What is corporate governance?

The set of rules, regulations, policies and practices that determine smooth functioning of a Company is defined as Corporate Governance. Instilling accountability and ethics within a corporate are the primary objectives of Corporate Governance. A body Corporate, in order to sustain and develop connection with its customers, clients or users has to build a structure where distinct roles are assigned to different people. Whenever people work together, they need certain level of discipline and authoritative force for which these rules, regulations and practices are developed. Corporates are made of people and hence the rules made to organize them becomes a part of Corporate Governance.   

Good corporate governance is a mode to develop trust and confidence towards and within a company. It is achieved by balancing interests of shareholders, employees, distributors, workers and customer, community and nation at large. It assures improved financial performance and long-term sustainability. Key aspects of corporate governance include:

a. Composition and independence of the board of directors

b. Role of management

c. Company’s ethics and values

d. Transparency in financial reporting.

e. protection of shareholder rights.

Effective corporate governance requires a commitment to continuous improvement, regular evaluation of policies and practices, and a willingness to adapt to changing circumstances and stakeholder expectations. Many countries have established regulations and guidelines for corporate governance, and companies may also choose to adopt voluntary codes of conduct and best practices.

Evolution of corporate governance in India?

Corporate governance became a major topic of discussion in the early 1990s, when the country liberalized its economy and opened up to foreign investment in 1990s. The Securities and Exchange Board of India (SEBI), the country’s primary regulator of the securities markets, played a key role in promoting good corporate governance practices.

In 1999, SEBI formed a committee on corporate governance under the chairmanship of Kumar Mangalam Birla, the chairman of the Aditya Birla Group, one of India’s largest business conglomerates. The Birla Committee’s recommendations formed the basis of the first corporate governance code for Indian companies, known as the ‘Clause 49’ of the Listing Agreement.

CLAUSE 49 OF THE LISTING AGREEMENT

The Clause 49 code, introduced in 2000, required listed companies to have a minimum number of independent directors on their boards, establish audit committees, and disclose more information about their governance practices to shareholders. The code has since been revised several times, with the most recent version introduced in 2018, which requires stricter disclosure norms, enhances the role of independent directors and strengthens the whistleblower mechanism.

In addition to the Clause 49 code, SEBI has also introduced several other regulations and guidelines aimed at promoting.

BOARD OF DIRECTORS IN CORPORATE GOVERNANCE

The board of directors is a key component of corporate governance in any organization. The board is responsible for overseeing the management of the company and ensuring that its operations are conducted in a transparent and ethical manner. The board is also responsible for setting the strategic direction of the company and ensuring that it is aligned with the interests of all stakeholders.

In India, the Companies Act, 2013 defines the role and responsibilities of the board of directors. According to the Act, the board is responsible for:

Fiduciary duty: The board has a fiduciary duty to act in the best interests of the company and its stakeholders. This includes exercising due diligence and care while making decisions and ensuring that the company complies with all applicable laws and regulations.

Strategic planning: The board is responsible for setting the strategic direction of the company and ensuring that it is aligned with the long-term interests of all stakeholders.

Oversight of management: The board is responsible for overseeing the management of the company and ensuring that its operations are conducted in a transparent and ethical manner.

Risk management: The board is responsible for identifying and managing the risks faced by the company, including financial, operational, and reputational risks.

Financial reporting: The board is responsible for ensuring that the company’s financial statements are accurate and complete and that they comply with all applicable accounting standards.

Board composition and succession planning: The board is responsible for ensuring that a corporate has an appropriate mix of skills and expertise to effectively oversee the management of the company. The board is also responsible for planning for the succession of key personnel, including the CEO.

In India, the board of directors is required to have at least one-third of its members as independent directors. Independent directors are appointed for a maximum of two terms of five years each and are responsible for ensuring that the company’s operations are conducted in a transparent and ethical manner. The independent directors play a crucial role in ensuring that the interests of all stakeholders are protected and that the board operates in a fair and impartial manner.

LEGAL AND REGULATORY FRAMEWORK OF CORPORATE GOVERNANCE IN INDIA

In India, the legal and regulatory framework for corporate governance includes various laws, regulations, and guidelines aimed at promoting transparency, accountability, and good governance practices in companies. Some of the key components of this framework are:

1. Companies Act, 2013: The Companies Act is the primary legislation governing the incorporation, management, and operation of companies in India. It sets out the duties and responsibilities of company directors and other officers, and establishes the legal framework for corporate governance in the country.
2. Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015: This regulation emphasizes on strengthening the independent directors system, increasing the role of audit committees, enhancing disclosure norms and encouraging responsible voting by institutional investors.
3. Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015: This regulation emphasizes on strengthening the independent directors system, increasing the role of audit committees, enhancing disclosure norms and encouraging responsible voting by institutional investors.
4. Reserve Bank of India (RBI) guidelines: The RBI has issued guidelines for corporate governance in the banking sector, which include requirements for the composition of boards, the establishment of audit committees, and the disclosure of information to stakeholders.
5. Insolvency and Bankruptcy Code, 2016: This code aims at promoting a transparent and efficient insolvency and bankruptcy regime in India, which further strengthens the corporate governance practices.

Overall, the legal and regulatory framework for corporate governance in India is constantly evolving, with new laws, regulations, and guidelines being introduced to address emerging issues and promote best practices in the corporate sector.

INSOLVENCY AND ITS IMPACT ON CORPORATE GOVERNANCE

The IBC also provides for the appointment of an independent director to the board of the company during the insolvency resolution process. The independent director is responsible for ensuring that the company’s corporate governance practices are in line with the requirements of the IBC and that the interests of all stakeholders are protected.

Overall, the IBC has had a significant impact on corporate governance practices in India by promoting transparency and accountability in the insolvency resolution process. The appointment of a resolution professional and an independent director has strengthened the governance framework of companies in distress, ensuring that their affairs are managed efficiently and effectively during the insolvency resolution process.

Second stage of corporate governance?  Post Satyam scam

India’s corporate community got a shock after, Jan 2009 with damaging revelations about colossal fraud and board failures in the financials of Satyam .It can also be considered as  Satyam scam worked as a catalyst for Government of India to improve corporate governance, accountability, disclosures, and enforcement mechanisms. Industry reacted shortly after information of the scandal broke, the CII began investigating the corporate governance issues arising out of the Satyam scandal.  corporate governance and Ethics Committees were formed by industry groups to study the impact and lessons of the scandal.

CONCLUSION

Corporate governance plays a critical role in ensuring that companies operate in a transparent and ethical manner. In India, there are several legal and regulatory frameworks in place to promote good corporate governance practices, including the Companies Act, 2013, and the SEBI regulations. These frameworks have helped to establish a governance structure that promotes accountability, transparency, and fairness in the management of companies.

The board of directors is a key component of corporate governance and is responsible for overseeing the management of the company and ensuring that its operations are conducted in a transparent and ethical manner. The appointment of independent directors to the board has strengthened the governance framework and ensured that the interests of all stakeholders are protected.