Navya Jain
Corporate governance in the business context refers to the systems of rules, practices, and processes by which companies are governed. Basically, it ensures that an organisation follows appropriate and transparent decision-making processes and that the interest of all stakeholders are protected. It works to achieve the goal of organisation and manages the relationship among stakeholders.
Corporate Governance term was first introduced in the Cadbury Committee Report 1992 by Financial Reporting Council, the London Stock Exchange and accountancy profession which described it as a system by which companies are directed and controlled. The entire mechanism of functioning of company and attempts to put in place a system of checks and balances between shareholders, directors, employees, auditors and management. The committee was created due to increase in lack of investors’ confidence in the honesty and accountability of listed companies.
The need for Corporate Governance was felt due to the increase in non- compliance of the standards relating to accountability and financial reporting which resulted as a huge loss to the investors also, it helps businesses remain financially strong by fostering a competitive environment. This fosters business expansion and improves the accountability structure, both of which significantly reduce risk. The company’s openness and disclosure are highly emphasised in corporate governance policy, and it is stated that if an organisation is transparent and adopts an appropriate corporate governance structure, the risk of past frauds that have affected corporations would be reduced.
As part of corporate governance, organisations are required to create a code of conduct that will demonstrate their commitment to operating ethically, upholding moral principles, and maintaining a positive reputation in both domestic and international markets.
Bad corporate governance creates a doubt on reliability and integrity of the company. Scams like satyam scam, 2G scam etc are all result of bad corporate governance. In the Satyam Scam, the Raju brothers proposed a merger with a business called “MAYTAS,” which is simply Satyam spelt backward. The meeting minutes revealed that the directors initially objected to the merger but ultimately approved it, and a significant amount of cash inflow was recorded on the balance sheet. The Raju brothers then declared themselves insolvent and bankrupt. Eventually, after it was discovered that the cash inflow was a fake and PwC was questioned regarding it, the Raju brothers were imprisoned and Satyam was acquired by Mahindra. After this scam, the need of corporate governance was felt badly and that to the need of good corporate governance and therefore, corporate governance became integral part of Companies Act, 2013
On the other side, good corporate governance establishes regulations that are transparent and manages the power dynamics between the Board of Directors and management. In general, businesses aim to have excellent corporate governance. For many shareholders, a corporation must exhibit strong corporate governance through consideration for the environment, moral behaviour, and ethical business practises in addition to being successful.
In India, the role of Corporate Governance emerged from the reports of various committees as there various benefits of the same-
It started from the report of Kumar Mangalam Birla committee report by Securities Exchange Board of India which formulated the concept of comprehensive procedure for corporation. Primary objective of the committee was to view corporate governance from the perspective of investors and shareholders and to prepare a code to suit the Indian corporation environment.
In 2003, Narayan Murthy Committee further improve the standards of corporate governance. Essential recommendation of the report were- 1) Audit Committee to mandatorily review the financial Statement, draft audit report etc, 2) Audit Committee members shall be financially literate, at least one of the member should have an expertise in financial management.
JJ Irani Committee Report of 2004 recommended on fixing the minimum directors for various classes of committees though the maximum number of directors can be at whims of company or Articles of Association of the concerned company.
CII Task Force report recommended to mandate the contract of appointment and renumeration to director and the constitution of Audit Committee.
Kota Committee report of 2017 recommended improving standards concerning corporate governance of listed companies, board evaluation practice, disclosure and transparency related issues and also, it addressed the issues related to the right of investors regarding voting and participation in general meeting.
Thus, Companies Act 2013, incorporated a separate section on Corporate governance that is to be included in Annual Reports of certain companies, with a detailed compliance Report on Corporate Governance. Also, SEBI Regulations were also amended, inserting clause 49 in Listing Agreement, to enforce compliance with Corporate Governance Standards.
The Companies Act of 2013 mandated corporations to establish the following committees to oversee the running and managing of the company’s operations in order to have strong corporate governance in India:
- Audit Committee,
- Nomination and Remuneration Committee,
- Stakeholder Relationship Committee, and
- Corporate Social Responsibility Committee.
Some of the benefits of Corporate Governance are-
1. Investor and shareholder relationship- For a business that needs an investor’s investment, good corporate governance processes and principles are crucial. It has been observed that companies in India raise capital at high share prices by giving investors a false impression of the company’s performance and profitability. Investors suffered greatly as a result of the companies’ poor governance because they used to perform extremely slowly after raising funds. Investors now invest in businesses that have solid corporate governance principles in place, follow them, and have a sound corporate governance structure. Corporate governance is therefore crucial to attracting investors and maintaining positive investor relations.
2. Investor Grievances- Corporate Governance increase investors satisfaction. The Kumar Mangalam committee on corporate governance found that Indian companies were not giving the needed information to investors in India in a timely manner enough attention. Although the Reserve Bank of India (RBI) and SEBI have provided certain steps to address the issue, it is up to the companies to resolve investor complaints and safeguard their investments by implementing excellent corporate governance policy, structure, or framework.
3. Global Perspective- Attracting foreign investment today heavily depends on how strictly corporate firms adhere to the fundamentals of corporate governance. The connection between corporate governance and flows of foreign investment has grown in significance in this era of globalisation, when quantitative constraints have been lifted and trade barriers have been eliminated.
4. Healthy Stock Market- Indian corporate governance practises are crucial for a company to have a strong stock market. A strong and active stock market is essential for investor protection. Therefore, it is crucial that a company has a strong corporate governance framework that prevents employees from engaging in insider trading, which is bad for any company’s stock market.
Indian Government wanted to establish a strong financial atmosphere and securities market with a regulator promoting the latest Corporate Governance standards. Therefore, in 1999 Parliament gave SEBI a statutory authority as the regulator whose aim is to curb malpractices such as lack of transparency in trading operations.
The objective for giving SEBI, a statutory authority was-
1) Protection of investors- protect the interest of investors and provide healthy environment.
2) Prevention of Malpractices
3) Fair and proper functioning- orderly functioning of capital market and keep a close check over the acts of financial intermediaries such a brokers etc.
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Author Details: Name- Navya Jain | College- University of Petroleum and Energy Studies | Year- 3rd year | Course- BA.LLB (Corporate Hons.)
