Evolution of Corporate Governance in India
Corporate governance is all about managing a company by balancing the interest of all stake holders and abiding to the laws of the land. For a company, there are many stakeholders. Some of the major stake holders in a business are shareholders, employees, customers, creditors, suppliers and society in general. Transparency and accountability are thus crucial in corporate governance practices.
Corporate Governance and Board of Directors
Corporate governance mainly refers to the management of a company. Unlike in a sole proprietorship firm or partnership firm, the owners do no play active role in the management of a company. In a company the ownership is separated from management and the owners do not play active role in the day to day affairs of the company. The policy decisions in a company are taken by the Board of Directors and management of the company is carried out by an established corporate management structure.
Ensuring that the management team runs the show by safeguarding the interest of the owners and also protecting the interest of all those who happen to associate with the company is what good corporate governance is all about. The responsibility of ensuring corporate governance in a company mainly rests with the Board of Directors and it has to balance social, regulatory and market requirements through fair, efficient and transparent administration.
Clause 49 in the Companies Act, 2013 and Listing Obligations and Disclosure Requirement Regulations 2015 of SEBI, are the governing principles for corporate governance for Indian listed companies. The companies agree to the principles as part of the listing agreement with the stock exchanges. Corporate governance ensures that companies have appropriate decision-making processes and controls in place to safeguard the interest of all stakeholders.
Importance of Corporate Governance in India
In India, many businesses originated as family owned businesses in which family members were in managerial positions. In such a business, there was not much distinction between the interests of the company and business. With the evolution of equity markets, many such business groups or houses got listed. They continued to follow the same management style. The promoters continued to wield their influence on policy decisions and often the interests of public shareholders got ignored. Members of family occupying membership in boards and management with lavish benefits and salary, loans to group companies, unjustifiable business deals with associates, risky mergers and acquisitions etc were some of the unhealthy practices followed by such companies. As these practices were detrimental to the growth of stock market and to the country itself, government tried to fix bad practices through rules and laws. Accordingly, as per the norms of Companies Act 1956, company Boards were required to obtain Central Government permission for certain decisions like remuneration beyond a threshold, loans to directors etc. Companies Act also stipulated shareholder approval for appointment of relatives in Boards etc.
As these controls proved ineffective, SEBI constituted a series of committees to suggest suitable and elaborate corporate governance norms for Indian companies. Kumar Mangalam Birla Committee in 2000, Narayana Murthy Committee in 2003, Adi Godrej Committee in 2012 and Uday Kotak Committee in 2017, were the committees entrusted with the tasks of suggesting improvements in corporate governance norms for Indian companies. Companies Act and SEBI guidelines were revised in tune with such recommendations to improve the overall governance practice of companies.
Major conditions to be fulfilled as part of Corporate Governance
As of now, Indian companies are required to satisfy a number of conditions as part of corporate governance framework. Number of independent directors not less than one-third of the Board strength, presence of lady directors, disclosure of related party transactions, appointment audit and nomination companies, adherence to risk management practices, ensuring Internal Financial Controls, certification by CEO and CFO on the governance norms, protection of interest of minority shareholders, corporate social responsibility (CSR) etc are some of the major principles of corporate governance.
Corporate Governance and stakeholders
Shareholders are the real owners of a company. They are the direct losers if a company runs into to trouble. Exorbitant remuneration to key persons, unjustifiable valuations during acquisitions and mergers, siphoning of funds, improper decision making etc directly affect the investment of shareholders. At the same time, top quality, efficient and ethical decision-making contributes towards sustainable businesses and long-term value creation for shareholders. .
A company becoming bankrupt has bearing on all stakeholders of the company. Company will not be able to meet its obligation to their suppliers and lenders, employees will be either retrenched or their salaries will be reduced, customers will be deprived of after sale services and government will loose income from various activities of the company. Loose governance and lack of government controls will deter investors from fresh investment in companies and for foreign investors the country will become bad preference. Non-adherence to corporate governance by companies will jeopardize the growth prospects of the country itself.
