Perspectives of Corporate Governance in India
Governance is a systematic process
which is carried out by the management to fulfill the felt needs and
aspirations of the people and vision, mission, and objectives of the
corporation. Corporate governance involves a set of relationships between a
company’s management, its board, its shareholders and other stakeholders.
Corporate governance also provides the structure through which the objectives
of the company are set, and the means of attaining those objectives and
monitoring performance are determined. The structure to ensure corporate
governance includes the board of directors, top management, shareholders,
creditors and others. Corporate governance is essentially about leadership. Be
accountability to all times to all shareholders.
Governance is the activity of
governing. It relates to decisions that define expectations, grant power, or
verify performance. It consists either of a separate process or of a specific
part of management or leadership processes. People set up a government to
administer these processes and systems. In the case of a business or of a
non-profit organization, governance relates to consistent management, cohesive
policies, processes and decision-rights for a given area of responsibility. For
example, managing at a corporate level might involve evolving policies on
privacy, on internal investment, and on the use of data. Governance is the
kinetic exercise of management power and policy.
The
term Corporate is used for a company. Corporate relate to the business
corporation. Corporate governance is the overall control of activities in a
corporation. Corporate governance is the set of process, customs, policies,
laws, and institutions affecting the way a corporation is directed,
administered or controlled. Corporate
governance comprises the long-term management and oversight of the
company in accordance with the principles of responsibility and transparency. The
term can refer to internal factors defined by the officers, stockholders or
constitution of a corporation, as well as to external forces such as consumer
groups, clients, and government regulations.
According
to Kumar Mangalam Birla Report: “The
fundamental objective of corporate governance is the “enhancement of long-term
shareholder values while at the same time, protecting interest of other
shareholders”.
Gandhian Principle Say ‘Trusteeship obligations inherent in
company operations, where assets and resources are pooled and entrusted to
the managers for optimal utilization in
the stakeholders’ interests.
Corporate Governance and Corporate Management:
Corporate management is concerned
with the efficiency of the resource use, value addition and wealth creation
within the broad parameters of the corporate philosophy established by
corporate governance. Good corporate governance will reduce risk and ensure
sustainable value creation.
Good governance practices stem from
the culture and mindset of an organization. As stakeholders across the globe
evince keen interest in the practices and performance of companies, corporate
governance has engaged on the company’s good. Corporate governance is based on
the principles of integrity, fairness, equity, transparency, accountability and
commitment to values. Good corporate governance, besides protecting the
interests of shareholders and all other stockholders, contributes to the
efficiency of a business enterprise, to the creation of wealth and to the
country’s economy.
Good corporate governance should
ensure that appropriate goals and strategies are established that the
strategies adopted are implemented and that the results achieved are subject to
measurement and follow-up. The principles will also help ensure that the
group’s activities are subject to appropriate and effective control. An
appropriate division of roles and satisfactory control will contribute to the
greatest possible value creation over time, to the benefit of the shareholders
and other stakeholders.
Good corporate governance consists of
a system of structuring, operating and controlling a company such as to achieve
the following:
·
A
culture based on a foundation of sound business ethics.
·
Fulfilling
the long-term strategic goal of the owners while taking into account the
expectations of all the key stakeholders.
·
Maintaining
proper compliance with all the applicable legal and regulatory requirements under
which the company is carrying out its activities.
Factors Influencing Corporate Governance: They are:
·
The
structure of ownership of a company determines to a considerable extent how a
corporation is managed and controlled.
·
The
financial structure of the corporate has implications for the quality of
governance.
·
The
legal, regulatory and political environment within which a company operates determines
in large measure the quality of corporate governance.
Mechanisms of Corporate Governance: They are:
·
Companies
in India
·
The
primary securities law in India
·
Statutory
audit is yet another mechanism directed to ensure good corporate governance.
·
Development
banks hold large blocks of shares in companies. Being equity holders, these
investors have their nominees in the boards of companies. These nominees can
effectively block resolutions which may be detrimental to their interests.
·
Discipline
capital market itself has considerable impact on corporate governance.
·
The
code of conduct is based on the explicit assumption that good governance helps
to maximize shareholder value, which will necessarily maximize corporate value
and thereby satisfy the claims of creditors, employees and the State.
The Responsibilities of the Board for Corporate Governance:
The system by which companies are directed and
controlled. Boards of directors are responsible for the governance of their
companies. The stockholders’ role in governance is to appoint the directors and
the auditors and to satisfy themselves that an appropriate governance structure
is in place. The responsibilities of the board include setting the company’s
strategic goals, providing the leadership to put them into effect, supervising
the management of the business, and reporting to the stockholders on their
stewardship. The board’s actions are subject to laws, regulations, and the
wishes of the stockholders in the general meetings.
The corporate governance structure specifies
the distribution of rights and responsibilities among different participants in
the organization, such as the board managers, shareholders and other
stakeholders, and spells out.
Corporate governance consists of three elements:
·
The
long term relationship which has to deal with checks and balances, incentives for
manager and communications between management and investors ;
·
The
transactional relationship which involves dealing with disclosure and
authority.
·
The
long term strategic goals and enhancement of the long term shareholder value
and protecting the interest of other stakeholders.
Institutional Framework for effective Corporate Governance:
The impact of sound corporate
governance in promoting national economic development. The governance framework
is there to encourage the efficient use of resources and equally to require
accountability for the stewardship of those resources. The framework of how
directors and management perform their respective duties to add and create
shareholder value. Framework of rules and practices by which a board of
directors ensures accountability, fairness, and transparency in the firm’s
relationship with its all stakeholders. This framework consists of:
·
An
independent, well functioning judicial system
·
Anti-corruption
strategies.
·
Reform
of government agencies
·
An
investigative and informed media
·
An
active, integrity – based business community
·
A
well regulated banking sector
·
Exit
mechanisms : bankruptcy and foreclosure
·
Sound
securities markets
·
Competitive
markets
·
Transparent
and fair privatization procedures and
fair taxation regimes.
Indian Companies Philosophy on Corporate Governance:
i). Reliance is in the forefront of implementation of corporate
governance best practices. Constitution of a board of directors of appropriate
composition, size, varied expertise and commitment to discharge its
responsibilities and duties. Fair and equitable treatment of all its
stakeholders including employees, customers, shareholders and investors.
ii). Indian Oil believes that good corporate governance practices would
efficient conduct of the affairs of the company and also help in maximizing
value for all its stakeholders. The company endeavours to uphold the principles
and practices of corporate governance to ensure transparency, integrity and
accountability in its functioning, which are vital to achieve its vision of
becoming a major diversified, transnational, integrated energy company.
iii). As part of the Tata group, the company’s philosophy on
corporate governance is founded upon a rich legacy of fair, ethical and
transparent governance practices, many of which were in place even before they
were mandated by adopting highest standards of professionalism, honesty,
integrity and ethical behaviour. The company is in full compliance with the
requirements of corporate governance under Clause-49 of the listing agreement
with the Indian Stock Exchanges. Risk management and internal control functions
have been geared up to meet the progressive governance standards.
iv). ONGC management continues to strive for excellence in good governance
and responsible management practices, benchmarking with best of global
companies. ONGC has been practicing corporate governance principles much before
it became mandatory. The company
believes that for a company to be successful it must maintain global standards
of corporate conduct towards its stakeholders. The company believes that it is
rewarding to be better managed and governed and to identify its activities with
national interest.
In recognition of excellence in corporate
governance, the following awards have been conferred on ONGC :
·
ICSI
National Award for excellence in corporate governance -2003 by the institute of
company secretaries of India
·
Golden
peacock award for excellence in corporate governance -2006’ by the institute of
directors.
v). Over the years Wipro has shown a commitment towards
effective corporate governance and has always been at the forefront of
benchmarking its internal systems and policies with global standards.
Consistent with this commitment. Wipro believes that it needs to show a great
degree of responsibility and accountability. The board of directors of the
company shall have an optimum combination of executive and non-executive
directors with not less than fifty percent of the board of directors comprising
of non-executive directors. In case the company has an executive chairman, at
least half of the board should comprise of independent directors.
Sub-optimal Use of Corporate Governance in India
Making sure that the managers
actually act on behalf of the owners of the company - the stockholders - and
pass on the profits to them are the key issues in corporate governance.
The numerous shareholders who contribute to the capital of the company are the
actual owners of business. They elect a board of directors to monitor the
running of the company on their behalf. The board, in turn, appoints a team of
managers who actually handle the day-to-day functioning of the company and
report periodically to the board. Thus managers are the agents of shareholders
and function with the object of maximizing shareholders’ wealth.
Limited liability and dispersed
ownership – essential features that the joint-stock company form of
organization thrives on – inevitably lead to a distance and inefficient
monitoring of management by the actual owners of the business. Managers enjoy
actual control of business and may not serve in the best interests of the
shareholders. These potential problems of corporate governance are universal.
In addition, the Indian financial sector is marked with a relatively
unsophisticated equity market vulnerable
to manipulation and with rudimentary analyst activity; a dominance of family
firms ; a history of managing agency system; and a generally high level of
corruption. All these features make corporate governance a particularly
important issue in India
The reality is even more complicated
and biased in favour of management. In real life, managers wield an enormous
amount of power in joint-stock companies and the common shareholder has very
little say in the way his or her money is used in the company. In companies
with highly ownership, the manager functions with negligible accountability.
Most shareholders do not care to attend the general meetings to elect or change
the board of directors and often grant their “proxies” to the management. Even
those that attend the meeting find it difficult to have a say in the selection
of directors as only the management gets to propose a slate of directors for
voting. Consequently the supervisory role
of the board is often severely
compromised and the management, who really has the keys to the business, can
potentially use corporate resources to further their own self-interests rather
than the interests of the shareholders.
The inefficacy of the board of
directors in monitoring the activities of management. The underlying premise is
that shareholders dissatisfied with a particular management would simply
dispose of their shares in the company. As this would drive down the share
price, the company would become a takeover target. If and when the acquisition
actually happens, the acquiring company would get rid of the existing
management. It is thus the fear of a
takeover rather than shareholder action that is supposed to keep the management
honest and on its toes.
Legal Environment and Corporate Governance:
The
legal system of a country play a crucial role in creating an effective
corporate governance mechanism in a country and protecting the rights of
investors and creditors. Securities and Exchange Board of India (SEBI) has at
its meeting held on January 25, 2000 considered the recommendations of the
Kumar Mangalam Birla Committee on corporate governance and decided to implement
the recommendations through an amendment to the listing agreement of companies
listed with the stock exchanges.
Corporate governance has
been a central issue in developing countries long before the recent spate of
corporate scandals in advanced economies made headlines. Indeed corporate
governance and economic development are intrinsically linked. Effective corporate governance systems promote the development of strong financial systems –
irrespective of whether they are largely bank-based or market-based – which, in
turn, have an unmistakably positive effect on economic growth and poverty
reduction.
Essentially corporate governance deals with
effective safeguarding of the investors’ and creditors’ rights and these rights can be
threatened in several other ways. For instance, family businesses and corporate groups are common in many countries
including India
Conclusion:
Corporate
governance is considered as an important instrument of investor protection.
Good corporate governance protects the interest of shareholders, stakeholders
and contributes to the efficiency of enterprise and wealth of the country. Effective
good governance ensure the stakeholders with a relevant interest in the
economic activities are fully taken into account. It can make a significant
contribution in the prevention of fraud in the
company and makes business environment more transparent.
Corporate
governance has received increased attention because of high-profile scandals
involving abuse of corporate power and, in some cases, alleged criminal
activity by corporate officials. An integral part of an effective corporate
governance regime includes provisions for civil or criminal prosecution of
individuals who conduct unethical or illegal acts in the name of the
company.
Poor
corporate governance also hinders the creation and development of new firms.
Good corporate governance also lowers of the cost of capital by reducing risk
and creates higher firm valuation once again boosting real investments.
Effective corporate governance mechanisms ensure better resources allocation
and management raising the return to capital. There is a strong inverse
relationship between the quality of corporate governance and currency
depreciation. Good corporate governance can remove mistrust between
stakeholders, reduce legal costs and improve social and employee relationships and external economies.
Corporate
governance is often seen as cost effective. It ensures long- term strategic
objectives and maintenance the organization integrity reputation and
accountability to its relevant constituencies. Reliance, TATA Group, Indian Oil Company, ONGC,
Wipro and Bajaj Group are some of the
organizations which are growing sturdily in the competitive global market.
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Issues. The India
2. C.V.Baxi(2007), Corporate Governance,
Excel Books, New Delhi
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Corporate Governance: The Role of Accounting Professionals, Indian Journal of
Accounting, Vol.xxxii.
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Jacqueline L.Doyle, George Logan (2004), What is Corporate Governance, Mc Grew
Hill, New Delhi
5. Kumar Mangalam Birla Report on
Corporate Governance- SEBI, January, 2000.
6.K.Aswathappa(2009), Essentials of
Business Environment, Himalya Publishing House, Mumbai.
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Governance- Effectiveness of Independent Directors, The Indian Journal of
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Global Concepts 7 Practices, Excel Books, New
Delhi
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Governance in India , Prentice
Hall of India, New Delhi
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K.R(2000), Accountants and Corporate Governance, India Journal of Accounting,
Vol. xxxi.
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