THIS ARTICLE WAS WRITTEN BY AVNI SHARMA, A STUDENT OF GGSIP UNIVERSITY, NEW DELHI.
Entities accumulate their capital from large number of stakeholders based in domestic and international markets. These investors primarily expect two things i.e. protection of capital and return on capital which is higher than the cost of capital. Investors reflect faith in management’s ability to perform and to comply with their expectation. Hence, it is the responsibility of the entity’s governing body to ensure that they act in their best interests at all times and adopt good governance practices to run the entity.
Need for its implementation
The last few years have seen corporate collapse across the globe as a result of inadequate focus on corporate governance. These events have resulted in greater regulations coming into force. Evidence suggests that companies lacking robust governance practices have a significant risk attached to them when competing for scarce capital in the public markets. The aim of “Good Corporate Governance” is to enhance the long term value of the company for its stakeholders and all other partners. It integrates all participants involved in a process, be it economic or social.
Pillars and Elements of Corporate Governance
Accountability combined with fairness, transparency, independence, good board practices act as a guidance force of what is expected by the shareholders.
Companies should follow internal control procedures which include establishment of Independent Audit Committee, risk management framework, disaster recovery systems and robust management information systems tools for ensuring compliance with laws and regulations. Shareholders’ rights should be defined very clearly. Well organized shareholder meetings should be conducted to make the former feel part of company’s progress.
Ensuring effective corporate governance
Good governance has to emerge from the tone set by top management, committed directors and executives. If the senior management is not personally committed to high ethical standards, no amount of board process or corporate compliance programs will serve their true purpose. Corporate governance must serve as a means to organize, structure and to establish an efficient prioritization and balancing of interests. Good corporate governance helps in the reconciliation of otherwise diverging interests. Diversity of board members is also important to avoid stagnant working. There must also be a gender diversity. There is a need to adopt a more professional, independent and transparent approach to appointing independent directors.
Risk management and corporate governance principles areinterrelated. Expertise in this area is a requirement. An entity response to a crisis will have a significant bearing on its short term and long-term performance.
Legal framework in India
The Companies Act, 2013 introduced some progressive and transparent processes which benefit stakeholders, directors as well as management of companies. The Act has greater emphasis on corporate governance through the board processes.It includes:
- Introduction of changes to the composition of board of directors.
- Listed companies are required to appoint independent directors and at least one woman director on their boards.
- Maximum permissible directors cannot exceed in a public limited company. It can only be done with the approval of the shareholders after passing a special resolution.
- Nominee director should no longer be treated as independent directors.
- Act in ‘good faith’ in the best interest of stakeholders
- Avoid ‘conflict of interests’
- Avoid ‘undue gain’ personally
- Exercise ‘diligence’ and ‘reasonable care’ on duty
As a part of Audit and other committees
- Monitoring effectiveness of auditors
- Approving related party transactions
- Evaluation of internal financial controls and risk management system.
- To undergo annual performance evaluation
- Boards are finding it difficult to deal with the numerous changes brought in by the Companies Act and the SEBI regulations. Companies and governance experts have been placing compliance steps into two categories: what must be done and what can be loosely followed. Director evaluation, for example, falls into the second category. Since neither the act nor SEBI prescribe a process, companies are developing their own, creating great inconsistency.
- The Companies Act also mandated corporate social responsibility for Indian companies, and there is likely to be increased focus on CSR strategies and spending.
- In 2015, the government set up panels to review the act and remove what it sees as undue burden on Indian businesses in areas such as intercompany loans, related-party transactions, and consolidated financial statements. The reviews are likely to lead to new legislation being proposed in 2016.
- Minority shareholders are taking advantage of the changes to defeat management proposals on compensation and other matters. New proxy advisory services have emerged to assist investors.
- Additionally in 2016, India intends to shift to International Financial Reporting Standards (IFRS), which may lead to volatility in company earnings and new tax demands. The switch will also mean that board directors and investors must study company and auditor accounting judgments more carefully.
Effective implementation of good governance would ensure stakeholders confidence in entities, which will lead to greater capital focus to support growth.
The Companies Act, 2013 introduced innovative measures to appropriately balance legislative and regulatory reforms for the growth of the enterprise and to increase foreign investment at par with international practices.
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