Corporate governance is the system of rules, processes, and laws that define how a business is operated, regulated, and controlled. It takes into account the interests of all stakeholders - shareholders, customers, suppliers, government regulators, and management - by considering both internal and external factors.
As an investor, you want to select companies that practice good corporate governance in the hope of avoiding losses and other negative consequences such as bankruptcy.
To assess if a company is upholding good corporate governance, one can research various aspects such as:
- Disclosure practices
- Executive compensation structure?
- Risk management (the checks and balances on decision-making)
- Policies and procedures for reconciling conflicts of interest?
- The members of the board of directors?
- Contractual and social obligations?
- Complaints received from shareholders and how they were addressed
- Audits (the frequency of internal and external audits and how issues have been handled)
For example, PepsiCo has consistently practiced good corporate governance and updated it often. The 2020 proxy statement included input from investors on board composition, strategy, ethics, human capital management, executive compensation, and shareholder/ stakeholder engagement plus a graphic of the leadership structure.
It showed a combined chair and CEO along with an independent presiding director and a link between the company's "Winning With Purpose" vision and changes to the executive compensation program.
Policy documents are written declarations of a government's intentions, goals, and principles for the implementation of its policies. These documents outline the government's stance on various issues, including economic and social policies. In India, policy documents are released by various government bodies, including the Ministry of Finance, RBI, and SEBI.
Let’s see what is the importance of Policy Documents for Investors:
- Policy documents shape India's investment climate, offering insights into govt. economic policies and their effect on the stock market and other investments. Investors must pay attention to Policy documents to gauge potential risks/opportunities.
- Investors are often interested in policies that are popular among the public, as they are more likely to be implemented and have a positive impact on the economy. For example, policies that promote infrastructure development or job creation can attract investors' attention. Similarly, policies that provide incentives for specific industries or sectors can create investment opportunities for investors.
- Policy documents often contain financial information that can be crucial for investors. This information can include GDP growth rates, inflation projections, and fiscal deficits, among others. Investors can use this information to analyze the overall economic health of the country and make informed investment decisions.
- Analyze policy documents for details that may affect investments: changes in tax/subsidy/regulatory laws, infrastructure development & social welfare plans can provide potential opportunities.
In India, policy documents are essential for companies to ensure compliance with the country's legal and regulatory frameworks. The Companies Act, 2013, and the Securities and Exchange Board of India (SEBI) regulations require companies to have policies on various aspects like:
- Board Composition Policy: This policy outlines the qualifications, experience, and expertise required for board members and the criteria for their appointment/removal. SEBI in India requires listed companies to have at least one woman director on their boards.
- Risk Management Policy: Outlines approach to identifying, assessing, and managing risks across the organization; defines roles/responsibilities of board, management, and stakeholders in the risk mgmt process.
- Whistleblower Policy: Establishes a safe process for employees to report unethical/illegal activities, w/ investigation & resolution of complaints & confidentiality of whistleblowers.
- Code of Conduct Policy: This policy document outlines ethical standards and values all company personnel must follow, including conflicts of interest, anti-bribery/corruption, and insider trading.
- Environmental and Social Responsibility Policy: The company is committed to environmental & social sustainability, reducing its carbon footprint & promoting social development.
Policy documents are critical for investors in India. They provide important insights into the government's economic policies, financial details, and investment opportunities. Investors should pay close attention to policy documents and analyze them thoroughly to make informed investment decisions.
