Corporate Governance

December 30, 2022 3 Mins Read
295 Views

Corporate Governance Significance, Issues, and Recommendations

Corporate Governance

Context: Chanda Kochhar, the former CEO of ICICI Bank, is an example of the negative consequences of greed in business. The CBI has accused the bank of approving a loan of INR 3,250 crore to Videocon Group, contrary to regulatory guidelines and the bank’s own policies.

What is Corporate Governance?

It refers to a system, process, and principles that ensure that the company is governed in the best interest of all stakeholders. It provides the structure through which the company’s objectives are set and the means of attaining those objectives and monitoring the performance.

Significance of Corporate Governance

Good Governance benefits not only the company but also the environment around it in the following way:

  • Premium
    • Well-governed companies across the world command a premium of anywhere between 10 to 40% more than they’re not so well governed counterparts.
  • Cover up the weakness of the country’s corporate laws
    • Good firm-level governance often makes up for weaknesses in a country’s corporate laws or the enforcement of such laws as such organizations uphold the values such as integrity, fairness, transparency, and honesty.
  • Corporate Sustainability
    • Corporations that are run in the best interests of all the stakeholders enjoy trust and confidence in the organization and provide long-term sustainability.
  • Foreign Investment
    • Good corporate practices based on transparency and sound business principles attract foreign investment.
  • Regulate risks and opportunities for corruption
    • Often frauds and scandals within a company become more likely when directors and senior management do not have to comply with a formal governance code.
  • Curbing nepotism
    • Good corporate practices curb favoritism and nepotism while valuing merit in appointments.
  • Internal checks and balances
    • Good corporate practices better internal checks and balances to curb mismanagement, conflict of interest, and misuse of company resources.

Also Read: Investigating India’s Missing Women: An In-Depth Essay

Steps were taken to promote ethical corporate governance in India

  • Companies Act, 2013
    • It regulates the incorporation, formulation, and functioning of companies in India. It makes comprehensive provisions to govern all listed and unlisted companies in India. It empowers shareholders and highlights higher value for corporate governance.
  • Securities Contract (Regulation) Act, 1956
    • The act aims to prevent undesirable transactions in securities by regulating business dealings.
  • Competition Commission of India
    • CCI was established to promote and sustain competition culture and inspire businesses to be fair, innovative, and competitive. It aims to curb monopolistic tendencies in the working of the market.
  • National Companies Law Tribunal
    • NCLT established under the Companies Act, 2013, it deals with the corporate disputes of civil nature . It also the adjudicating authority under the Insolvency and Bankruptcy Code.
  • Accounting standards issued by the institute of Charted Accountants of India
    • These standards bring much needed structure to the financial reporting and mandates disclosure of accounting policies, statements, cash-flow, construction contracts, borrowing cost etc.

Recommendation by various committees

  • Kumar Mangalam Birla Committee Report (2000)
    • Mandatory recommendations for listed companies with paid up share capital of 3 crore and above
      • Audit committee should contain 3 independent directors.
      • Setting up remuneration committee.
      • Composition of Board of Directors to be optimum of executive and non-executive directors.
      • At least 4 meetings of Board in a year.
  • Narayan Murti Committee Recommendations (2002)
    • It focused on responsibility of audit committee, quality of financial disclosure, requiring board to assess and disclose business risk in the company’s annual report.
  • Naresh Chandra Committee Recommendations (2002)
    • It covers auditor-company relationship, rotation of statutory audit firms/partners, procedure for appointment of auditors and determination of audit fees, fairs statements of financial affairs of companies.
  • Uday Kotak Committee Recommendations
    • Capping the maximum number of directorships for a person to eight.
    • Separation of office of chairmanship and CEO/MD of the top 500 listed companies.
    • SEBI should have power to grant immunity to whistle blowers.
    • Public sector companies should be governed by listing regulations, not by nodal ministries.

Tags: