Corporate Governance
Meaning:
Corporate governance refers to the set of processes, practices, principles, policies and laws by
which a company is directed, managed or controlled. It is a structure of rules, relationships,
systems within the business and by which authority is exercised and controlled in the
organisation.
Definition:
The Institute of Company Secretaries of India defines corporate governance as the application
of best management practices, compliance of laws in true letter and spirit and adherence to
ethical standards for effective management and distribution of wealth and discharge of social
responsibility for sustainable.
Development of all stakeholders
Corporate governance involves the relationship among a company’s management, board of
directors, shareholders and other stakeholders and it provides the structure through which the
company’s objectives are set and the means of attaining those objectives and monitoring
performance.
Corporate governance ensures accountability, fairness and transparency in a company’s
relationship with its stakeholders including shareholders, employees, customers, creditors,
suppliers and the broader community.
Nature of Corporate Governance
1. Corporate governance is based on the principle that business is accountable for its
actions.
2. Corporate governance highlights the importance of ethics and social responsibility in the
management of business.
3. Corporate governance considers shareholders as the true owners of the company with
unchallengeable rights.
4. Corporate governance is about commitment to values and ethics in the functioning of
business.
5. It makes a distinction between personal and corporate funds in the management of
company.
6. The role of corporate governance is setting right goals, selecting right paths, making
right decisions and doing right actions so as to ensure honesty and fairness to business
operations.
Objectives of Corporate Governance
1. Monitoring the performance:
Corporate governance sets guidelines for the performance of the organisation. It
guarantees that the shareholders receive a fair return on their investment through good
performance.
2. Compliance:
Corporate governance insists on compliance with legal requirements, industrial
standards and accountability to the stakeholders. It is to meet the requirements of laws,
community expectations, etc.
3. Implicate moral values:
The functioning of an organisation on the basis of moral values depends on the
seriousness of its moral foundation. It should execute their activities in conformity to
accepted moral principles.
4. Ensure fairness in operations:
Corporate governance facilitates and helps the companies to make right decisions in a
proper way so as to ensure honesty and fairness in their operation.
5. Equitable treatment of shareholders:
Corporate governance aims at ensuring fair and equitable treatment of shareholders
without any discrimination.
Equal treatment of all shareholders and protection of shareholder rights are the two
important aims of corporate governance.
6. Safeguard the interest of investors:
Corporate governance aims at the protection of investors’ rights and interest by
increasing disclosure, establishing well-structured and independent board of directors,
ensuring transparency, mechanisms to avoid mismanagement, and preventing
shareholders by..
7. . Fair treatment of workforce:
Corporate governance accepts the diversity of people in the workforce. It ensures equal
opportunity in all aspects of employment, regardless of race, colour, gender, age, marital
status, disabilities, or any other basis.
8. Strong internal control and discipline:
Corporate governance checks fraud and corruption in business. It promotes integrity,
cooperation, and responsibility to the community and the society
9. . Good relationship:
Corporate governance aims to maintain good relationships between all internal and
external stakeholders of the business.
10. . Transparency and full disclosure:
Corporate governance aims to ensure higher degrees of transparency in an
organisation by encouraging full disclosure of transactions in the company accounts. Full
disclosure includes compliance with the rules and regulations, disclosing information to
shareholders, etc.
Need/Importance of Corporate Governance
1. Builds trust and credibility:
When a company follows strong corporate governance practices, it fosters trust among
shareholders, employees, customers, and other stakeholders. Transparency in decision-
making, financial reporting, and risk management helps stakeholders feel confident in
the company’s operations.
2. Improves financial performance:
Proper governance leads to better management, strategic decision-making, and
operational efficiency. Companies with good governance are often better at managing
risks.
3. Ensures long-term responsibility:
4. Attracts investment:
Good governance practices attract both domestic and foreign investors due to
increased trust and lower risk.
5. Protects stakeholders' interest:
It balances the interest of different stakeholders like shareholders, employees,
customers, suppliers, and the society.
6. Legal and regulatory compliance
7. Ensures accountability
8. Reduces risk and prevents fraud
The four principles of corporate governance:
1. Transparency:
Open and honest disclosure of financial and operational information to all stakeholders.
2. Accountability:
Management and the board are responsible for the performance of the company and
must be held accountable for their actions. This includes ensuring compliance with laws
and regulations as well as ethical conduct.
3. Fairness:
All stakeholders should be treated equitably with their interest fairly considered in
decision-making process. This is particularly relevant in situations involving minority
shareholders.
4. Responsibility:
Corporate entity has a responsibility towards society beyond merely maximizing profit.
This includes environmental protection, social welfare initiatives, and ethical business
practices.
5. Independence:
The board of directors should be independent, ensuring objective oversight of
management and protection of shareholders' interest. Independent directors play a
crucial role in this aspect.
Features of Corporate Governance:
1. Honouring the rights of shareholders
2. Equitable treatment of shareholders:
Shareholders of the business must be treated equally and fairly without discrimination.
3. Responsible board of directors:
The board of directors of the company would act with utmost responsibility in all its
decisions and actions. The board group needs to review and understand various
performance issues and take steps to improve management performance.
4. Ethical behaviour:
Good corporate governance establishes certain behavioural standards in the
organization to govern its policy, administration, and day-to-day operations.
5. Disclosure and transparency:
A company with good corporate governance discloses to shareholders and other
stakeholders all material facts related with their operations and ensures that all the
practices are transparent with access to clear, factual information.
6. Accountability:
Good corporate governance ensures that all members of the organization are
responsible and accountable for their decisions and their actions.
7. Integrity:
Good corporate governance ensures straight-forward dealing, honesty, and objectivity.
8. Effectiveness:
Good governance ensures that the organization generates and delivers quality
outcomes efficiently so as to give maximum benefits to the stakeholders.
Factors Influencing Corporate Governance
1.Ownership structure:
The ownership structure of a company greatly influences....
its nature of its governance. Companies in different countries follow different pattern of
ownership structure. The Indian corporate environment is characterized by the co-existence of
state-owned, private and multi-national enterprises. The shares of these enterprises are held by
institutions as well as small investors.
2. Structure of Board of Directors – The structure of board of directors greatly influences the
management and control of the companies. The board is responsible for establishing corporate
goals, policies and selecting top level executives to carry out these goals, objectives and
policies.
3. Management Quality – The quality of a company's management team is a critical factor
influencing corporate governance. Effective managers are ethical, transparent and accountable
and they prioritize the long term interest of the company over short term gains.
4. Capital Structure – The proportion between debt and equity has considerable influence over
the governance of the companies. More debt capital reduces the influence of shareholders on
the management and control of the companies.
5. Internal Control System – Internal control are the policies designed to ensure the accuracy
and reliability of financial reporting, protect the companies asset and prevent fraud and errors.
Strong internal controls are essential for effective corporate governance.
6. Corporate Environment – The legal, economic, political and social environment within which
a company operates determines in large the
7. Market forces – Market forces such as competition and investor involvement can also
influence corporate governance. Companies that operate in competitive markets are more likely
to adopt good governance practices to attract investors and maintain their competitive edge.
8. Stakeholders pressure – Stakeholders such as employees, customers, suppliers etc. also
influence corporate governance. Companies that are responsive to the needs of stakeholders
and are more likely to build trust and maintain their reputation.
9. Media scrutiny – Media can play a vital role in corporate governance practice and holding
companies accountable for their actions.
Difference between Governance and Management
Importance of Corporate Governance:
1. Enhances investor confidence:
Good governance attracts more investment and improves the valuation of the company.
2. Protects shareholders’ interests:
It safeguards the interests of shareholders, especially minority ones.
3. Ensures transparency and accountability:
It helps disclose correct information and ensures that the management is answerable to
stakeholders.
4. Improves access to capital:
Companies with good governance find it easier to raise capital.
5. Enhances company’s reputation:
Good governance builds trust and improves the image of the company.
6. Reduces risk of fraud and scandals:
Governance discourages manipulation, fraud, and unethical practices.
7. Ensures compliance with laws:
It ensures that companies follow legal and regulatory requirements.
8. Improves decision-making:
Governance helps in better decision-making and strategic planning.
9. Importance of Corporate Governance
a) Attracts investors – Relia.
b) Enhances company’s reputation – S
c) Improves efficiency – It
d) Reduces risk
e) Ensures accountability – It
f) Enhances trust – Ensur
g) Promotes transparency –
Mechanism of Corporate Governance:
1. Board of Directors:
The board is responsible for ensuring transparency, accountability, and fairness in a
company’s relationship with all its stakeholders.
2. Audit Committee:
A sub-committee of the board of directors, it monitors the financial reporting process
and disclosure of financial information.
3. Remuneration Committee:
It ensures that executive compensation is aligned with performance and shareholder
interest.
4. Nomination Committee:
It ensures appointment of qualified and competent directors.
5. Shareholders:
They have the right to elect directors and approve major decisions in the company.
6. Management:
Responsible for implementing corporate governance policies and running the day-to-
day affairs of the company.
7. Statutory Auditors:
They independently verify financial statements to ensure accuracy and compliance with
laws.
Committees on Corporate Governance
Global and Indian Perspective
Global Perspective on Committees of Corporate Governance
The following are the some of the important committees on corporate governance:
Cadbury Committee (UK 1991)
This committee was set up in May 1991 by the UK government, headed by Sir George Adrian
Cadbury, to address the issues raised in the corporate sector in the late 1980s and early 1990s.
The main recommendations of the Cadbury Committee were the following:
1. Emphasize the role of board of directors in overseeing company management and
ensuring transparency in financial reporting.
2. Hold for the establishment of independent audit committees to monitor financial
practices.
3. Recommended the separation of the roles of chairman and CEO to avoid conflicts of
interest.
4. Promoted the need for companies to provide clear and reliable reporting.
The King’s Report (South Africa 1994, 2002)
South Africa’s King’s report of corporate governance was established to address corporate
governance issues particularly in the post-apartheid era. The first King report was issued in
1994 and followed by the King’s 2002.
Recommendations
The report recommended to introduce the concept of triple bottom line emphasizing financial,
social, and environmental factors in governance.
It encouraged companies to consider the interest of all stakeholders, not just shareholders,
focused on the structure and operations of board of directors.
Also, it advocated for diversity including the role of independent directors.
The Hampel Committee
The Hampel Committee was established in November 1995 to review the recommendations of
Cadbury Committee. The committee was constituted under the leadership of London Stock
Exchange and it was headed by Sir Ronald Hampel.
Recommendation
The committee recommended to promote high standards of corporate governance in the
interest of investor protection and prevent pressure and enhance the standing of companies
listed on the stock exchange.
The committee gave four major recommendations into role of directors, the role of shareholders,
accountability, and...
OECD Principles (1999 and 2004)
The Organisation for Economic Cooperation and Development is an international economic
organization of 30 countries, founded in 1961 to promote economic progress and world trade.
The OECD released principles of OECD in May 1999 and they were revised in 2004.
1. Transparency
The company should provide timely, accurate, understandable, and accessible
disclosure.
2. Accountability
The board of directors and the management must be accountable for their actions.
3. Fairness
Shareholders’ rights should be protected and minority shareholders should be treated
fairly.
4. Board Responsibility
The board should have clear responsibility in all areas including overseeing risk
management, regulatory compliance, compensation, etc.
Indian Perspective of Committees on Corporate Governance
The following are the some of the major committees on corporate governance in India.
The Confederation of Indian Industry (CII) Code of Corporate Governance:
The CII has been a front runner in the evolution of corporate governance in India.
4. The CII released the voluntary code of corporate governance in 1997. It took the lead in
recommending corporate governance practices for its member companies.
2. The Kumar Mangalam Birla Committee
In 1999, SEBI constituted the Kumar Mangalam Birla Committee under the chairmanship of
Kumar Mangalam Birla (who is a member of SEBI) to promote and raise standards of good
corporate governance.
The primary objective of the committee was to improve corporate governance from the
perspective of the investors and shareholders and to prepare a code to suit the Indian corporate
environment.
3. Naresh Chandra Committee
The Ministry of Corporate Affairs appointed a high-level committee headed by Mr. Naresh
Chandra in August 2002 to examine various corporate governance issues.
The committee had been entrusted to analyze change and recommend changes if necessary in
areas such as the statutory auditor-company relationship, the procedure for appointment of
auditors and determination of audit fees, and measures required to ensure that management
and companies actually present true and fair statements of the financial affairs.
Other responsibilities included:
● Adequacy of the regulation of chartered accountants and company secretaries,
● Role of independent directors, etc.
4. N. R. Narayana Murthy Committee
This committee was constituted by SEBI in 2002 to study the role of audit committees, audit
reports, independent directors, related party transactions, risk management, directorships,
director compensation, codes of conduct, and financial disclosures.
It aimed to make recommendations to improve the governance framework for listed companies
in India.
The committee proposed to:
● Increase the minimum number of independent directors
● Recommended that listed companies should have at least one woman director on the
board
Other recommendations:
● A formal process for evaluating the performance of the board and individual
directors
● Suggested greater transparency in corporate disclosures, especially regarding related
party transactions and executive compensation
5. C. Achuthan Committee
SEBI constituted the Achuthan Committee in 2003 to focus specifically on:
● The role of auditors
● Issues related to their independence and effectiveness
6. Uday Kotak Committee
This committee was formed by SEBI in 2017 to review and...
...incorporated into the Listing Obligation and Disclosure Requirements (LODR) and SEBI's
revised corporate governance code, which came into effect in 2018.
Committee Contributions
Committees required to form separately in listed companies:
1. Audit Committee
2. Nomination and Remuneration Committee
3. Stakeholders Relationship Committee
Let me know if you'd like a compiled summary of all these committees and their roles, or a
cleanly formatted document.
4. Evolution of Corporate Governance
Corporate governance has evolved over the years in response to corporate failures and
widespread dissatisfaction with the functioning of companies and financial institutions. The need
for strengthening the corporate governance framework became all the more important after the
collapse of major corporate giants.
5. Cadbury Committee Report
In early 1990s, the UK government asked Sir Adrian Cadbury to chair a committee on the
financial aspects of corporate governance. The Cadbury Committee was set up in May 1991 by
the Financial Reporting Council, the London Stock Exchange, and the accountancy profession.
The committee was set up in response to the perceived low level of confidence in the financial
reporting of companies, particularly in the light of the financial scandals involving companies
such as Polly Peck, BCCI, and Maxwell.
The Cadbury Committee defined corporate governance as:
"Corporate governance is the system by which companies are directed and controlled."
The Cadbury Report made several recommendations to improve the standards of corporate
governance in companies including:
● Separation of the role of CEO and Chairman
● Establishment of audit committees of the board
● Inclusion of non-executive directors
● Timely disclosure of financial statements
● Strengthening the role of shareholders
● Rotation of auditors
● Increased transparency in management
● Promoting ethical practices
6. Narayana Murthy Committee Report (2003)
The Narayana Murthy Committee was set up by SEBI in 2002 to review the role of corporate
governance. The committee emphasized the importance of independent directors, audit
committees, risk management, and the role of stakeholders in corporate governance.
It also recommended for:
● Better disclosure of financial and non-financial information.
● Strengthening internal control processes and risk management framework.
● Enhancing the quality of financial reporting by companies.
The report recommended that companies should submit quarterly compliance reports to stock
exchanges, including details of corporate governance practices.
7. Naresh Chandra Committee (2002)
This committee was established by the Department of Company Affairs to address corporate
governance in the context of auditing and accounting practices.
The recommendations included:
● Greater accountability of auditors.
● Establishment of an independent oversight board for auditing firms.
● Mandatory rotation of audit partners.
● Restrictions on auditors providing non-audit services to their clients.
8. OECD Principles of Corporate Governance – 1999 and 2004
The Organisation for Economic Co-operation and Development (OECD) first published its
principles of corporate governance in 1999 and revised them in 2004.
The main features of OECD principles are:
1. Ensuring the basis of an effective corporate governance framework:
Promotes transparent and efficient markets, is consistent with the rule of law, and
clearly articulates the division of responsibilities among different supervisory, regulatory,
and enforcement authorities.
2. Rights of shareholders and key ownership functions:
Protecting and facilitating the exercise of shareholders’ rights.
3. Equitable treatment of shareholders:
All shareholders of the same series of a class should be treated equally.
4. Role of stakeholders in corporate governance:
The corporate governance framework should recognize the rights of stakeholders.
5. Disclosure and transparency:
Timely and accurate disclosure is essential on all material matters.
6. Responsibilities of the board:
The board should ensure the strategic guidance of the company, effective monitoring of
management, and accountability to the company and the shareholders.
2. Evolution of Corporate Governance in India
● The initiative for introducing corporate governance in India began in the early 1990s.
● The Confederation of Indian Industry (CII) took the first step by setting up a committee in
1996 under the chairmanship of Rahul Bajaj to develop a voluntary code of corporate
governance.
● In 1999, the SEBI (Securities and Exchange Board of India) appointed the Kumar
Mangalam Birla Committee to promote and raise the standards of corporate governance.
● Based on the recommendations of the Kumar Mangalam Birla Committee, Clause 49 of
the listing agreement was introduced, which became mandatory for all listed companies.
● Subsequently, the Narayana Murthy Committee (2002) was formed to review Clause 49
and suggest improvements.
● Other important committees include:
○ Naresh Chandra Committee
○ JJ Irani Committee
● These committees aimed at improving transparency, protecting investor interest, and
enhancing the accountability of companies.
4. N. R. Narayana Murthy Committee
The recommendations & purpose of governance framework for the functioning of audit
committees, board of directors, and financial disclosures in annual reports.
The committee proposed a number of measures like:
● Audit committee should be headed by a qualified and independent director.
● Establishing a code of conduct for directors and senior executives.
● The board engaged advisors having expertise in corporate governance.
5. Naresh Chandra Committee (2002)
Established by the Government of India in 2002.
Purpose: To examine the auditor–company relationship.
Recommendations:
● Rotation of audit partners.
● Restrictions on non-audit services by auditors.
● Greater disclosures of financial information in public interest.
6. CII – Confederation of Indian Industry (1998)
Formed a committee in 1996 under the chairmanship of Rahul Bajaj and gave the first voluntary
code on corporate governance in 1998.
7. Uday Kotak Committee (2017)
Constituted by the Securities and Exchange Board of India (SEBI), headed by Uday Kotak, for
improving corporate governance.
Recommendations:
● Minimum number of directors on board of listed companies.
● Committee required at least 6 independent directors.
● Enhanced role of audit committee, nomination & remuneration committee.
● Separation of roles of chairman and managing director.
● Disclosure of expertise of directors.
