Corporate Governance in India: Past, Present and Future By Sarthak Pradhan

Failure to implement good governance procedures has a cost in terms of a significant risk premium when competing for scarce capital in today’s public markets.

By Sarthak Pradhan

“Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations, and society.”  – (Sir Adrian Cadbury, UK, Commission Report)                            

Corporate Governance refers to the way a corporation is governed. It is the technique by which companies are directed and managed. It means carrying the business as per the stakeholders’ desires. It is conducted by the board of Directors and the concerned committees for the company’s stakeholder’s benefit. 

Corporate Governance is the interaction between various participants (shareholders, board of directors, and company’s management) in shaping a corporation’s performance and the way it is proceeding towards. The relationship between the owners and the managers in an organization must be healthy and there should be no conflict between the two. The owners must see that individual’s actual performance is according to the standard performance.

Corporate Governance deals with determining ways to take effective strategic decisions. It gives ultimate authority and complete responsibility to the Board of Directors. In today’s market-oriented and globalised economy, the need for corporate governance arises.

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Corporate Governance ensures transparency which ensures strong and balanced economic development. This also ensures that the interests of all shareholders are safeguarded. It ensures that all shareholders fully exercise their rights and that the organization fully recognizes their rights.

The definition of corporate governance by the Institute of Company Secretaries of India is as under: 

“It 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”.

The Principles of Corporate Governance

While there can be as many principles as a company believes make sense, some of the more well-known include the following:

Fairness

The board of directors must treat shareholders, employees, vendors, and communities fairly and with equal consideration.

Transparency

The board should provide timely, accurate, and clear information about such things as financial performance, conflicts of interest, and risks to shareholders and other stakeholders.

Risk Management

The board and management must determine risks of all kinds and how best to control them. They must act on those recommendations to manage them. 

Responsibility

The board is responsible for the oversight of corporate matters and management activities. It must be aware of and support the successful, ongoing performance of the company. 

Accountability

The board must explain the purpose of a company’s activities and the results of its conduct. It must communicate issues of importance to shareholders.

Corporate Governance– History In India

The 20th century witnessed the glory of the Indian Economy due to liberalization, globalization, and privatization. Indian economy for the first time here was together with the world economy for a product, capital and labour market and which resulted in a world of capitalization, corporate culture, business ethics which was found important for the existence of a corporation in the world marketplace. The organizational framework for corporate governance initiatives in India consists of the Ministry of Corporate Affairs (MCA), the Confederation of Indian Industry (CII) and the Securities and Exchange Board of India (SEBI). In 1998, the CII unveiled India’s first code of corporate governance. Moreover, SEBI and the Ministry of Corporate Affairs have appointed many committees to modify the existing structure of Corporate Governance in India. They are,

Kumar Mangalam Birla Committee 

N.R. Narayan Murthy Committee 

Naresh Chandra Committee on Corporate Audit and Governance

The Ministry of Corporate Affairs had also set up a National Foundation for Corporate Governance (NFCG) in association with the CII, ICAI and ICSI as a not-for-profit trust to provide a platform to deliberate on issues relating to good corporate governance, to sensitize corporate leaders on the importance of good corporate governance practices as well as to facilitate the exchange of experiences and ideas amongst corporate leaders, policymakers, regulators, law enforcing agencies and nongovernment organizations. 

Reasons For Corporate Governance Failures:

Family interference in Board’s decision hampers the autonomy of the Director and the interest of stakeholders. 

Serving on multiple boards is problematic because doing so can overburden directors. 

Lack of proper training and orientation regarding the awareness of rights, responsibilities, duties and liabilities.

Unseen influence of political class.

Directors’ reliance on information from the management and auditors, without independent verification.

Absence of detailed reporting on related party transactions. 

Poor quality of consolidated accounting and segment.

Delays in the delivery of verdicts, high costs of litigation and the lengthy judicial appointment process in courts make the legal enforcement mechanism ineffective. 

There is no proper system to monitor the work of audit firms or to review the accounts prepared by the company’s statutory auditors. However, in the aftermath of the Satyam case, the SEBI has decided to introduce a peer review mechanism to review the accounts prepared by a company’s statutory auditor. 

In addition, the SEBI has also decided to constitute a panel of auditors to review the financial statement of all BSE Sensex and NSE Nifty companies. 

Requirements To Strengthen Corporate Governance

To promote or to increase awareness among entrepreneurs’ adoption of good corporate governance practices, which are an integral element for doing and managing a business. 

To ensure the quality of audit that is at the root of effective corporate governance by making the Auditor accountable for the disclosure of financial information. 

To make the Board of Directors as well as the CEOs and CFOs accountable for the discharge of their duties with the proper use of their rights within the powers.  

To pay special attention to the quality and effectiveness of the legal, administrative and regulatory framework. 

To increase shareholder activism i.e., the exercise and enforcement of rights by minority shareholders to enhance shareholder value over the long term. 

To infuse India’s Business Culture with a “Spirit of Corporate Governance” to maintain sustainable and effective corporate governance. 

To implement more robust Bankruptcy Laws which are a key component of any corporate governance system. 

To eliminate “Regulatory Arbitrage” i.e., to establish a clear mandate for each regulatory Authority for the enforcement of Clause 49 of the Listing Agreement, thereby improving India’s corporate governance enforcement mechanism. 

To make statutory compliance for the listed companies compulsorily obtain a report on Corporate Governance Rating (CGR) from a Credit Rating Agency in India.

Future Prospects For Corporate Governance

To highlight the frauds and irregularities in the corporate sector the issues of governance, accountability and transparency in the affairs of the company, as well as the rights of shareholders and the role of the Board of Directors have never been as prominent as it is today. With the integration of the Indian economy with global markets, industries and corporations in the country are being increasingly asked to adopt better and transparent corporate practices. The degree to which corporations observe basic principles of good corporate governance is an increasingly important factor in taking key investment decisions.

If companies are to reap the full benefits of the global capital market, capture efficiency gains, benefit by economies of scale and attract long-term capital, the adoption of corporate governance standards must be credible, consistent, coherent and inspiring. Hence, in the years to come, corporate governance will become more relevant and a more acceptable practice worldwide. This is easily evident from the various activities undertaken by many companies in framing and enforcing codes of conduct and honest business practices; following more stringent norms for financial and non-financial disclosures, as mandated by law; accepting higher and appropriate accounting standards; enforcing tax reforms coupled with deregulation and competition; etc. 

Conclusion

Good corporate governance may not be the engine of economic growth, but it is essential for the proper functioning of the engine. As competition increases, the environment in which companies operate also changes and in such a dynamic environment the systems of corporate governance also need to evolve. Failure to implement good governance procedures has a cost in terms of a significant risk premium when competing for scarce capital in today’s public markets. Thus, the essence of corporate governance is in promoting and maintaining integrity, transparency and accountability in the management of the company as well as in the manifestation of the values, principles and policies of a corporation. To make an honest and objective assessment of corporate governance practices we do need more laws but better enforcement because the effectiveness and the utility of good corporate governance practices rest on their enforceability. Ultimately, good corporate governance practices in India will be shaped by our administrative and regulatory authorities like SEBI, MCA, etc. by implementing transparent and effective corporate governance laws.

Hence, it is truly said by Annamarie van der Merwe, “Corporate governance needs a mindset change. It’s about outcomes. It’s about ethics, value-creation, effective control and legitimacy” 

The Author

Sarthak Pradhan, Masters in Personnel Management & Industrial Relations, Utkal University, Vanivihar, Bhubaneswar, Odisha

The article is a part of Essay Writing Competition-2022 (EWC) on topic of ‘Corporate Governance in India: Past, Present and Future ‘among students. India CSR Network along with Centre for CSR Studies, Chandragupt Institute of Management Patna (CIMP) organising an Essay Writing Competition-2022 (EWC) on topic of Corporate Governance in India: Past, Present and Future among students. This is a country level competition and is open for all college students.

Also Read: Corporate Governance in India: Past, Present and Future – By TCA Varshini

Read: India CSR and CIMP present essay writing competition on Corporate Governance for students