The main legislative, regulatory and other corporate governance sources
• The Companies Act 2013 CA (Companies Act) is the principal legislation governing companies in India.
• In addition to the Companies Act, companies are governed by the Securities and Exchange Board of India Act 1992 (SEBI Act) and various regulations notified under the SEBI Act, particularly the SEBI, LODR (Listing Obligations and Disclosure Requirements) Regulations 2015. Companies are also bound by the standard listing agreement of BSE/NSE.
• Companies are required to comply with accounting standards issued by the Institute of Chartered Accountants of India, the national professional accounting body of India. The Companies Act requires the financial statements of a company to be prepared in accordance with the prescribed accounting standards to provide a true and fair view of its state of affairs.
• Companies are also required to comply with the secretarial standards issued by the Institute of Company Secretaries of India, an organization for the regulation and development of the profession of company secretary in India.
• The Ministry of Corporate Affairs of the Government of India has also prescribed the Corporate Governance Voluntary Guidelines 2009 in the wake of the global financial crisis and large format corporate failures in India. These Guidelines are voluntary in nature and intend to develop a transparent, ethical and responsible corporate governance framework in India.
• Need for corporate governance
• (a) Corporate Performance: Improved governance structures and processes ensure quality decision-making, encourage effective succession planning for senior management and enhance the long-term prosperity of companies, independent of the type of company and its sources of finance. This can be linked with improved corporate performance- either in terms of share price or profitability.
• (b) Enhanced Investor Trust: Investors consider corporate governance as important as financial performance when evaluating companies for investment. Investors who are provided with high levels of disclosure and transparency are likely to invest openly in those companies.
• (c) Better Access To Global Market: Good corporate governance systems attracts investment from global investors, which subsequently leads to greater efficiencies in the financial sector.
• (d) Combating Corruption: Companies that are transparent, and have sound system that provide full disclosure of accounting and auditing procedures, allow transparency in all business transactions, provide environment where corruption would certainly fade out. Corporate Governance enables a corporation to compete more efficiently and prevent fraud and malpractices within the organization.
• (e) Easy Finance from Institutions: Several structural changes like increased role of financial intermediaries and institutional investors, size of the enterprises, investment choices available to investors, increased competition, and increased risk exposure have made monitoring the use of capital more complex thereby increasing the need of Good Corporate Governance. Evidences indicate that well-governed companies receive higher market valuations. The credit worthiness of a company can be trusted on the basis of corporate governance practiced in the company.
• (f) Enhancing Enterprise Valuation: Improved management accountability and operational transparency fulfill investors’ expectations and confidence on management and corporations, and in return, increase the value of corporations .
• (g) Reduced Risk of Corporate Crisis and Scandals: Effective Corporate Governance ensures efficient risk mitigation system in place. A transparent and accountable system makes the Board of a company aware of the majority of the mask risks involved in a particular strategy, thereby, placing various control systems in place to facilitate the monitoring of the related issues.
• (h) Accountability: Investor relations are essential part of good corporate governance. Investors directly/ indirectly entrust management of the company to create enhanced value for their investment. The company is hence obliged to make timely disclosures on regular basis to all its shareholders in order to maintain good investor’s relation. Good Corporate Governance practices create the environment whereby Boards cannot ignore their accountability to these stakeholders.
Corporate Governance Forums
The need to find an institutional framework for corporate governance and to advocate its cause has resulted in the setting up and constitution of various corporate governance forums and institutions the world over of the prominent Forums and Institutions of Corporate Governance.
These forums are active in promoting the culture of creativity and compliance among corporate .They have pivotal role in improving the corporate governance. Some of the prominent Forums and Institutions of Corporate Governance are-
The Institute of Company Secretaries of India (ICSI)
National Foundation for Corporate Governance (NFCG)
Organization for Economic Co-operation and Development (OECD)
Institute of Directors, UK (IoD)
Commonwealth Association of Corporate Governance (CACG)
International Corporate Governance Network (ICGN)
European Corporate Governance Institute (ECGI)
Asian Corporate Governance Association (ACGA)
Corporate Secretaries International Association (CSIA)
Centre for Corporate Governance and World Council for Corporate Governance
• Lessons from corporate failure need to be learnt
• Corporate Governance and Human Resource Management should be dealt with together
• Disclosure, transparency, and accountability need to be ensured
• Compliance with laws and norms on regular basis
• Strengthening the external monitoring system
• Third party evaluation of the Related party transactions
• Demarcating fiduciary and other duties of the controlling shareholders
• Improving the quality and periodicity of the financial disclosures
• The Board should lay down a code of conduct for all Board members and senior management of the company. The code of conduct shall be posted on the website of the company.
• Companies should have a committee of independent non-executive directors who should have the responsibility to ensure that the systems are in place to assure employee compliance with the code of ethics.