The term ‘Corporate Governance’ refers to a set of rules by which a corporation is governed. This system speaks of the procedure, principles, and regulations to run a business in favor of both the business and the stakeholders. 90% of the businesses comply with the Corporate Governance ethics to avoid penalty.
As per the latest news on July 22, 2020, covered by The Economics Times near about 12 public sector bodies such as Hindustan Petroleum Corp, NMDC and others failed to comply with the norms mentioned by Corporate Governance. Each of those entities was charged a fine of ₹13 lakh by NSE and BSE.
“Corporate Governance is the relationship of a company with its stakeholders; more broadly, its relationship to the society.”
- Financial Times, 1997
All about Corporate Governance significance
Corporate Governance meaning is a culmination of a structure and system which is concerned with the ways of bringing the interests of investors and manager into line and ensuring that firms are running for the benefit of investors. Corporate Governance works in furtherance of acceptance by the management of the inalienable rights of the shareholders who may be considered as the true owners of the corporation.
What Corporate Governance refers to, is the relationship that exists between different participants, and defining the directions and performance of the corporate firms. The main factors of corporate governance are The CEO (the management), The Board of Directors, The Shareholders (the owners).
Experts (OECD– Organisation for Economic Corporation and Development) defined corporate governance as –system by which business corporations are directed and controlled.
Evolution of Corporate Governance models
Corporate Governance evolution took place since the companies started using the stock market to meet their financial needs. Executive greed (excessive desire to make high profits), rampant corruption (unrestricted or unchecked ill practices), insider trading, and terrible corporate practices have been threatening good corporate governance principles in India. Evolution of corporate governance in India can be categorized as follows-
- The Managing Agency System (1850-1955): It was an age-old system. The First Managing Agents in India were British Merchants, who brought necessary financial and managerial resources together to make a profit. But they were busy making profits for themselves even at the cost of the shareholders. After independence, many changes by the Government were made to restrict the ill-effects caused by the managing agents. It resulted in several changes in the provisions of The Companies Act, 1956.
- The Promoter System (1956-1991): It replaced the Managing Agency System, and radical changes in the economy started taking place since then. Govt. of India opted for economic liberalization to become an active player in the global economy. The Government passed the new Companies Act intending to eliminate the ill-practices of the Managing Agency System, to safeguard the shareholder’s right, and to protect the common interest of the company.
- Anglo-American System (1992-onwards): Various developments and influences from outside resulted in the birth of this system. In this system, Board is having responsibility to ‘govern’ and the Executivee. the managing director is vested with the regulation of daily affairs of the firm.
Benefits of business ethics and Corporate Governance
- Wide Spread of Shareholders – Corporate governance objectives help in the practical implementation of shareholders’ democracy through a particular code of conduct.
- Changing Ownership Structure – As the institutional investors and mutual funds became the largest shareholders it forced the corporate management to abide by some established code of corporate governance theories.
- Corporate Scams and Scandals – Scams in the last decade have shaken public confidence in corporate governance scope. Hence, there is a need for reviving investors’ confidence for economic development in the corporate sector.
- Greater Expectations of Society – In order to meet greater social expectations (reasonable price, better quality, pollution control, best resource utilization, etc.), there is a need for best management in the economic corporate governance report.
- Hostile Take-Overs – There is an utmost need for corporate governance in the form of an efficient code of conduct for corporate management to subside hostile take-over.
- Huge Increase in Top Management Compensation – Corporate governance concept helps in curtailing the ill-practices of exorbitant payments to top-ranking managers out of corporate funds.
- Globalization – Indian companies consider corporate governance benefits to gain more and more profit from the International capital market.
Principles of Corporate Governance committee
- Transparency in the administration of the corporation
- Accountability of Chairman, Board of Directors, and other Executives in the best interest of the stakeholder of the company
- Independence of management of the corporation.
Legislations on Corporate Governance features
- The Companies Act, 2013—consists of law provisions concerning the constitution of corporate administration.
- SEBI Guidelines.—SEBI is a governing authority having jurisdiction and power over listed companies and which issues regulations, rules, and guidelines to companies to ensure the protection of investors.
- Standard Listing Agreement of Stock Exchanges.—is for those companies whose shares are listed on the stock exchanges.
- Accounting Standards Issued by the Institute of Chartered Accountants of India (ICAI).—An independent body, providing guidelines for transparency of financial transactions, as per Section 129 and 133 of The Companies Act, 2013.
- Secretarial Standards issued by the Institute of Company Secretaries of India (ICSI).—ICSI is an independent body, which has secretarial standards in terms of the provisions of the new Companies Act.
Role of Institutional Investors in Corporate Governance structure
- Institutional investors constitute a broad umbrella that includes mutual funds, unit trusts, investment trusts, endowments, trustee departments of banks, insurance companies, public and private pension funds, etc.
- Institutional investors assert that a close association between an institutional investor and a portfolio company can result in a stable relationship that gives freedom to the management to be innovative and take up long term investment projects.
Corporate governance definition speaks of a power that provides businesses with the zeal of achieving goals, managing risk, and complying with the norms. The ever-increasing competition amongst the businesses has intensified corporate governance need in both national and international economic sectors.