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Issues and Challenges of Corporate Governance in India

Corporate Governance is basically all about how corporations are directed, managed, controlled and held accountable to their shareholders. In India, the question of Corporate Governance has come up mainly in the wake of economic liberalization and de-regularization of industry and business.

With the rapid pace of globalization many companies have been forced to tap international financial markets and subsequently to face greater competition than before. Both policymakers and business managers have become increasingly aware of the importance of improved standards of Corporate Governance.

India has one of the best corporate governance laws but poor implementation together with socialistic policies of the perform era has affected corporate governance. Concentrated ownership of shares, pyramiding and tunneling of funds among group companies mark the Indian corporate landscape.
  1. Express or implied contracts between the stakeholders and the company for the distribution of rights, duties, reward and responsibility, etc. among different sharers in the corporation.
  2. Procedure for proper control and supervision of information flow in the company, proper operation of checks-and- balances.
  3. Procedures for resolving and conforming the clashing interests and opinions of different participators in the corporation.
This operation ensures responsibility of the Board of Directors to all stakeholders of the corporation i.e. managers, shareholders, suppliers, creditors, auditors, controllers, workers, guests and society in general; for giving the company a fair, clear and efficacious administration. So it isn't just mere company administration but a corporate administration system. It's a code of conduct that must be followed for running and proper functioning of a corporate entity.

Aims of Corporate Governance

Good governance is an integral to the very existence of a company. It's nothing more than how a corporation is administered or controlled. Good governance inspires and strengthens investors' confidence by assuring company's commitment to high growth and earnings. The need for the growth of corporate governance concept is of course and basically deals with to achieve objects of corporate governance.

The system of corporate governance is to achieve the specific goals to fulfilling long- term strategic pretensions of owners. To taking care of the interests of employees. To consideration for the atmosphere and regional community to maintaining excellent relations with guests and suppliers. To fulfil all the applicable legal and regulatory conditions.

By using corporate governance procedures wisely and participating results, an organization can motivate all stakeholders to figure toward the corporation's goals by demonstrating the advantages to stakeholders, of the pot's success. Good governance is good business. To conclude, by and large attempt of the Board should be to take the organisation forward and to maximize future value and shareholders wealth.

Why corporate governance is important?

  1. Changing ownership and business structure:
    In recent years, the ownership structure of companies has changed a lot. Now Public financial institutions, mutual funds, etc. are the single largest shareholders in most of the large companies. They have effective control on the management of the companies.

    They force the management to become more efficient, transparent, accountable, etc. They also ask the management to make consumer-friendly policies, to protect all social groups and to protect the environment. That is how the changing ownership structure has resulted in corporate governance.

    Scale of business activities has grown in manifolds. For obtain the economies of growth many takeovers and mergers takes place in the business world. And corporate governance is required to protect the interest of all the parties during that takeovers and mergers.
  2. Increased importance of corporate social responsibility:
    In current scenario corporate social responsibility is given a lot of importance. As businesses gain everything from society so society also has some expectation from businesses. And responsibility for fulfilling these expectation by corporate is called corporate social responsibility. Social responsibility requires from the board to protect the rights of the every related party i.e. customers, employees, shareholders, suppliers, local communities, etc. For fulfilling all these liabilities they need corporate governance.
  3. Increased corrupt practices in business:
    In recent years, many scams, frauds, and corrupt practices have come to light. Misuse and misappropriation of public funds are happening in the stock market, banks, financial institutions, companies, and government offices at large scale. For the purpose to avoid these financial irregularities, many companies have started corporate governance.
  4. Inactiveness of shareholders:
    shareholders only attend the Annual general meeting of their companies. They are generally inactive in the management. Shareholders' associations are also not strong. Directors generally make a profit of this situation and misuse their power. So, there is an imperative need for corporate governance to protect all the stakeholders of the company.
  5. Globalized era:
    As now Indian economy had become globalized, most big companies are selling their goods in the global market. For maintaining and growing they have to attract foreign investors and foreign customers and they also have to follow foreign rules and regulations. All this requires corporate governance. Without Corporate governance, it is impossible to enter, survive in the global market.
  6. Legal bindings:
    Practice of corporate governance is also required by the law. In India SEBI and Indian companies, the Act defines the scope and process of corporate governance.

Development of Corporate Governance in India

The notion of good governance is really old in India dating back to third century B.C. Where Chanakya (Vazir of Parliputra) developed fourfold duties of a king Raksha, Vriddhi, Palana and Yogakshema. Substituting the king of the State with the Company CEO or Board of Directors the principles of Corporate Governance refers to securing shareholders wealth (Raksha), enhancing the wealth by proper use of Assets (Vriddhi), maintenance of wealth through profitable ventures (Palana), and above all protecting the interests of the shareholders (Yogakshema or safeguard).

Corporate Governance wasn't in the agenda of Indian Companies until the early 1990s and no one would find an important reference to this subject in the book of law till then. In India, weaknesses in the system such as undesirable stock market practices, boards of directors without satisfactory fiduciary liabilities, poor disclosure practices, lack of transparency, and chronic capitalism were all crying for reforms and upgraded governance. 

Issues and Challenges in Corporate Governance

  1. Selection procedure and term of Board:
    The selection procedure adopted in Indian corporations is the biggest challenge for good corporate governance. Law requires a healthy mix of executive and non-executive directors, independent directors, and woman directors. Most companies in India tend to only comply on paper; board appointments are still by way of word of mouth or fellow board member recommendations. It is common for friends and family of promoters and management to be appointed as board members.

    Life-term board members can pose many problems to business say fixed beliefs, power gaining etc. so no business prefers to appoint board members for life-term. And if the board is very short then they will not take long term decisions with full of their efficiency because in long run they will be changed or relieved from their duties. So the term of board must be fixed with due attention. Typically in a board of directors, directors sit for a brief term say 2 to 5 years and it is good practice to switch some of directors at a fixed time interval instead of changing whole board at a single time.
  2. Performance Evaluation of Directors:
    SEBI, India's capital markets regulator, has released a 'Guidance Note on Board Evaluation' in January 2017. Which cover all major aspects of Board Evaluation including the Subject & Process of Evaluation, Feedback to the persons being evaluated, Action Plan based on the results of the evaluation process, Disclosure to stakeholders, Frequency & Responsibility of Board Evaluation. But for achieving the desired objectives from performance evaluation, they need to make the evaluation result public and these disclosures may put the corporate in big trouble.
  3. Missing Independence of Directors:
    Independent directors' appointment was supposed to be the biggest corporate governance reform by kumar mangalam committee on corporate governance in 1999. However in reality independent directors have hardly been able to make the desired impact. Till now the appointment of directors in most of companies is made at the discretion of promoters, so it is still questionable. For providing the true success it is necessary to limit the promoter's powers in matters relating to independent directors.
  4. Removal of Independent Directors:
    Under law, an independent director can be easily removed by promoters or majority shareholders. When an independent director doesn't take the side with promoter's decisions, they are removed from their position by promoters. So to save their post directors have to work for the interest of promoters. To resolve this issue SEBl's International Advisory Board had proposed an increase in transparency for the appointment and removal of directors.
  5. Liability toward Stakeholders:
    Indian company act 2013 mandates that directors owe duties not only towards the company and shareholders but also towards the other stakeholders and for the protection of the environment. But generally, board tries to limit and escape from these kinds of accountability good idea to require the entire board to be present at general meetings to give stakeholders an opportunity to pose questions to the board.
  6. Founder/Promoter's extensive Role:
    In India, instead of separate entity of businesses, promoters or founders continuously influence the business decisions Family owned Indian companies suffer an inherent inhibition to let go of control. They affect the decisions by influencing the board and management. This is done because they had the significant portion of company's share. So to remove this issue it will be good idea to amplify the shareholder base and reduce the shareholding of founders.
  7. Transparency and Data Protection:
    Corporate governance is based on the principle of transparency but it cannot be defined what information is to be disclosed or not. In today's cut throat environment of competition it can be very dangerous if wrong information be disclosed. In digitalization Privacy and data protection is a central governance issue. For this the board must be capable of handling data and to ensure the protection of such data from potential misuse. And by looking at the importance of data and the potential cost if data be misused, we can say that organization must invest a reasonable amount of resources to protect the data.
  8. Business Structure and internal conflicts:
    Business structures also put hindrance on the way to good governance as they require many layers of management, executives and other officers. This makes it very difficult for the company leaders to receive accurate, important data from the lower levels and to command orders to lower level of the company as the data may be distorted at any point of chain. Board of executives can make much good decisions and policies. But if the internal relationship in the organization says between board and managers is not good then the implementation of decisions and policies also get affected. Rebellious managers can sabotage corporate decisions and policies at many levels of the business.
  9. Environment of mistrust:
    In recent years, many scams, frauds, misappropriation of public money, and corrupt practices have taken place and because of the doubtful practices of key executives and board members, confidence of investors and society has diminished. It is happening in the stock market, banks, financial institutions, companies and government offices. This has made the business environment distrustful

Challenges & Imperatives
  1. A corporation should be fair and transparent to its stakeholders in all its transactions. This has turn imperative in present's globalized business world where corporations need to access global pools of capital need to attract and retain the good human capital from various parts of the world. Unless a corporation embraces and demonstrates ethical conduct, it'll not be capable to succeed.
  2. What's Corporate Governance it's known fact that vital necessities of success of any association lingers on its ability to mobilize and use all kinds of resources to meet the objects easily set as part of the planning process.
  3. Corporate governance is about ethical conduct in business. Ethics is concerned with the law of values and principles that enables a person to choose between right and wrong. Further, ethical dilemmas arise from clashing interests of the parties involved.
  4. It's enough possible that in the effort at arriving the best possible financial results or business results there could be attempts at doing things which are verging on the illegal or indeed illegal. There's also the possibility of grey areas where an act isn't illegal but considered unethical. These raise moral issues.
  5. The quick migration of four elements across national borders. These are:
    1. Physical capital in terms of plant and machinery;
    2. pecuniary capital;
    3. Technology; and
    4. Labor.
  6. Strong corporate governance is essential to flexible and vibrant capital markets and is an important instrument of investor protection.
  7. Companies raise capital from market and investors suffered due to unscrupulous guidance that performed much worse than past reported figures. Numerous corporates didn't pay heed to investors grievances.
  8. The board of directors and the elderly position administration of an enterprise- walking their talk. It's by walking their talk that the top administration can earn credibility. This also has a direct bearing on the morale of an organization.
  9. When it comes to the hardware aspect of corporate governance, we go into the issue of a law, which becomes a reference point for actions. But the sad fact in our country is that even though there's a lot of talk about corporate governance, when it comes to reality, nothing big happens.
  10. In the Indian context lack of clarity that leads to corrupt or illegal actions.
  11. Maybe the most important challenge we face towards better corporate governance is the mindset of the people and the organizational culture. This change will have to come from within.
  12. Another important aspect is to realise that eventually the spirit of corporate governance is more important than the form. Substance is more important than style. Values are the substance of commercial governance and these will have to be definitely articulated and systems and procedures devised, so that these values are practiced.
  13. We then come to a common moral problem in running enterprises. One can have practices which are legal but which are unethical. In fact, numerous a time, tax planning exercises may border on the fine razor's edge between the rigorously legal and the patently unethical.
The concept of corporate governance hinges on total transparency, integrity and responsibility of the administration and the board of directors. Be it finance, taxation, banking or legal structure each and every place requires good corporate governance. Corporate Governance is a means not an end, Corporate Excellence should be the end. Once, the good Corporate Governance is achieved and the Indian Commercial Body will shine to outshine the whole world.

In the Indian context, the need for corporate governance has been pointed because of the frauds occurring constantly since the emergence of the concept of liberalisation from 1991. We had the Harshad Mehta fraud, Ketan Parikh Scam, UTI fraud, Vansishing Company Scam, Bhansali Scam and so on. In the Indian corporate scene, there's a need to induct global standards so that at least while the scope for frauds may still exist, it can be at least reduced to the minimum.

Corporate governance and ethical actions have a number of advantages. Primarily, they help to make good brand image for the company. Once there's a brand image, there's greater faithfulness, once there's greater loyalty, there's greater commitment to the employees, and when there's a commitment to workers, the workers will turn more creative.

In the current competitive atmosphere, creativity is vital to get a competitive edge. Corporate Governance in the Public Sector cannot be avoided and for this reason it must be embraced. But Corporate Governance should be embraced because it has much to offer to the Public Sector. Good Corporate Governance, Good Government and Good Business go hand in hand. 


Written By: Amit Singh, LLM Student (Corporate Law), Amity Law School, Jaipur

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