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CORPORATE GOVERNANCE – LEADING CORPORATES TOWARDS SUSTAINABILITY

Author: Payal Motwani, CS Management Trainee from Institute of Company Secretaries of India


CORPORATE GOVERNANCE: THE ORIGIN

Corporate governance is about maximization of shareholders value legally, ethically and on a sustainable basis. It addresses the issues facing the BOD, its interaction with the top management, relationship with the owners and other interested with the affairsof the company.The root of the word Governance is from the word ‘gubernate’, which means to steer. Hence taken together it would imply steering an organization in the desired direction.


NEED FOR CORPORATE GOVERNANCE

Corporate governance is fundamental to the presence of organization in the corporate world. It creates a corporate culture of transparency, accountability and disclosure.


BENEFITS OF HAVING SOUND CORPORATE GOVERNANCE

  • Ensures long term sustainability and growth of organization

  • Increase in investor’s confidence

  • Share prices too positively go up

  • Enhances brand image

  • Reduces cost and wastages.


HOW TO ENSURE A GOOD CORPORATE GOVERNANCE IN AN ORGANISATION

  1. By Clearly designating the role and powers of Board of Directors

  2. By setting clear objectives and ethical framework

  3. Establishing performance evaluation measures and then evaluating the performance

  4. The Board of directors should have sufficient skills like financial,legal, operational, leadership etc.

  5. Well defined open procedure to be in place for appointments and reappointments of directors.

  6. Continuous training of board members so that they are competent enough to face the challenges in the corporate world.

  7. Audit committee is of utmost importance in promoting good governance. Hence the quality of audit committee significantly contributes to the governance of any corporate.


VIGIL MECHANISM: A MEASURE OF GOOD CORPORATE GOVERNANCE

The whistle blower is a person who blows his whistle for any unethical acts conducted by/in the organization. Hence this mechanism aims at providing a channel to directors, employees to report genuine concerns about dishonest conduct, frauds or infringement with the code of conduct.


To have a proper vigil mechanism in place is considered as a measure for promoting good governance as it seeks to take appropriate actions to protect the interest of company and those who have reported such cases i.e., the whistleblowers.


EXAMPLE OF ENRON THAT LED TO EMERGENCE OF CORPORATE GOVERNANCE STRICTER NORMS

The Enron Scandal consists of Enron duping the regulators by resorting to off-the-books accounting practices and incorporating fake holding. The company utilized special purpose vehicles to hide its toxic assets and big amounts of debts from the investors and creditors. They resorted to unethical practices and concealing crucial data from its stakeholders. It is important to learn from this Scandal and the reason why there should be strong corporate governance policies should be followed in the corporations.


CORPORATE GOVERNANCE – INFOSYS

INFOSYS has received the highest Corporate governance rating by ICRA. This is due to its strong executive management structures and high-quality disclosures practices and standards of transparency far beyond the regulatory requirement.


REGULATORY FRAMEWORK OF CORPORATE GOVERNANCE IN INDIA

  • Companies Act,2013: The provisions relating to Board of directors, independent directors, audit committees related party transactions etcare provided under the act

  • SEBI Guidelines: For listed companies in India, SEBI is the regulatory authority that issues regulations and guidelines to ensure the smooth working of companies and ensure investor protection.

  • Accounting Standards issued by the institute of chartered accountants of India (ICAI): the institute provides guidelines for disclosure and recording of financial information by the companies.

The standards provide that financial information shall give a true and fair view of the company’s affairs.

  • Secretarial Standards issued by the institute of company secretaries of India (ICSI): the institute has issued 2 Secretarial Standards. SS1 “Meetings of Board of Directors” and SS2 “General Meetings”


INSITUTIONAL INVESTORS AND THEIR ROLE IN ESTABLISHING A GOOD GOVERNANCE

These are those big investors that take money from the public and invest in different companies on their behalf. Therefore they, act in Fiduciary capacity. Their investment is in huge amount and therefore they can help promote an ethical culture in the company.


These institutional investors before investing such a huge amount in any company perform extensive due diligence exercises and keep a continuous watch on their performances, decisions and events to be held in the company.


A company needs funds to grow and diversify its business and hence no company can ignore these institutional investors. Companies with better corporate governance in place are better to invest in as this would mean decreased monitoring costs.

  • One to one meeting with the company before investing

  • Using Corporate governance Rating (CGR) as a measure to access the governance compliance by the company.

  • Targeting the underperforming companies


CONCLUSION

Corporate Governance is managing, monitoring and overseeing various corporate systems in such a manner thatcorporate reliability, reputation are not put at stake. The Author is of the view that Every organization irrespective of its size should work in an ethical manner , satisfying the law in letters and spirit and not just the letters. The corporates should maintain high level of transparency and disclosures and communicating it to the stakeholders how the corporate is managed internally so that their money and trust are maintained.