Corporate Governance in India – Past, Present & Future by Sonali Soni: Top Prize winning article

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By Sonali Soni

(Sonali Soni, 3rd year Student of Chanakya National Law University, Patna, is top prize winner of  “INDIACSR Essay Writing Competition on Corporate Governance in India”. (EWC-2010). Here is the article:

CHAPTER I: INTRODUCTION

Corporate governance is concerned with set of principles, ethics, values, morals, rules regulations, & procedures etc. Corporate governance establishes a system whereby directors are entrusted with duties and responsibilities in relation to the direction of the company’s affairs.

The term “governance” means control i.e. controlling a company, an organization etc or a company & corporate governance is governing or controlling the corporate bodies i.e. ethics, values, principles, morals. For corporate governance to be good the manager needs to meet its responsibilities towards its owners (shareholders), creditors, employees, customers, government and the society at large. Corporate governance helps in establishing a system where a director is showered with duties and responsibilities of the affairs of the company.

For effective corporate governance, its policies need to be such that the directors of the company should not abuse their power and instead should understand their duties and responsibilities towards the company and should act in the best interests of the company in the broadest sense.

The concept of ‘corporate governance’ is not an end; it’s just a beginning towards growth of company for long term prosperity.

CHAPTER II – HISTORY & NEED OF CORPORATE GOVERNANCE

Corporate governance concept emerged in India after the second half of 1996 due to economic liberalization and deregulation of industry and business. With the changing times, there was also need for greater accountability of companies to their shareholders and customers. The report of Cadbury Committee on the financial aspects of corporate Governance in the U.K. has given rise to the debate of Corporate Governance in India.

Need for corporate governance arises due to separation of management from the ownership. For a firm success, it needs to concentrate on both economical and social aspect. It needs to be fair with producers, shareholders, customers etc. It has various responsibilities towards employees, customers, communities and at last towards governance and it needs to serve its responsibilities at the best at all aspects.

The “corporate governance concept” dwells in India from the Arthshastra time instead of CEO at that time there were kings and subjects. Today, corporate and shareholders replace them but the principles still remain same, unchanged i.e. good governance.

20th century witnessed the glossy of Indian Economy due to liberalization, globalization, and privatization. Indian economy for the 1st time here was together with world economy for product, capital and lab our market and which resulted into world of capitalization, corporate culture, business ethics which was found important for the existence of corporation in the world market place.

CHAPTER III: DIFFERENT DEFINITIONS OF CORPORATE GOVERNACE

1.  Cadbury Committee[1] ( U.K.), 1992 has defined corporate governance as such : “Corporate governance is the system by which companies are directed and controlled. It encompasses the entire mechanics of the functioning of a company and  attempts  to  put  in  place  a  system  of  checks  and  balances between the shareholders, directors, employees, auditor and the management.”

2.  “Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides this; it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance.”  [2]

3.  Definition of corporate governance by the Institute of Company Secretaries of India is as under :

“Corporate Governance is the application of best Management practices, Compliance of law in true letter and spirit and adherence to ethical standards for Effective Management and distribution of wealth and discharge of social Responsibility for sustainable development of all stakeholders”.  [3]

CHAPTER IV: ROLE OF LA W IN CORPORATE GOVERNANCE
Law can only provide a minimum code of conduct for proper regulation of human being or company.[4] Law is made not to stop any act but to ensure that if you do that act, you will face such consequences i.e. good for good and bad for bad. Thus, in the same manner, role of law in corporate governance is to supplement and not to supplant. It can not be only way to govern corporate governance but instead it provides a minimum code of conduct for good corporate governance. Law provides certain ethics to govern one and all so as to have maximum satisfaction and minimum friction. It plays a complementary role. Role of law in corporate governance is in Companies Act which imposes certain restrictions on Directors so that there is no misrepresentation of documents, there is no excessive of power, so that it imposes duty not to make secret profit and make good losses due to breach of duty, negligence, etc, duty to act in the best interest of the company etc.

CHAPTER V: PERSPECTIVES OF CORPORATE GOVERNANCE

Before dealing with ‘perspectives’ of corporate governance lets understand what is meant by the term ‘perspective’. Oxford Advanced Learner Dictionary defines the term perspective as:-
1.    ‘The Art of drawing solid objects on a flat surface so as to give the right impression of their relative height, width, depth, distance, etc.’
2.   Apparent relation between different aspects of a problem.

In simple terms it means ‘the right impression’.

Mainly we will deal with the perspectives of corporate governance from three points of view:
1.   Shareholders (Capital Market) – Control perspective
2.   Organization (Management) – Control perspective
3.   Stakeholders –  Control perspective

1. Shareholders: as providers of a risk capital have final control on resource allocation decisions.
2. Organization: have the main purpose is to control i.e. through skills, intelligence, innovation, ideas, professionalism etc. Therefore, here in this perspective, resource allocation decision should rest with them.
3. Stakeholders: here, it says that for long term business, only shareholders value maximization should not be seen as sole goal but it should be for well being of all groups with stake of long run of business and it should be goal of corporate governance.

CHAPTER VI: IMPORTANT ISSUES IN CORPORATE GOVERNANCE

There are several important issues in corporate governance and they play a great role, all the issues are inter related, interdependent to deal with each other. Each issues connected with corporate governance have different priorities in each of the corporate bodies.

The issues are listed as below:
1.       Value based corporate culture
2.       Holistic view
3.       Compliance with laws
4.       Disclosure, transparency, & accountability
5.       Corporate governance and human resource management
6.       Innovation
7.       Necessity of judicial reforms
8.       Globalization helping Indian companies to become global giants based on good corporate governance.
9.       Lessons from Corporate failure

1.  Value based corporate culture: For any organization to run in effective way, it needs to have certain ethics, values. Long run business needs to have based corporate culture. Value based corporate culture is good practice for corporate governance. It is a set of beliefs, ethics, principles which are inviolable. It can be a motto i.e.  A short phrase which is unique and helps in running organization, there can be vision i.e. dream to be fulfilled, mission and purpose, objective, goal, target.

2.  Holistic view: This holistic view is more or less godly, religious attitude which helps in running organization. It is not easier to adopt it, it needs special efforts and once adopted it leads to developing qualities of nobility, tolerance and empathy.

3.  Compliance with laws: Those companies which really need progress, have high ethical values and need to run long run business they abide and comply with laws of Securities Exchange Board Of India (SEBI), Foreign Exchange Regulation Act, Competition Act 2002, Cyber Laws, Banking Laws etc.

4.  Disclosure, transparency, and accountability: Disclosure, transparency and accountability are important aspect for good governance. Timely and accurate information should be disclosed on the matters like the financial position, performance etc. Transparency is needed in order that government has faith in corporate bodies and consequently it has reduced corporate tax rates from 30% today as against 97% during the late 1970s. Transparency is needed towards corporate bodies so that due to tremendous competition in the market place the customers having choices don’t shift to other corporate bodies.

5.  Corporate Governance and Human Resource Management: For any corporate body, the employees and staff are just like family. For a company to be perfect the role of Human Resource Management becomes very vital, they both are directly linked. Every individual should be treated with individual respect, his achievements should be recognized. Each individual staff and employee should be given best opportunities to prove their worth and these can be done by Human Resource Department. Thus in Corporate Governance, Human Resource has a great role.

6.  Innovation: Every Corporate body needs to take risk of innovation i.e. innovation in products, in services and it plays a pivotal role in corporate governance.

7.  Necessity of Judicial Reform[5]: There is necessity of judicial reform for a good economy and also in today’s changing time of globalization and liberalization. Our judicial system though having performed salutary role all these years, certainly are becoming obsolete and outdated over the years. The delay in judiciary is due to several interests involved in it. But then with changing scenario and fast growing competition, the judiciary needs to bring reforms accordingly. It needs to speedily resolve disputes in cost effective manner.

8.  Globalization helping Indian Companies to become global giants based on good governance: In today’s age of competition and due to globalization our several Indian Corporate bodies are becoming global giants which are possible only due to good corporate governance.

9.  Lessons from Corporate Failure[6]:  Every story has a moral to learn from, every failure has success to learn from, in the same way, corporate body have certain policies which if goes as a failure they need to learn from it. Failure can be both internal as well as external whatever it may be, in good governance, corporate bodies need to learn from their failures and need to move to the path of success.

CHAPTER VII: CORPORATE GOVERNANCE IN INDIA PAST, PRESENT & FUTURE

Good corporate governance in the changing business environment has emerged as powerful tool of competitiveness and sustainability. It is very important at this point and it needs corporation for one and all i.e. from CEO of company to the ordinary staff for the maximization of the stakeholders’ value and also for maximization of pleasure and minimization of pain for the long term business.

Global competitions in the market need best planning, management, innovative ideas, compliance with laws, good relation between directors, shareholders, employees and customers of companies, value based corporate governance in order to grow, prosper and compete in international markets by strengthen their strength overcoming their weaknesses and running them effectively and efficiently in an efficient and transparent manner by adopting the best practices.

Corporate India must commit itself as reliable, innovative and prompt service provider to their customers and should also become reliable business partners in order to prosper and to have all round growth.

Corporate Governance is nothing more than a set of ideas, innovation, creativity, thinking having certain ethics, values, principles etc which gives direction and shape to its people, employees and owners of companies and help them to flourish in global market.

Indian Corporate Bodies having adopted good corporate governance will reach themselves to a benchmark for rest of the world; it brings laurels as a way of appreciation. Corporate governance lays down ethics, values, and principles, management policies of a corporation which are inculcated and brought into practice. The importance of corporate governance lies in promoting and maintains integrity, transparency and accountability throughout the organization.

Corporate governance has existed since past but it was in different form. During Vedic times kings used to have their ministers and used to have ethics, values, principles and laws to run their state but today it is in the form corporate governance having same rules, laws, ethics, values, and morals etc which helps in running corporate bodies in the more effective ways so that they in the age of globalization become global giants.

Several Indian Companies like PepsiCo, Infuses, Tata, Wipro, TCS, and Reliance are some of the global giants which have their flag of success flying high in the sky due to good corporate governance.

Toady, even law has a great role to play in successful and growing economy. Government and judiciary have enacted several laws and regulations like SEBI, FEMA, Cyber laws, Competition laws etc and have brought several amendments and repeal the laws in order that they don’t act as barrier for these corporate bodies and developing India. Judiciary has also helped in great way by solving the corporate disputes in speedy way.

Corporate bodies have their aim, values, motto, ethics and principles etc which guide them to the ladder of success. Big and small organizations have their magazines annual reports which reflect their achievements, failure, their profit and loss, their current position in the market. A few companies have also shown awareness of environment protection, social responsibilities and the cause of upliftment and social development and they have deeply committed themselves to it. The big example of such a company can be of Deepak Fertilizers and Petrochemicals Corporation Limited which also bagged 2nd runner up award for the corporate social responsibility by business world in 2005.

Under the present scenario, stakeholders are given more importance as to shareholders, they even get chance to attend, vote at general meetings, make observations and comments on the performance of the company.

Corporate governance from the futuristic point of view has great role to play. The corporate bodies in their corporate have much futuristic approach. They have vision for their company, on which they work for the future success. They take risk and adopt innovative ideas, have futuristic goals, motto, and future objectives to achieve.

With increase in interdepence and free trade among countries and citizens across the globe, internationally accepted corporate governance standards are of paramount importance for Indian Companies seeking to distinguish themselves in global footprint. The companies should always keep improving, enhancing and upgrading themselves by bringing more reliable integrated product and service quality. They should be more transparent in their conduct.

Corporate governance should also have approach of holistic view, value based governance, should be committed towards corporate social upliftment and social responsibility and environment protection. It also involves creative, generative and positive things that add value to the various stakeholders that are served as customers. Be it finance, taxation, banking or legal framework each and every place requires good corporate governance.

Hence corporate governance is a means and not an end, corporate excellence should be end.

CHAPTER VIII: SUMMARY

The concept of corporate governance hinges on total transparency, integrity and accountability of the management and the board of directors. The importance of Corporate Governance lies in its contribution both to business prosperity and to accountability.

In the age of globalization, global competition, good corporate governance helps as a great tool for corporate bodies. It existed from Vedic times as the Highest standards in ArthaShastra to today’s set of ethics, principles, rules, regulations, values, morals, thinking, laws etc as good corporate governance.

Corporate Governance is a means not an end, Corporate Excellence should be the end. Once, the good Corporate Governance will be achieved, the Indian Corporate Body will shine to outshine the whole world.

(Sonali Soni , 3rd year Student of Chanakya National Law University, Patna, is top prize winner of  “INDIACSR Essay Writing Competition on Corporate Governance in India”. (EWC-2010).

INDIACSR (www.indiacsr.in), the only news portal on CSR in India is pleased to announce the result of “INDIACSR Essay Writing Competition on Corporate Governance in India”. (EWC-2010) which ran throughout Novemebr, December 2010 and January 2011. INDIACSR received 36 entries from the students of all over India. The competition invited individuals those are studying in colleges in various disciplines.)

CHAPTER IX: BIBLIOGRAPHY
1. Dr. G.K Kapoor, Taxmann’s Corporate Laws- 2006.
2. Dr. K.R.Chandratre, Dr A.N. Navare, Bharat Corporate Governance, Bharat publication -2010.
3. Kshama Kaushik & Kaushik Datta, Corporate Governance Myth to Reality-2005.

[1] Cadbury committee(UK) 1992
[2] OECD principles of corporate governance (1999).
[3] OECD principles of corporate governance (1999).
[4] Report of the Company Affairs Committee of the Confederation of the British Industry, Page 71.
[5] Report of the Company Affairs Committee of the Confederation of the British Industry, Page 71.
[6] Report of the Company Affairs Committee of the Confederation of the British Industry, Page 71.

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