporate governance. For instance, reliance on family-owned enterprises or state-owned entities in some developing countries may require governance mechanisms distinct from those of publicly traded firms. Moreover, there’s a growing recognition of the importance of integrating environmental and social considerations into corporate governance frameworks, especially in regions where sustainability challenges are pressing. This comparative analysis of corporate governance theories across developed and developing nations illuminates the strengths, weaknesses, and diversity of governance models worldwide, aiming to enhance corporate accountability and sustainability. It holds promise for informing both policy formulation and practical implementation. The disparities in corporate governance practices between developed and developing economies underscore the intricate interplay of legal, economic, social, and cultural factors that influence business conduct globally.
WHAT IS CORPORATE GOVERNANCE AND WHY IT IS RECEIVING MORE ATTENTION?
Corporate governance definitions encompass a wide range of perspectives, typically falling into two categories. The first set focuses on the actual behaviour of corporations, including measures like performance, efficiency, growth, financial structure, and treatment of shareholders and stakeholders. The second set revolves around the normative framework within which firms operate, deriving from sources such as the legal system, judicial system, financial markets, and labour markets.
For studies within a single country or specific firms, the behavioural patterns approach is often preferred, examining aspects like board operations, executive compensation’s role in firm performance, labour policies’ impact on performance, and shareholder dynamics. In comparative studies, the focus shifts to the normative framework and how differences therein affect firm behaviour, investor behaviour, and other factors.
The breadth of the corporate governance framework can vary. A narrow definition might focus solely on capital market rules governing equity investments in publicly listed firms, including listing requirements, insider trading regulations, disclosure rules, accounting standards, and minority shareholder protections. A definition specific to finance might emphasize how outside investors safeguard against insider expropriation, covering minority rights, creditor rights strength, executive director composition and rights, and the ability to pursue legal action.
A broader definition, akin to that proposed by economists Andrei Shleifer and Robert Vishny, sees corporate governance as ensuring financiers receive returns on their investments, resolving collective action problems among dispersed investors, and reconciling conflicts of interest among corporate stakeholders.
Sir Adrian Cadbury’s perspective expands this to view corporate governance as the system directing and controlling companies, while a broader view considers it as a complex set of constraints governing bargaining over the quasi-rents generated by firms. This encompasses the determination and allocation of profits among stakeholders, referring to both rules and institutions shaping these dynamics.
WHY HAS CORPORATE GOVERNANCE GOT MORE ATTENTION IN RECENT TIMES
One factor contributing to the heightened significance of corporate governance is the proliferation of scandals and crises, which serve as manifestations of broader structural issues. Corporate governance has emerged as a crucial aspect for economic development and policymaking in numerous countries due to several reasons.
Firstly, the private, market-driven investment process, supported by effective corporate governance, has become increasingly vital for economies, particularly with the privatization of sectors once controlled by the state. Firms seeking capital have turned to public markets, while mutual societies and partnerships have transitioned into listed corporations.
Secondly, advancements in technology, financial market liberalization, trade openness, and structural reforms have made the allocation of capital within and across countries more complex. This complexity underscores the importance of good governance but also presents challenges in monitoring capital usage.
Thirdly, capital mobilization is increasingly intermediated, distancing it from the principal owner, owing to the growing size of firms and the expanding role of financial intermediaries. Institutional investors are playing a larger role, particularly with the shift away from traditional retirement systems towards more investment-oriented ones, necessitating robust corporate governance frameworks.
Fourthly, deregulation and reform programs have reshaped the financial landscape, replacing longstanding institutional governance arrangements with new ones. However, inconsistencies and gaps have emerged during this transition period.
Lastly, international financial integration has surged, leading to increased cross-border investment and trade flows. This has resulted in cross-border corporate governance challenges, as different governance cultures intersect, sometimes uneasily.
CORPORATE GOVERNANCE MECHANISM
Throughout the ages, there have been numerous examples of poor governance practices resulting in significant drops in market value. Examples include the 2001 Enron scandal, GM’s failure to respond to a whistleblower’s warning in 2014, which resulted in significant fines, and Wells Fargo’s aggressive cross-selling tactics. Corporate governance, which is essentially a set of rules and practices overseen by a company’s board of directors and independent committees, seeks to balance stakeholder interests while increasing shareholder value. A strong governance programme is critical to a company’s financial health, growth, and long-term success because it reduces inefficiencies caused by adverse selection and ethical risks. The following are the three primary types of mechanisms and controls in corporate governance:
INTERNAL CONTROL MANAGEMENT
Internal administrators oversee review activities and enact measures to attain organizational objectives. Here are some illustrations:
Internal control procedures and internal auditors:
These guidelines, established by various levels of authority within the company including the audit committee, board of directors, senior management, and other staff, aim to facilitate reliable financial reporting, operational efficiency, and adherence to regulatory and legal requirements. We assure you of our diligent efforts to achieve these goals. Internal auditors, as part of the company’s workforce, assess both the structure and effectiveness of internal control mechanisms and the accuracy of financial reporting. The Board’s role includes safeguarding invested capital by appointing and providing protection to top-level executives. Regular committee meetings enable the identification, discussion, and mitigation of potential issues, tailored to the diverse governance structures of different companies.
BALANCE OF POWER
At its core, the principle of power balance necessitates the separation of roles between the president and treasurer, ensuring a fundamental division of authority. This concept extends to organizations where distinct entities oversee and regulate each other’s functions to maintain equilibrium. In such settings, one group might propose company-wide organizational shifts, while another scrutinizes and dismisses these proposals, and a third champions perspectives external to these groups.
COMPENSATION
Performance-based compensation enables you to connect a portion of your pay directly to your individual performance. This compensation may take the form of cash, non-monetary benefits like shares or stock options, or other incentives.
EXTERNAL GOVERNANCE MANAGEMENT
External corporate governance oversees the influence of external shareholders within the company. Here are a few instances: Seeking and evaluating performance metrics, complying with government regulations for mergers and acquisitions, issuing declarations of commitment amidst competitive pressures, and managing acquisition processes through regulatory agencies.
LINKING CORPORATE GOVERNANCE IN DEVELOPED AND DEVELOPING COUNTRIES
Throughout history, numerous instances of inadequate governance practices have led to substantial declines in market values. Examples include the Enron accounting scandal in 2001, resulting in a significant loss of market value, and General Motors facing hefty fines and settlements in 2014 due to neglecting whistleblower warnings about ignition switch failures. More recently, Wells Fargo faced repercussions for aggressive product cross-selling tactics and misleading investigations, impacting employees, customers, and shareholders alike. Corporate governance encompasses the rules, practices, and procedures guiding a company’s oversight and control through its board of directors and independent committees. It aims to balance the interests of various stakeholders—management, employees, suppliers, customers, and the community—while creating value for shareholders. A robust governance framework is crucial for a company’s financial health, growth, and long-term success. Developed countries’ experiences highlight that good governance mitigates risk, enhances performance, facilitates access to capital markets, improves product and service marketability, strengthens governance, and boosts corporate value, thereby making external funding more accessible and cost-effective. In developing and emerging economies, corporate governance addresses issues beyond ownership and control separation, such as property rights, minority shareholder protection, and contract enforcement.
However, effective governance reforms in these contexts require the establishment of democratic, market-oriented institutions, and legal frameworks. Corporate governance reforms are underway globally, particularly in developing nations, shaping the lives of billions. These reforms, often intertwined with economic globalization processes, constitute a significant aspect of new development strategies in many countries. Questions regarding the efficacy of this development model and potential alternatives are paramount, contingent upon various factors. These include the broader socio-economic context, the effectiveness of governance reforms, and the aspirations of prospective beneficiaries.
1) The essence of the reforms, the rationale behind their implementation, and their impacts.
2) Directive inquiries regarding the concept of development, emphasizing prioritization of responsibilities and rights among different stakeholders.
3) Tactical inquiries about future prospects, exploring the strategies and approaches devised for achieving success, and assessing potential shifts in these strategies amid evolving economic and political landscapes.
Offering exhaustive responses to these inquiries is undoubtedly a daunting endeavour, exceeding the confines of this publication’s scope. Rather, the contents herein serve a more specific purpose, presenting a collection of case studies from individual developing nations. These studies delve into governance in its broadest sense, encompassing not only board practices and structures but also a myriad of factors influencing corporate decision-making, such as financial markets, the banking system, industrial policy, and labour relations.
The countries under examination are notably sizable, including prominent representatives like India, Brazil, Mexico, and Nigeria. While some cases highlight well-established development strategies like import substitution industrialization (e.g., Korea) and export-oriented industrialization (considered highly successful), others present less conventional approaches (e.g., China, South Africa). The central focus across all cases is a descriptive analysis of ongoing reforms, particularly the challenges surrounding their implementation. Additionally, these studies touch upon the repercussions of reforms and offer suggestions regarding the normative obligations of involved parties, as well as areas requiring further developmental attention. The interaction between developed and developing nations has seen enhancements, notably driven by the continuous outsourcing of information technology requirements from developed to developing countries. India’s IT outsourcing industry, for instance, boasts a staggering worth exceeding $150 billion and sustains a robust growth rate of 12% annually. Corporate governance lapses, exemplified by cases like Enron and Satyam, serve as stark illustrations of governance failures observed across both developed and developing economies.
LINKING CORPORATE GOVERNANCE IN INDIA AND USA
The commercial ties between the US and India are robust, particularly driven by the consistent outsourcing of information technology (IT) services from the US to India. The IT outsourcing sector in India is valued at $150 billion and continues to grow at a rate of 12% annually, although recent slowdowns have been attributed to shifts in US presidency. To gain insights into corporate governance models in both countries and the repercussions of governance failures, we examine the Enron and Satyam scandals.
Enron Corporation, a Texas-based energy company, once thrived as one of America’s top corporations, thanks to its innovative work culture and substantial revenues. However, in 2001, one of the largest accounting scandals in US history unfolded, revealing fraudulent practices that inflated earnings by nearly $600 million and concealed massive losses. Enron’s subsequent bankruptcy filing in 2002 resulted in catastrophic losses for employees and investors, highlighting deficiencies in its corporate governance, particularly within the audit committee.
Despite regulatory compliance, Enron’s audit committee failed to prevent or detect the creative accounting practices that led to its downfall. The scandal exposed flaws in governance theories such as agency theory and stakeholder theory, emphasizing the dangers of excessive focus on performance-linked compensation and inadequate oversight by independent directors.
The Satyam scandal, often dubbed the “Enron of India,” was another significant corporate fraud, involving the manipulation of nearly $1.1 billion in earnings. Despite the presence of independent directors, Satyam’s governance framework proved insufficient in preventing fraudulent activities orchestrated by its chairman, B Ramalinga Raju. The scandal underscored the challenges of separating ownership and control in corporate governance.
Both scandals underscore the importance of effective corporate governance in safeguarding investor interests and preserving organizational integrity. While regulatory reforms have been implemented in response to such crises, enforcement remains a challenge, leaving loopholes for unethical practices to persist.
In more recent developments, the Wells Fargo scandal exposed the adverse effects of high-pressure sales cultures and inadequate oversight by the board of directors. The scandal, coupled with broader issues such as lack of diversity in corporate boards and increasing executive compensation, underscores the ongoing challenges in corporate governance across industries and geographies.
BOARD STRUCTURE IN DEVELOPING AND DEVELOPED COUNTRIES
In developed nations, traditional board structures are losing relevance in the contemporary business landscape. There’s a growing sentiment in favour of separating the roles of chairman and CEO. Yet, when it comes to CEO succession planning, an increasing number of companies in both economies are opting for a unified board and CEO role. These companies perceive that consolidating these roles will enhance communication with shareholders, thereby minimizing potential ambiguities and overlaps between the chairman and CEO functions.
BOARD REPRESENTATION OF WOMEN AND MINORITIES IN DEVELOPING AND DEVELOPED COUNTRIES
Enhancing diversity and inclusivity within corporate boards involves increasing the representation of women, minorities, and independent directors with varied backgrounds, perspectives, and expertise. Research indicates that Fortune 500 companies boasting a higher proportion of female directors tend to achieve superior financial outcomes compared to those with fewer female directors. Despite this evidence, women and minorities face underrepresentation in corporate boards and management roles due to entrenched business norms, extensive working hours, and the persistent burden of childcare responsibilities predominantly falling on mothers. However, both developing and developed countries exhibit reluctance to transition away from male-dominated workplace cultures.
THE STATUS OF CORPORATE GOVERNANCE IN INDIA
The concept of good governance has ancient roots in India, tracing back to the 3rd century BC when Chanakya, the Prime Minister of Pataliputra, formulated the four royal duties: Raksha (protection), Vriddhi (prosperity), Palana (maintenance), and Yogaksema (well-being). While initially applied to governance under monarchs, these principles have found resonance in corporate governance, where safeguarding shareholders’ wealth, enhancing it through prudent asset utilization, and fostering sustainable growth are paramount. However, corporate governance didn’t gain prominence in Indian corporate circles until the early 1990s, with scant references in legal literature prior to that. The emergence of systemic weaknesses like flawed stock market practices, boards lacking fiduciary responsibility, inadequate disclosure norms, opacity, and persistent crony capitalism necessitated reforms and bolstered governance standards in India. Both the Securities and Exchange Board of India (SEBI) and the Ministry of Corporate Affairs (MCA) have spearheaded these efforts, implementing various reforms through initiatives like the Corporate Governance Committee.
CONFEDERATION OF INDIAN INDUSTRY
Founded in 1995 under the leadership of renowned entrepreneur Rahul Baja, the Federation of Indian Industries emerged as a task force. In April 1998, the Confederation of Indian Industry (CII) introduced the Good Corporate Governance code, addressing diverse facets of corporate governance. Notably, it was the first initiative to critique and suggest the reduction of nominated directors.
KUMAR MANGALAM BIRLA COMMISSION REPORT
While the Confederation of Indian Industry (CII) Code garnered positive reception within the corporate sector, there was a prevailing sentiment that a statutory code would be more appropriate in the Indian context compared to a voluntary one. Consequently, the Securities and Exchange Board of India (SEBI) took a significant step by forming a commission in 1999, headed by Kumar Mangalam Birla, to advocate for and enhance good corporate governance standards. Subsequently, in the early 2000s, the SEBI Board endorsed and implemented the primary recommendations of this commission, which were then integrated into Clause 49 of the Stock Exchange Listing Agreement.
CORPORATE AFFAIRS DIVISION
In May 2000, the Corporate Affairs Administration (DCA) established a comprehensive study group, chaired by Dr. P.L. Reddy, Director of DCA. The group was assigned the challenging objective of exploring methods to ensure sustainable corporate excellence. In November 2000, the Task Force on Corporate Excellence within the group unveiled a set of initiatives aimed at elevating governance standards across Indian companies. They compiled a report outlining recommendations for this purpose.
REPORT SUBMITTED NARESH CHANDRA COMMITTEE
In August 2002, the Ministry of Finance and Business Affairs established a committee chaired by Naresh Chandra to evaluate and propose legislative adjustments pertaining to various aspects, including the interaction between accountants and clients, as well as the function of independent directors. The committee provided recommendations concerning two primary aspects of corporate governance: financial and non-financial information disclosure, and the implementation of independent audits along with management oversight.
REPORT SUBMITTED BY NARAYAN MURTHY IN 2002
SEBI has convened a committee led by Ms. Narayana Murthy to evaluate the adherence of listed companies to the Corporate Governance Code and propose revisions to Section 49. The committee’s key recommendations primarily focus on aspects such as the Audit Committee, Audit Reports, Independent Directors, Inter-Party Transactions, Risk Management, Directorships, Director Remuneration, Codes of Conduct, and Financial Disclosures. Following liberalization, SEBI revamped the corporate governance framework significantly, notably through the restructuring of Article 49 of the Listing Agreement. Effective from December 31, 2005, Section 49 of the Indian Stock Exchange Listing Agreement encompasses mandatory requirements, including ensuring board independence by mandating a minimum number of independent directors and establishing board audit committees with a significant portion of independent directors. Additionally, publicly traded companies are obliged to provide regular financial and other disclosures to ensure transparency.
IRANI COMMISSION JJ REPORT
The Companies Act of 1956 was enacted on the recommendation of the Baba Commission in 1950, aiming to consolidate existing company laws and establish a modern framework for businesses in independent India. Upon its implementation in 1956, it replaced the Companies Act of 1913. As India’s corporate sector expanded alongside its economy, the Act underwent 24 amendments to address evolving needs. Notably, the Companies (Amendment) Act of 1998 introduced significant changes following recommendations from the Sachar Commission. Subsequent amendments, including the Companies (Amendment) Bill of 1999, 2000, 2002, and 2003, further refined the law, incorporating insights from various committees such as the Women’s Committee. In response to India’s economic reforms in the 1990s, the government recognized the necessity for a comprehensive overhaul of the Companies Act, 1956. Thus, in December 2004, the government established a committee led by Dr. JJ Irani to advise on proposed amendments to the Act.
ISSUES AND CHALLENGES OF CORPORATE GOVERNANCE IN INDIA
BOARD SELECTION PROCESS AND TENURE
Selecting Indian companies for corporate governance poses the most significant hurdle. While regulations mandate a balanced blend of executive, non-executive, independent, and female directors, adherence often appears superficial. Board appointments predominantly rely on informal networks or referrals from existing members. It’s prevalent for promoters and management to nominate acquaintances and relatives to their boards
PERFORMANCE EVALUATION OF DIRECTORS
SEBI, the regulatory authority for India’s capital market, released a ‘Guidance Note on Board Evaluation’ in January 2017, which comprehensively addresses all essential components of board assessment. This includes aspects such as the focus and methodology of the review, providing feedback to evaluators, devising action plans based on review outcomes, disclosing results to stakeholders, and determining the frequency and duties of board evaluations. However, making the evaluation results public, necessary for meeting performance appraisal objectives, could potentially lead to significant challenges for the company.
LACK OF DIRECTOR INDEPENDENCE
The inclusion of independent directors was touted as the most significant corporate governance reform by the Kumar Mangalam Corporate Governance Committee in 1999. Despite this, independent directors have often fallen short of delivering the anticipated impact. Currently, director appointments in many companies still largely hinge on the founders’ discretion, raising doubts about the efficacy of this practice. To genuinely enhance governance, it’s imperative to curtail the promoter’s influence in matters concerning independent directors.
REMOVAL OF INDEPENDENT DIRECTORS
According to regulations, independent directors can be swiftly ousted by the founder or controlling shareholder. Should an independent director oppose the promoter’s decisions, they risk being removed from their position. Consequently, directors often feel compelled to align with the organizer’s interests to safeguard their roles. To address this issue, SEBI’s International Advisory Board has recommended enhancing transparency in both the appointment and dismissal of directors.
RESPONSIBILITY TO STAKEHOLDER
As per the Companies Act of India, 2013, directors are mandated to uphold responsibilities not only towards the company and its shareholders but also towards other stakeholders and environmental preservation. However, boards typically seek to minimize and disassociate themselves from such obligations. We suggest that the entire board be present at the Annual General Meeting (AGM) to enable stakeholders to directly engage with the board and pose questions.
DISTRUST ENVIRONMENT
In recent times, there has been a surge in instances of fraud, embezzlement of public funds, corruption, and dubious practices by key executives and boards of directors. These occurrences have significantly eroded investor and public trust across various sectors including stock markets, banks, financial institutions, corporations, and government agencies. Consequently, the overall business environment has become increasingly uncertain.
CORPORATE GOVERNANCE GUIDELINES, 2009
The Corporate Governance Voluntary Guidelines, 2009, were initiated by the Ministry of Corporate Affairs following extensive consultation with stakeholders facilitated by the National Foundation for Corporate Governance. These guidelines were inspired by the recommendations put forth by various bodies such as the Task Force of CII on Corporate Governance led by Shri Naresh Chandra and the Institute of Company Secretaries of India. They aimed to offer corporate entities in India a framework for voluntary self-governance, adhering to established standards of ethical and responsible business conduct.
CORPORATE SOCIAL RESPONSIBILITY VOLUNTARY GUIDELINES, 2009
In December 2009, the Ministry of Corporate Affairs (MCA) introduced the Corporate Social Responsibility Voluntary Guidelines, marking an initial move to integrate the concept of Business Responsibilities into mainstream practices. The MCA encouraged businesses to embrace the principles outlined in these guidelines for responsible business conduct. Furthermore, the document stated that based on the feedback and experience garnered from the implementation of these guidelines within the Indian corporate sector, the Government might undertake a review and enhancement process after one year.
THE IDEAL CORPORATE GOVERNANCE MODEL
Investor and consumer trust in businesses is diminishing due to ethical breaches in various companies and concerns regarding the role of business in society. Emerging markets, like India, are becoming increasingly significant in the global economy, comprising over 30% of global GDP. Therefore, understanding corporate governance is essential for boards of directors to fulfil their oversight responsibilities and assess the suitability of company management. Deloitte has devised a risk intelligence enterprise model as a guide to effective governance.
According to Deloitte, corporate governance aims at effective risk management and involves the oversight of the board of directors, execution by executive management, and implementation by business units and supporting functions. The corporate governance framework serves to define the roles and responsibilities of the board, committees, and management, aiding in prioritization, structuring policies, and preventing neglect of critical issues, as seen in cases like Wells Fargo. This framework enables collaboration between the board and management to address critical issues efficiently and productively. Deloitte’s framework emphasizes governance, strategy, performance, integrity, and talent as key objectives.
Corporate governance serves to facilitate effective, entrepreneurial, and prudent management to ensure long-term company success, enabling firms to establish corporate culture and values. An effective corporate governance model enhances transparency, accountability, and competitive advantage, enabling firms to outperform peers.
Corporate Governance: US
The corporate governance structure in a country is influenced by various factors such as legal and regulatory frameworks, rights and responsibilities of involved parties, and ownership patterns. Although several factors may impact corporations differently, it is possible to delineate corporate governance models for different countries based on key components such as the role of key players, share ownership patterns, board composition, regulatory frameworks, disclosure requirements, and stakeholder interaction.
The Anglo-American model, also known as the unitary system, is a dynamic, shareholder-oriented model characterized by an independent board of directors and institutional investors acting as monitoring agents. Ownership is dispersed among various shareholders, including institutional investors like pension funds. The average board size is around 9.2 members, with smaller boards having a high proportion of independent directors and committees. Executive compensation is often tied to shareholder returns. Audit committees, comprising at least three independent directors, oversee internal audits, test controls, ensure compliance, and manage risks. Poorly performing firms may face takeover risks.
However, corporate scandals like Enron and WorldCom have prompted scrutiny of the US corporate governance model, particularly concerning equity-based executive compensation. This scrutiny led to legislative measures such as new SEC listing requirements, the Sarbanes-Oxley Act, and the Dodd-Frank Act, aiming to enhance board objectivity, accountability to shareholders, and overall governance effectiveness.
The Sarbanes-Oxley Act (SOX) of 2002, enacted in response to corporate and accounting scandals, established the Public Company Accounting Oversight Board (PCAOB) to regulate auditors and enhance internal audit processes and compliance. SOX mandated individual responsibility for financial reports by a company’s principal officers, increased reporting requirements, and addressed conflicts of interest in audit services.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 aimed to improve financial stability and consumer protection following the 2007-2008 financial crisis. It mandated increased shareholder involvement in corporate governance, transparency in executive compensation, and additional disclosure requirements regarding financial performance and executive compensation.
Corporate Governance: India
India, being one of the largest emerging markets, has a corporate governance framework theoretically based on international best practices. It is a blend of the Anglo-American and German models, with different types of corporations—private, public, and public sector undertakings—exhibiting varying ownership structures and shareholder patterns.
Regulatory oversight is provided by the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI). SEBI monitors corporate governance for listed companies through Clause 49 of the listing agreement, focusing on shareholder rights, stakeholder roles, disclosure, transparency, and board responsibilities.
Despite effective frameworks and investor protection measures, weak enforcement due to judicial backlog and corruption remains a challenge. However, India’s corporate governance landscape boasts high ease of credit and a well-functioning banking sector, with SEBI overseeing a robust regulatory regime.
The Companies Act of 2013 replaced the Companies Act of 1956, providing a comprehensive framework for corporate governance through enhanced disclosures, reporting, transparency, and compliance requirements. It mandates female director representation, corporate social responsibility committees, and provisions for class action suits, empowering shareholders and enhancing accountability.
Clause 49 of the listing agreement, introduced by the Kumar Mangalam Birla Committee in 2000, and subsequently amended, focuses on shareholder rights, stakeholder roles, transparency, and board responsibilities. It sets criteria for board composition, director independence, tenure, and risk management, along with performance evaluation and whistleblower protection provisions.
Sustainability Disclosures
Corporate sustainability encompasses environmental, social, and governance factors, with shareholders increasingly engaging in labour rights, environmental conservation, and ethical sourcing practices. Companies are linking executive compensation with sustainability metrics to incentivize responsible practices.
Improved environmental and social policies, oversight structures, and sustainability disclosures are becoming common as companies seek to align with shareholder expectations and gain competitive advantage. For instance, National Grid links executive compensation to reduced greenhouse gas emissions and carbon footprint, showcasing a growing trend toward sustainability integration in corporate governance.
CONCLUSION
This research article provides an overview of corporate governance models’ transparency and oversight, examining both developing and developed economies. Conducted under constraints such as limited time and resources, the study only begins to delve into the issue, suggesting further research is warranted. Strengthening ties between developed and developing countries necessitates deeper exploration in this area, particularly for businesses transitioning between the two economies. Findings reveal significant disparities in corporate
governance models due to varying cultural norms and business landscapes. Notable differences include board diversity, financial statement disclosure, board governance structure, and the presence of independent directors. Businesses operating in diverse economies should be cognizant of these distinctions.
Since India’s liberalization in 1991, numerous fraud cases, including the Harshad Mehta Scam, Ketan Parikh Scam, and UTI Scam, underscore the imperative for robust corporate governance. Ethical behaviour and governance offer numerous advantages, fostering a positive brand image, enhancing loyalty and employee engagement, and fueling creativity, essential for competitiveness. In the public sector, embracing corporate governance is essential, as it aligns with societal benefits and promotes good governance and business practices. Ultimately, effective corporate governance can elevate Indian companies on the global stage.
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