Good corporate governance is not just about ticking the boxes or giving into bureaucracy or red tape. It’s also about keeping up with the changes in legislation, regulation, market practice, and expectation
By TCA Varshini
We’ve transcended from a time wherein trade was largely individualistic. It was driven by economic necessity and a desire for wealth encouraged by political protection and expansion. Evolution in Global trade is attributed to products of major economic systems worldwide, propelled by many philosophies like socialism, capitalism, neoliberalism, etc. and this led to the emergence of Corporates. Today, intercompany transactions account for a major proportion of international trade.
Behind every successful society, lies a thriving business sector, and hence, to thrive, businesses like any other entities also need laws to regulate their unbridled growth, operations, misuse of capital and concentration of power in the hands of an unscrupulous few. What we’re seeking is a holistic approach that makes every stakeholder satisfied and this makes the concept of Corporate Governance, sine-qua-non for organisational success.
With the advent of unprecedented changes and complexities across many spheres in the commercial context, it is pertinent to review this concept’s past, present, and futuristic trends and its subsequent reverberations, not only in organisations but also in our country. Ergo, this essay aims to provide the reader with an overview of the same.
In its simplest sense, Corporate Governance can be defined as the rules and practices that determine the direction, and control of the organisation and enable it to maintain an amicable relationship with all of its stakeholders. Good corporate governance is not just about ticking the boxes or giving into bureaucracy or red tape. It’s also about keeping up with the changes in legislation, regulation, market practice, and expectation. It’s significant for companies because of a concept called “Divorce between Ownership and Control” which draws boundaries between the Owners – Shareholders and Controllers of the company- the Board of directors. Hence, the responsibilities of the Board to meet stakeholder expectations are laid down.
While a lot of modern-day management and governance standards may be credited to the Western world, the roots of this concept are deeply embedded in Indian History, particularly during the Mauryan Period. Chanakya is very prominently known for establishing Corporate Governance through regulatory frameworks in the kingdom of Magadh.
His work, Arthashastra crystallises the concepts of Corporate Social Responsibility, Human Resource Management, Transparency, Standardisation of Industrial policies, Specialised professionalism, etc.: which are quintessential elements of good corporate governance. As we step into the Colonial era, we see that the British established the East India Corporation, a trading company that soon manifested itself into an empire. As an agent of British Imperialism, it focused primarily on exploiting labour, materials, and political instability to secure profits, which contradicts Chanakya’s perspective on Corporate management as in which People came first and profits, next.
About two centuries later, an independent India recognized that our inward-looking social policies discouraged investment and over-regulated the then-introduced reforms. Hence, they were eased and the economic reforms of the 1990s were introduced to jumpstart the service sector, and drive innovation and growth through what is known as the Jugaad phenomenon or Frugal engineering. It only then does Corporate Governance find its way officially into our legal texts. However, despite the efforts undertaken, our systems suffered from undesirable and unethical practices, lack of transparency and chronic capitalism.
To cure the system of its ailment, a fine attempt was made by the Securities Exchange Board of India in 1992. What started as a regulation to supervise trading soon became the base for corporate governance in India. This was further shaped by the Confederation of Indian Industries and manoeuvred into a robust framework by the Companies Act and the Companies Rules. Further, the Satyam Scam in the early 2000s gave the much-required impetus to the stricter implementation and monitoring of the governance rules by agencies under various laws.
As we step into the present about 3 decades later, we find that forces of competition, technology and globalisation have converged to spur innovation and transform the economy. It has made us economically ambitious as we envisage a $5 trillion economy by 2025. To materialise this estimate, we have been significantly focusing on expanding our markets by providing favourable conditions to attract greater FDI and promoting our indigenous enterprises, concomitantly.
However, the perimeter is vulnerable and the game has changed. There have been a few impediments along the way in the name of White Collar Crimes/ Corporate Scandals. It is important to answer two questions at this point, the first being what is the cause of these scandals and the second being, what is its impact on the organisation, for scandals like these usually have a two-fold impact.
To answer both of these questions, we refer to research conducted in 2019 by scholars from LPU. The findings of this research suggest that a weak Corporate Governance model is the fundamental cause of over 25% of scams that took place in India since the year 2000. The weak regulatory framework, poor leadership and the willingness of professionals to compromise their professionalism are also contributing factors. As a result, Corporates suffer in terms of damaged performance, negative goodwill, and reputation and the shareholders suffer psychologically and financially due to reduced share prices and at the risk of losing their investments.
Such scams also endanger our economy by detrimentally impacting individuals, their careers, financial institutions and the market as a whole depending upon the company’s contribution to the economy. This in turn has affected our ranking in the World Corporate Governance Index 2022 as per which our country is placed in the second group of countries, which are capable of entering the index but need to take further actions to promote corporate governance.
As we take a step further to identify who exactly is behind these scams, it’s quite unfortunate to see the involvement of professionals like CAs, CSes and Key Managerial Personnel at higher levels. Earlier this year, the MCA asked the ICSI institute to take disciplinary action against two Company Secretaries for endorsing certain incorporation documents of dummy companies worth Rs 150 crores which were dealing in Loans and Betting apps linked to Chinese nationals.
Upon further investigation, it was observed that both the CS had a history of being involved in fraudulent and suspicious businesses. In another case, more than 30 CAs and CSes were booked by the Economic Offences Wing for being involved with 34 companies wherein foreigners were made owners and directors of the companies through deception.
When the very protectors of the pillars of Corporate Governance namely Fairness, Transparency, Accountability and Responsibility become its wreckers, they tarnish the reputation of the profession and hence, the government passed the CA, CWA and CS (Amendment Bill), 2021 with an intent to restructure the self-regulatory and disciplinary mechanisms of the ICSI, ICAI and ICWAI. Earlier this year, Shri Piyush Goyal, Minister of Commerce and Industry, called for better Corporate Governance Standards in the Start-up ecosystem on the onset of financial irregularities like data fraud and tax evasion in prominent start-ups like BharatPe, Trell and Zilingo. This would entail better transparency and ease in auditing.
A focus on the future motivates people to make changes in the present after reviewing the current status quo. With over 1000 acts, a substantial number of amendments and statutory compliances to adhere to, we find that simpler and mature norms have become an absolute necessity. A good example of this is the recent regulatory change made by SEBI concerning Related Party Transactions (RPT) which will limit the scope of large shareholders to bring their families and promoters into RTP without the permission of the minority shareholders. It is believed that this will promote corporate governance.
Another striking example of this is the LODR regulation that mandates the separation of roles of Chairperson and Managing director. Ergo, it is pertinent to assess and advise the government to weed out unnecessary archaic compliances or those that promote red-tapism to improve the ease of doing business in our country. Furthermore, as we prepare for the future, we also need to take into consideration the amelioration of technology.
With more companies joining the crypto bandwagon and experimenting with AI in their boardrooms with an intent to promote shareholder democracy despite the legal status of AI still being under debate and a lot of other relevant loose ends to tie like accountability issues, we’ll also need to reform our current laws to meet these future requirements.
With professionals as the circle and good corporate governance as the radius, we draw this circle of successful corporations. With the Corporate Profit to GDP ratio reaching a 10-year high in the FY2022, it only shows us how indispensable corporates are to our economy. Ironically, a lot of time is spent controlling external factors that are beyond our reach and yet, internal reactions are left to run wild. Hence, it is important to understand that it is only these internal factors that give organisations the much-needed integrity and a positive working environment wherein all employees are invested and all investors are satisfied.
TCA Varshini is a bonafide student of the five – year B.B.A LLB (Honours) programme, under the School of Law of the Vellore Institute of Technology (VIT) University,Chennai. She is currently in the III year of the programme, this academic year 2022-23.
REFERENCES:
- Chanakya Sutras and Arthashastra: The Gospel for corporate management for modern application by Siba P Rath ( 2014)
- A study on the causes and effects of corporate financial scams on business operations and the national economy of India by Mathews Lunyeto Nyirenda (2019)
- World Corporate Governance Index 2022 report by SAHA rating
- Times of India Article – 2 Company Secretaries under lens for endorsing Chinese firms
- Business Standard Article – Need for ethics and Corporate Governance standards in Startups.
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.
Read: India CSR and CIMP present essay writing competition on Corporate Governance for students
Read: Corporate Governance in India: Past, Present and Future By Sarthak Pradhan
Related: Corporate Governance: Chairman, Managing Director and Totalitarianism
