CORPORATE GOVERNANCE: RELEVANCY IN TODAY’S CORPORATE SECTOR
Author: Suraj Gajanan Nemade, IV year of B.A.,LL.B from ILS Law College, Pune.
Corporate Governance in India has been a subject of increasing interest among researchers and practitioners in recent years, as the country’s economy has grown and the number of public companies has increased. The concept of Corporate Governance refers to the system of rules, practices and processes by which a firm is directed and controlled. The main objective of Corporate Governance is to ensure the alignment of the interest of the company’s shareholders with those of other stakeholders, such as employees, customers, suppliers and the community.
In India, corporate governance is regulated by the Companies Act, 2013, The Securities and Exchange Board of India (SEBI) guidelines etc. The Act lays down the duties and responsibilities of the board of directors, including their role in decision making, risk management and financial reporting. The SEBI guidelines provide further details on the functioning of the board, including the composition and role of audit committee, nomination and renumeration committee and other boards.
Lately, the “comply or explain” approach for designing and enforcing corporate governance norms has gained ground in regulatory parlance. This means that companies are required to comply with the regulations, but if they are unable to do so, they must explain the reasons why. This approach is perceived to give flexibility to a company to adopt the governance structure that is most appropriate for its operation which in turn is likely to lead to better governance outcomes.
Corporate governance is important for promoting the long-term success of companies and the economy because it helps to ensure that a company is being managed in an ethical and transparent manner. Good corporate governance means more efficient utilisation of resources, better access to capital, better and higher quality employment opportunities and a better chance of developing in a sustained way efficient domestic or regional capital markets. This can lead to increased trust and confidence from shareholders, investors and other stakeholders, which can in turn lead to increased investment and growth. Additionally, good corporate governance can held to prevent and mitigate risks such as financial fraud and mismanagement, which can have a negative impact on the company and the economy as a whole. Overall, good governance is essential for promoting the long-term success of companies and the economy, by fostering a culture of transparency, accountability and integrity.
This article aims to analyse the current state of corporate governance in India, and will discuss in brief the evolution of corporate governance in the country. It will also shed light on role of various stakeholders such as shareholders, Board Committees, board of directors and management is ensuring good governance. This article will also delve into the discussion of prevalent practices in the arena of corporate governance. Furthermore, this article will review the report of various committees on corporate governance in India and their recommendations to improve the corporate governance practices in India.
Evolution of Corporate governance in India
The concept of Corporate Governance has existed in India since the Arthashastra period, when monarchs or Kings and subjects predominated instead of a CEO. Today, corporations and shareholders take their place, but the fundamentals -good governance-remain the same.
Due to economic liberalisation and company and industry deregulation in the second half of 1996, the corporate governance idea evolved in India. Greater shareholder and consumer accountability was also required as a result of the changing circumstances. The discussion concerning corporate governance in India has been sparked by the Cadbury Committee’s findings on the financial aspects of corporate governance in UK.
Before the early 1990s, corporate governance was not a priority for Indian companies and there were few legal references to it. Reforms and better governance were desperately needed in India because of systematic flaws such unfavourable stock market practise, board of directors without sufficient fiduciary duties, inadequate disclosure standards, a lack of transparency and enduring capitalism. With the liberalisation of the Indian economy in 1991, there was a growing recognition of the need for better corporate governance practices, leading to the introduction of various regulatory measures aimed at improving transparency and accountability in corporate governance.
Since 1992, the Securities and Exchange Board of India (SEBI) was established as the primary regulator for the securities market in India has performed a pivotal role in enforcing corporate governance practices on corporate entities.
In 2013, the Companies Act was amended to provide for a more comprehensive framework for corporate governance in India. The Companies Act requires to have a minimum of two independent directors on their boards and to adopt a number of best practices for corporate governance, including the “comply or explain” principle.
In recent years, there has been a growing emphasis on sustainability and environmental, Social and Governance (ESG) considerations in corporate governance in India. Companies are increasingly expected to consider the impact of their operations on the environment, society, and stakeholders and to adopt sustainable business practices.
Role of various stakeholders in ensuring good governance includes
Board of Directors:
Board of Directors is responsible for overseeing the management of a company and ensuring that it is being run in the best interest of the of the shareholders. The board should set the tone for good governance by establishing clear policies and procedures, and by holding management accountable for their actions. Board’s responsibilities inherently demand the exercise of judgement. Therefore the Board necessarily has to be vested with reasonable level of discretion.
Every Company should have at least one director who lives in India to ensure that they are accessible in the event that a problem with the Board’s accountability develops. The ultimate responsibility to appoint and remove directors should be that of the Shareholders.
In the case of Cyrus Mistry v. Tata Sons Limited, the Supreme Court of India held that the removal of Cyrus Mistry as the Executive Chairman of Tata Sons Limited was not valid as it was done in violation of the Tata Sons Limited’s Articles of Association. This case highlighted the importance of corporate governance and the need for proper procedures to be followed in the removal of a director.
Shareholders paly an important role in ensuring good governance by exercising their rights to vote on important corporate decisions, such as appointment of Directors, approval of company policies and strategies, and the authorisation of significant transactions.
Corporate boards and managers should take care of shareholders’ investments in the company throughout the long term.
Additionally, shareholders should anticipate that the board and management will respond to issues and concerns that influence the long-term value of the firm and are of general interest to long term shareholders.
In case of DLF Limited v. Securities and Exchange Board of India, the Securities Appellate Tribunal (SAT) held that the DLF Limited and its directors had violated the SEBI (Prohibition of Insider Trading) Regulations, 2015 and imposed a penalty on the company and its directors. This case was significant as it reinforced the SEBI’s powers to ensure compliance with insider trading regulations and to protect the rights of shareholders.
A Board committee is a small working group that the board designates and is made up of board members in order to support the board’s work. Typically, committees are created to increase board effectiveness and efficiency in areas that call for more specialised, technical, and focused discussions.
Committees like Audit Committee, Nomination and Renumeration Committee, Corporate Social Responsibility (CSR) Committee and Stakeholders Relationship Committee are made compulsory to constitute by Companies Act, 2013 for all listed companies and such other classes of companies prescribed in the rules.
Management is responsible for the day to day running of a company and must act in the best interest of the shareholders. Good governance requires management to be transparent in their decision-making process to communicate openly with the board and shareholders.
Management is in charge of developing, overseeing and carrying out the company’s strategies. This includes, but is not limited to, manging the business operations under the direction of the board and informing it of their progress.
Principles of corporate governance
The G20/OCED Principles of Corporate Governance provide guidance to policymakers on how to assess and enhance the institutional, legal, and regulatory framework for corporate governance in order to promote financial stability, economic efficiency, and sustainable growth.
Ensuring the basis for an effective corporate governance framework:
A solid institutional, legal, and regulatory framework that market participants may rely on when they create their private contractual relationships is necessary for effective corporate governance. This corporate governance framework often consists of components of laws, regulations, self-regulatory agreements, voluntarily made promises and business practices that are a product of a country’s unique circumstances, history and tradition
The relationship between shareholders and directors is reciprocal; if directors are appointed by shareholders, they are also responsible to them. A board is in charge of carrying out shareholders requests. This entails guiding a business away from danger, around obstacles, and toward success while being true to its objective, honouring local legislation and being mindful of the politics present. The key duty of the board is to choose a CEO who will help the business and its employees reach their maximum potential.
Disclosure and transparency:
In the majority of nations, a substantial amount of information both required and optional is gathered on both publicly traded and sizable unlisted businesses and then communicated to a wide audience of users. Although some nations mandate periodic disclosure on semi-annual or quarterly basis or even more.
Accountability basically refers to the willingness or duty to take ownership of one’s deeds. Accountability is frequently viewed negatively and misunderstood by many people who believe it to be related to the conventional “Blame Game”. In actuality accountability provides answers to more queries than just who is accountable because it acknowledges achievements as well, it must be viewed positively as well.
Current practices of Indian companies to ensure corporate governance
Risk management practices in Indian companies:
Risk management practices play a crucial role in corporate governance in India, and are governed by various laws and regulations. The SEBI is one of the key organisations that provide guidance on risk management practices in the country
Some guidelines are as follows:
Companies are required to establish a risk management committee which is responsible for overseeing the risk management process and ensuring that it is aligned with the company’s overall strategy and objectives.
Companies must have clear policies and procedures in place of managing risks, which would be regularly reviewed and updated.
Companies must comply with applicable laws and regulations, including those related to health and safety, environmental protection and financial reporting.
Corporate Social Responsibility practices in India:
Corporate Social Responsibility (CSR) is an important aspect of corporate governance in India, and companies are required to comply with regulations on CSR as outlined in the Companies Act, 2013. The Act requires companies with a net worth of INR 500 crore or more, or a turnover INR 1000 crore or more, or a net profit of INR 5 crore or more, to spend at least 2% of their average net profits made during the three immediately preceding financial years on CSR activities.
Activities like, supporting health initiatives, funding health education programs, supporting renewable energy initiatives, supporting initiatives that improve the quality of life in local communities etc.
Investor education and engagement in India:
Investor education and engagement are important elements of corporate governance in India, as they help to ensure that investors have the information and knowledge they need to make informed investment decisions and to make informed investment decisions and to hold companies accountable for their actions.
SEBI is the primary regulator of the securities market in India, and has a mandate to promote investor education and protection. SEBI has issued various guidelines and circulars aimed at promoting investor education and engagement and provides a range of resources for investors, including investor manuals, educational materials and online tools.
Recommendations for improvement of corporate governance
There have been several committees formed by the government of India in recent years to study and recommend improvements to the corporate governance framework in the country. Some of the famous committees and their recommendations are:
Uday Kotak Committee on Corporate Governance:
In 2018, the Securities and Exchange Board of India (SEBI) constituted a committee on corporate governance, chaired by Uday Kotak, the Managing Director of Kotak Mahindra Bank. Committee constituted to make recommendations for resolving concerns investors have with voting and attending general meetings and the actions necessary to increase the efficacy of board evaluation procedures. Suggested about matters of disclosure and transparency.
The committee made several recommendations aimed at improving the governance practices of listed companies, including the appointment and renumeration of independent directors, board evaluation and stakeholder engagement. Committee recommended that all directors must attend at least half of board meetings, and in listed companies, at least half of the board members must be independent. Non-executive directors must obtain the public shareholders' approval in order to serve if they are over 75.
Shriram Subramanian Committee on Corporate Social Responsibility:
In 2019, the Ministry of Corporate Affairs constituted a committee on CSR, chaired by Shriram Subramanian, the founder of InGovern Research services. The Committee recommended a more robust framework for CSR in India, including mandatory CSR reporting and increased transparency and accountability.
Naresh Chandra Committee on Corporate Governance in State-Owned Enterprises:
In 2018, the Ministry of Heavy Industries and Public Enterprise constituted a committee on corporate governance in SOEs, chaired by Naresh Chandra, a former Indian diplomat. The committee made several recommendations aimed at improving the governance of SOEs, including the appointments of independent directors, greater transparency and enhanced stakeholder engagement.
The Institute of Company Secretaries of India (ICSI) suggested that listing agreements include a particular statement in Clause 49 stating that a nominee director should be deemed independent. The nominated directors' responsibility to protect the financial organisation they represent is crystal apparent. Therefore, to refer to them as independent is unusual. Clause 49 must be amended to correct this inconsistency.
The roles and responsibilities of the Managing Director/CEO and the Chairman of the Board should be clearly separated. To foster a balance of power, the roles of chairman and CEO should be separated.
Corporate Governance is a crucial aspect of any company’s functioning and success. It involves a set of rules, practices and processes that ensure the alignment of the interests of all stakeholders including shareholders, management, Board Committees and Board of Directors. Our country has come a long way in implanting and strengthening the corporate governance and upholding the interest of all the stakeholders. Still there are lot of work to be done in uplifting the work ethic and governance if corporate sector and for that recommendations of various committee would be light of guidance. Over the years, there have been several landmark case laws that have reinforced the importance of corporate governance in India and have established the responsibility of companies to act in the best interests of all stakeholders. In this context, it is clear that companies must continue to strive towards high standards of corporate governance in order to ensure long-term success and sustainability.