CORPORATE GOVERNANCE

Corporate Governance corresponds to the fair, transparent and ethical administration of a corporation giving maximum benefits to the shareholders.

Stakeholders in Corporate Governance-:

1.Company

2.Owners

3.Board Of Directors

4.Management

5.Employees

6.Suppliers

7.Customers.

Corporate governance is the system by which companies are directed and controlled.

Boards of directors are responsible for the governance of their companies.

The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the directors include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship.

The Board’s actions are subject to laws, regulations and the shareholders in general meeting.

Corporate Governance Initiatives 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).

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.

Why Corporate Governance?

?Corporate Governance and Code of corporate governance calls for ethical and accountable corporate administration.

The best practices of corporate governance are important not only for public or shareholders but also for the very existence of the company itself.

Adopting corporate governance will increase the value, sustainability and long-term profits.

Importance of corporate governance was highlighted at the time of Satyam Fraud and also when Kingfisher Airlines was making a loss.

Challenges of Corporate Governance?

• Conflict of Interest:?The challenge of managers potentially enriching themselves at the cost of shareholders e.g. recent case of former ICICI bank head Chanda Kochar approved a loan to Videocon for a quid pro quo deal for her husband.
• Weak Board:?Lack of diversity of experience and background represents a major area of weakness for these boards. There have been questions about board performing in the larger interests of the shareholders. In case of IL&FS, not a single red flag was raised by any board member.
• Separation of ownership and management:?In case of family-run companies, the separation of ownership and management remains a key challenge in majority of companies including some of India’s top ones.
• Independent directors:?Independent directors are partisan and are not able to check promoters unethical practices. Participation of at least one women Board of Directors is made compulsory in Companies Act 2013 but not implemented in true spirit.
• Executive Compensation:?Executive compensation is a contentious issue especially when subject to shareholder’s accountability. Executive compensation needs to stand the test of stakeholders' scrutiny.

Way Forward-:

Suggestions by Uday Kotak Panel-:

• Minimum 6 directors to be on board of listed entities; every listed entity to have at least 1 independent woman director
• More transparency on appointment of independent directors and should play a more active role on the boards.
• Audit Committee must review use of loans/adv/ investment by holding co in arm over Rs 100 crore.
• Diverse boards are better boards:?In this context, ‘diverse’ is all-encompassing, including gender, ethnicity, skills and experience.
• Robust risk management policies:?Adoption of effective and robust risk management policies for better decision making as it develops a deeper insight into the risk-reward trade-offs that all Corporations face.
• Effective governance infrastructure:?Policies and procedures which guide ethical behaviour should form the base of any organizational behaviour. Ensure separation of the line of responsibility between board and management.
• Evaluation of the Board’s performance:?The Board should consider addressing weaknesses uncovered in board evaluations, enhancing their governance processes.
• Communication:?Facilitating shareholder communication with the board is key. There is a need to provide a contact person with whom shareholders may discuss any issue.