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.
- 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.
- Procedure for proper control and supervision of information flow in the
company, proper operation of checks-and- balances.
- 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
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
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
Why corporate governance is important?
- 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
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.
- 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
- 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.
- 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.
- 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
- 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
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
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
Challenges & Imperatives
- 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
- 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.
- 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.
- 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
- 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.
- 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.
- 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
- 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.
- 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
- 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.
- 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
- 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.
- 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.
- The quick migration of four elements across national borders. These are:
- Physical capital in terms of plant and machinery;
- pecuniary capital;
- Technology; and
- Strong corporate governance is essential to flexible and vibrant capital
markets and is an important instrument of investor protection.
- 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.
- 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.
- 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.
- In the Indian context lack of clarity that leads to corrupt or illegal
- 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.
- 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.
- 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.
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,