Corporate Governance

• What exactly is Corporate governance? Before going deep into the topic, let’s first understand the structure of a company or corporation. There are a few entities which revolve around most companies and those include owners (shareholders), the board of directors, management and the stakeholders such as employees, suppliers, customers as well as the public at large.
• A good company should not only make a profit for the founders or owners but should benefit all stakeholders. Interests of ordinary shareholders should never be compromised. Shareholders are the true owners of the corporation and all governance policies of a corporation should uphold this fact.
• Corporate governance is the ethical practice of corporate administration where the interests of shareholders and other stake holders are always given high priority.
• Corporate governance is a concept which revolves around the appropriate management and control of a company.
• It includes the rules relating to the power relations between owners, the board of directors, management and the stakeholders such as employees, suppliers, customers as well as the public at large.
• Sustained growth of any organization requires the cooperation of all stakeholders, which requires adherence to the best corporate governance practices.
• In this regard, the management needs to act as trustees of the shareholders at large and prevent asymmetry of benefits between various sections of shareholders, especially between the owner-managers and the rest of the shareholders.
• In general, corporate governance corresponds to the fair, transparent and ethical administration of a corporation giving maximum benefits to the shareholders.
• Ethics is at the core of corporate governance, and management must reflect accountability for their actions on the global community scale.

  

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).

Understanding Corporate Governance:

• Just like the governance of a country, the governance of a corporation is also not an easy matter. Almost all modern corporations work transparently; there will be elections to the top posts. Shareholders elect the Board of Directors. Board of Directors appoint the officers (management) for day to day administration. They will run the company on behalf of shareholders.
• Commitment to the highest standards of ethics and integrity should be an uncompromising principle of every corporation. The objective of establishing a good governance structure is to foster entrepreneurial drive within a system of accountability to ensure maximum returns to all stakeholders.
• While it is debatable whether consensus can be reached on what is ‘Best Practice’ in terms of Corporate Governance, considering the structure, complexity and diversity of organizations. However, as a responsible corporate citizen, we make sure that we adhere to corporate best practices at all times.
• Corporate governance is based on principles such as conducting the business with all integrity and fairness, being transparent with regard to all transactions, making all the necessary disclosures and decisions, complying with all the laws of the land, accountability and responsibility towards the stakeholders and commitment to conducting business in an ethical manner.
• Another point which is highlighted in the SEBI report on corporate governance is the need for those in control to be able to distinguish between what are personal and corporate funds while managing a company.

National Foundation for Corporate Governance (NFCG): It was set up in the year 2003 by the Ministry of Corporate Affairs (MCA), in partnership with Confederation of Indian Industry (CII), Institute of Company Secretaries of India (ICSI) and Institute of Chartered Accountants of India (ICAI) to promote good Corporate Governance practices both at the level of individual corporate and Industry as a whole. In the year 2010, Institute of Cost Accountants of India (ICAI) and National Stock Exchange (NSE) and in 2013 Indian Institute of Corporate Affairs (IICA) were included in NFCG as Trustees. Vision

• Be the Key Facilitator and Reference Point for highest standards of Corporate Governance in India.

Mission

• To foster a culture of good governance, voluntary compliance and facilitate effective participation of different stakeholders;
• To catalyse capacity building in new emerging areas of Corporate Governance.
• To further research, scholarship, and education in corporate governance in India;
• To create a framework of best practices, structure, processes and ethics

Role of Corporate Governance in banks: Bank and Financial Institutions are the backbones of the economic and financial system of any country. Banks are the richest source of economic wealth of the company any nation’s progress report is depicted through healthy and sound functioning of the banking system of the country. To strengthen the banking practices in India, RBI plays a leading role in formulating and implementing corporate governance norms for banking regime in India sector. Banking structure is the lifeblood of an economy to survive in this globalized scenario. Key features of corporate governance in Companies Act, 2013:

• There has been a sea change in companies Act, 2013 which has waved its way from principle of corporate governance practices as the new key change in the act. The Companies Act, 2013 has taken a foot forward from SEBI’s Clause 49 of listing agreement by introducing provisions in the companies act 2013 which promotes corporate governorship code in such a manner that it will no longer be restricted to only listed public companies but also unlisted public companies. Companies Act, 2013 lays greater emphasis on corporate governance as it clearly provides the rules and regulations for the same.

Some of the provisions of the Companies Act, 2013 are discussed below: Board of Directors Board of directors is the decision making body of any company. It is the duty of the board to comply with all legal rules and regulations. So it is very important that a company constitutes a board of directors as per the provisions of Companies Act, 2103. Composition of Board- Section 149 of the Companies Act, 2013 provides for appointment of minimum three directors in a public company and two directors in a private company. A board can have a maximum of fifteen directors but can appoint more directors subject to special approval. Women Director- It is mandatory to appoint a women director in the following classes of company: Listed company:

• Public unlisted company having paid-up share capital of one hundred crore rupees or more, or having a turnover of 300 crore or more.
• Resident Director- Section 149(3) mandates that every company will have one director who has stayed in India for a period of not less than 182 days.
• Independent Director- Independent directors are impartial and bring expertise to the board. They play an important role in resolving conflicts among shareholders and the company. Section 149(6) provides for the qualifications for appointing an independent director in a public company. As per Companies Act, 2013 public listed company shall have at least one-third of directors as independent directors and public unlisted company will have two directors if they meet the following criteria:
• Public companies having a share capital of 10 crore or more;
• Public companies having a turnover of 100 crore or more;
• Public companies having outstanding loans, debentures and deposits of more than 50 crores.
• According to section 134 of Companies Act, 2013 the director has to give a detailed financial report which includes the director’s responsibility statement.
• This provision has been enacted to make directors accountable for their actions.

Corporate Social Responsibility:

• The concept of CSR rests on the good corporate citizenship where corporate contributions to the societal growth as a part of their corporate responsibility for utilizing the resources of the society for their productive use.
• Companies Act, 2013 gives a lot of importance to ethical corporate structure by penalizing the officer in default if they do not comply with the same.
• Independent directors also play a vital role in having effective corporate governance by helping the company formulate policies and representing the shareholders’ grievances.

Conclusion: The Companies Act, 2013 empowers independent directors with proper checks and balances so that such extensive powers are not exercised in an unauthorized manner but in a rational and accountable way. The changes are a step forward in the right direction to smoothly run the management and affairs of the companies in the interest of stakeholders. These are all welcome changes in the globalised corporate world of today and they will strengthen the core corporate machinery by instilling strong corporate governance norms in a company leading to economic efficiency and higher ethical standards which will always inspire the company’s management to work in the direction to uphold its goals of maximization of wealth of stakeholders backed with good corporate repute.