This article is presented by Himani Sharma, CS Finalist from Institute of Company Secretaries of India
Concept of Corporate Governance
Corporate or a Corporation is derived from the Latin term “corpus” which means a “body” and the root of the word Governance is from “gubernate” which means to steer.
When combined corporate governance means a set of systems procedures, policies, practices, standards put in place by a corporate to ensure that relationship with various stakeholders is maintained in a transparent and honest manner.
Various definitions of Corporate Governance
Corporate governance in India is the application of best management practices, compliance of law in true letter and spirit and adherence to ethical standards for more effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders. (ICSI)
Corporate governance deals with Laws, procedures, practices, and implicit rules that determine a company’s ability to make informed managerial decisions vis-à-vis its claimants, in particular, its shareholders, creditors, customers, the state and employees. (Confederation of Indian Industry)
Good corporate governance is about “intellectual honesty” and not just sticking to rules and regulations, capital flowed towards companies that practiced this type of good governance. (Mervyn King)
Need for Corporate Governance in India
Corporate governance is needed to create a corporate culture of transparency, accountability, and disclosure. It refers to compliance with all the moral and ethical values, legal framework voluntarily adopted practices.
Benefits of Corporate Governance
- Reduced risk of corporate crisis and scandals
- Corporate performance
- Better access to the global market
- Enhanced investor trust
- Combating corruption
- Easy finance from institutions
Elements of Good Corporate Governance
- Role and powers of the board
good governance is decisively the manifestation of personal beliefs and values which configure the organizational values, beliefs, and actions of its board. the board as the main functionary is primarily responsible to ensure value creation for its stakeholder.
- Management environment
management environment includes setting up of clear objectives and appropriate ethical framework, establishing due process, providing full transparency and clear enunciation of responsibility and accountability, implementing sound business planning encouraging business risk assessment, having right people and right skill for the jobs, establishing clear boundaries for acceptable behavior, establishing performance evaluation measures and evaluating performance and sufficiently Recognising individual and group contribution.
- Board skills
to be able to undertake its function efficiently and effectively, the board must possess the necessary blend of qualities, skills, knowledge, and experience.
clear and unambiguous legislation and regulations are fundamental to effective corporate governance. Legislation that requires continuing legal interpretation or it’s difficult to interpret on day to day basis can be subject to deliberate manipulation or inadvertent misinterpretation.
- Board induction and training
Directors must have a broad understanding of the area operation of the company’s business, corporate strategy, and challenges being faced by the board.
- Code of conduct
it is essential that the organizations explicitly prescribed norms of ethical practices and code of conduct are communicated to all stakeholders and are clearly understood and followed by each member of the organization.
- Board meetings
directors must devote sufficient time and give due attention to meet their obligations. Attending board meetings regularly and preparing thoroughly before entering the boardroom increases the quality of interaction at board meetings.
Corporate Governance Developments in India
The initiatives taken by the government in 1991, aimed at economic liberalization and globalization of the domestic economy, led India to initiate reform processes in order to suitably respond to the developments taking place the world over. On account of 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 and Exchange Board of India (SEBI) constituted committees to recommend initiatives in corporate governance.
Confederation of Indian Industry (CII) – Desirable corporate governance
CII took a special initiative on corporate governance, the first institution initiative in the Indian industry. The objective was to develop and promote a code for corporate governance to be adopted And followed by Indian companies, whether in the public sector or the private sector, banks, or financial institutions, all of which are corporate entities. the final draught of the said code was widely circulated in 1997. In April 1998, the code was released. it was called desirable corporate governance.
This code gave Many recommendations which governed all the corporate entities.
Kumar Mangalam Birla Committee Report
The Securities and Exchange Board of India (SEBI) Had set up a committee under the chairmanship of Kumar Mangalam Birla to promote and raise standards of corporate governance.
The report of the committee was the first formal and comprehensive attempt to evolve a code of corporate governance, in the context of prevailing conditions of governance in Indian companies, as well as the state of capital markets at that time.
The recommendations of the report led to the inclusion of Clause 49 in the listing agreement in the year 2000. (NOW LODR-2015)
These recommendations, aimed at improving the standards of corporate governance in India, are divided into mandatory and nonmandatory recommendations. The set recommendations have been made applicable to all listed companies with the paid-up capital of ₹3 Crores And above or net worth of ₹25 crores Or more at any time in the history of the company.
N.R. Narayana Murthy Committee Report on Corporate Governance
In the ears 2002, SEBI analyzed the statistics of compliance with the Clause 49 (Now LODR 2015) By listed companies and felt that there was a need to look beyond the mere systems and procedures if corporate governance in India was to be made effective in protecting the interests of investors. SEBI, therefore, constituted a committee under the chairmanship of Shri N.R. Narayana Murthy, for reviewing the implementation of the corporate governance code by listed companies and for the issue of revised Clause 49 Based on its recommendations.
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