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Corporate Governance | ETHICS

What is Corporate Governance? | Corporate Governance | ETHICS

  • Corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled.
  • Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the community.

Principles of Corporate Governance

Corporate governance has evolved around certain key principles, which form the base of rules and guidelines set for the corporate.

  • Transparency: Disclosure of the relevant information about corporate in timely and accurate manner is necessary. It helps stakeholder to know their rights and day to day activity of the corporate.
  • Accountability: It ensures the liability of the person who takes decision for the interest of the others. Hence persons like managers, chairmen, directors and other officers should be accountable to other stakeholders of the corporate.
  • Independence: Independence of top manager is important for smooth functioning of the corporate. Board of Director must work without the interference of any interested party in the corporate.

Guidelines for Corporate Governance At International Level

  • Cadbury Committee Report-The Financial Aspects of Corporate Governance (1992).
  • Greenbury Committee Report on Directors’ Remuneration (1995).
  • Hampel Committee Report on Corporate Governance (1998).
  • The Combined Code, Principles of Good Governance and Code of Best Practice, London Stock Exchange (1998).
  • CalPERS’ Global Principles of Accountable Corporate Governance (1999).
  • Blue Ribbon Report (1999).
  • King Committee On Corporate Governance (2002).
  • Sarbanes Oxley Act (2002).
  • Higgs Report: Review of the role and effectiveness of non-executive directors (2003).
  • The Combined Code on Corporate Governance (2003).
  • ASX Corporate Governance Council Report (2003).
  • OECD Principles of Corporate Governance (2004).
  • The Combined Code on Corporate Governance (2006).
  • UNCTAD Guidance on Good Practices in Corporate Governance Disclosure (2006).
  • The Combined Code on Corporate Governance (2008).

The need for Corporate Governance in India

  • A corporate has a lot of shareholders with different attitudes towards corporate affairs, corporate governance protects the shareholder democracy by implementing it through its Code of Conduct.
  • Large corporate investors are becoming a challenge to the management of the company because they are influencing the decision of the company. Corporate governance set the code to deal with such situations.
  • Corporate governance is necessary to build public confidence in the corporation which was shaken due to numerous corporate fraud in recent years. It is important for reviving the confidence of investors.
  • Society having greater expectations from corporate, they expect that corporates take care of the environment, pollution, quality of goods and services, sustainable development etc. code to conduct corporate is important to fulfil all these expectations. Takeovers of the corporate entity created lots of problems in the past. It affects the right of various stakeholders in the company. This factor also pushes the need of corporate governance in the country.
  • 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.
  • The huge flow of international capital in Indian companies are also affecting the management of Indian Corporates which require a code of corporate conduct.

Corporate Governance Initiatives in India

  • In India, corporate governance initiatives have been undertaken by the Ministry of of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI).
  • The first formal regulatory framework for listed companies specifically for corporate governance was established by the SEBI in February 2000, following the recommendations of Kumarmangalam Birla Committee Report. It was enshrined as Clause 49 of the Listing Agreement.
  • Further, SEBI is maintaining the standards of corporate governance through other laws like the Securities Contracts (Regulation) Act, 1956; Securities and Exchange Board of India Act, 1992; and Depositories Act, 1996.
  • The Ministry of Corporate Affairs had appointed a Naresh Chandra Committee on Corporate Audit and Governance in 2002 in order to examine various corporate governance issues. It made recommendations in two key aspects of corporate governance: financial and non-financial disclosures: an independent auditing and board oversight of management. It is making all efforts to bring transparency to the structure of corporate governance through the enactment of Companies Act and its amendments.
  • India’s SEBI Committee on Corporate Governance defines corporate governance as the “acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company.”
  • It has been suggested that the Indian approach is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution, but this conceptualization of corporate objectives is also prevalent in Anglo-American and most other jurisdictions.
  • With the goal of promoting better corporate governance practices in India, the Ministry of Corporate Affairs, Government of India, has set up National Foundation for Corporate Governance (NFCG) in partnership with Confederation of Indian Industry (CII), Institute of Company Secretaries of India (ICSI) and Institute of Chartered Accountants of India (ICAI).

Issues in Corporate Governance in India

Although there exist many issues in the field of Corporate Governance especially in India, an effort has been made to highlight only the major ones here:

  • Independent Directors: Independent directors are appointed for a reason which does not seem to be fulfilled in the current scenario. Even after SEBI guidelines being issued to the corporates, for the appointment of an audit committee or giving of a comprehensive definition of the independent directors, the actual situation appears to be worse.
  • Board performance: The requirement of at least one woman director is necessary, and also the balance of executive and non-executive directors are not maintained. Evaluation is not performed from time to time and transparency is lost somewhere. The performance is not result oriented. These requirements are not always met with.
  • Risk Management: The risk management techniques are to be mandatorily be undertaken by the directors as per the Company Laws and they have to mention in their report to shareholders as well. This is not being done in the most sincere manners required for the job.
  • Accountability to Stakeholders: The accountability is not restricted to that of the shareholders or the company, it is for the society at large and also the environment. The directors are not to keep in mind their own interests but also the interests of the community.
  • Corporate Social Responsibility (CSR): Being among the few countries to legislate on CSR, it is mandatory for companies to invest minimum 2% of the profits in the last 3 years for CSR activities. Otherwise proper reasons should be mentioned in the reports in case of failure. The companies seem to be reluctant towards making such investments.
  • Privacy and Data Protection: This is an important governance issue. Cyber security has evolved to be the most important aspect of modern governance. Good governance can only be achieved once the directors and other leaders in the company are well known about the hazards in this field.

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