Tag: Corporate Governance Osmania University b.com Notes

Corporate governance is basically a set of rules, practices, and procedures that guides company oversight and control by its Board of Director and independent committees. It involves balancing the interests of a company’s stakeholders including management, employees, suppliers, customers, and the community with the need to deliver value to its shareholders/owners. Having a strong, active, governance program is absolutely critical to the ongoing financial health, growth, and success of an enterprise over time.

To be effective, your company’s leaders must take responsibility for their decisions and the performance of the organization as a whole. For example, the leaders of a company should design and adhere to a code of ethics that helps management promote each of the important characteristics of good corporate governance.

1. Effective Risk Management

Even if your company implements smart policies, competitors might steal your customers, unexpected disasters might cripple your operations and economy fluctuations might erode the buying capabilities of your target market. You can’t avoid risk, so it’s vital to implement effective strategic risk management. For example, a company’s management might decide to diversify operations so the business can count on revenue from several different markets, rather than depend on just one.

2. Discipline and Commitment

Corporate policies are only as effective as their implementation. A company’s management can spend years developing a strategy to push into new markets, but if it can’t mobilize its workforce to implement the strategy, the initiative will fail. Good corporate governance requires having the discipline and commitment to implement policies, resolutions and strategies.

3. Clear Organizational Strategy

Good corporate governance starts with a clear strategy for the organization. For example, a furniture company’s management team might research the market to identify a profitable niche, create a product line to meet the needs of that target market and then advertise its wares with a marketing campaign that reaches those consumers directly. At each stage, knowing the overall strategy helps the company’s workforce stay focused on the organizational mission: meeting the needs of the consumers in that target market.

4. Fairness to Employees and Customers

Fairness must always be a high priority for management. For example, managers must push their employees to be their best, but they should also recognize that a heavy workload can have negative long-term effects, such as low morale and high turnover. Companies also must be fair to their customers, both for ethical and public-relations reasons. Treating customers unfairly, whatever the short-term benefits, always hurts a company’s long-term prospects.

5. Transparency and Information Sharing

Managers sometimes keep their own counsel, limiting the information that filters down to employees. But corporate transparency helps unify an organization: When employees understand management’s strategies and are allowed to monitor the company’s financial performance, they understand their roles within the company. Transparency is also important to the public, who tend not to trust secretive corporations.

6. Corporate Social Responsibility

Social responsibility at the corporate level is increasingly a topic of concern. Consumers expect companies to be good community members, for example, by initiating recycling efforts and reducing waste and pollution. Good corporate governance identifies ways to improve company practices and also promotes social good by reinvesting in the local community.

7. Regular Self-Evaluation

Mistakes will be made, no matter how well you manage your company. The key is to perform regular self-evaluations to identify and mitigate brewing problems. Employee and customer surveys, for example, can supply vital feedback about the effectiveness of your current policies. Hiring outside consultants to analyze your operations also can help identify ways to improve your company’s efficiency and performance.

Corporate governance is the structures and processes for the direction and control of companies. It is also about the relationships among the management, Board of Directors, controlling shareholders, minority shareholders and other stakeholders. Open to public Information disclosure, high transparency and accountability are basic important elements of best corporate governance that strives the sustainability of corporations and society. To avoid mismanagement, good corporate governance is necessary to enable companies operate more efficiently, to improve access to capital, mitigate risk and safeguard stakeholders. It also makes companies more accountable and transparent to investors so as to minimize expropriation and unfairness for shareholders.

Corporate governance refers to the accountability of the Board of Directors to all stakeholders of the corporation i.e. shareholders, employees, suppliers, customers and society in general; towards giving the corporation a fair, efficient and transparent administration.

Corporate governance is about making your business work better while abiding by the rules.

Good management is, of course, critical for the operation of a company. But managers need direction in order to prioritise operations and to allocate funds.

Need for Corporate Governance

The need for corporate governance is highlighted by the following factors:

(i) Wide Spread of Shareholders

Today a company has a very large number of shareholders spread all over the nation and even the world; and a majority of shareholders being unorganised and having an indifferent attitude towards corporate affairs. The idea of shareholders’ democracy remains confined only to the law and the Articles of Association; which requires a practical implementation through a code of conduct of corporate governance.

(ii) Changing Ownership Structure

The pattern of corporate ownership has changed considerably, in the present-day-times; with institutional investors (foreign as well Indian) and mutual funds becoming largest shareholders in large corporate private sector. These investors have become the greatest challenge to corporate managements, forcing the latter to abide by some established code of corporate governance to build up its image in society.

(iii) Corporate Scams or Scandals

Corporate scams (or frauds) in the recent years of the past have shaken public confidence in corporate management. The event of Harshad Mehta scandal, which is perhaps, one biggest scandal, is in the heart and mind of all, connected with corporate shareholding or otherwise being educated and socially conscious.

The need for corporate governance is, then, imperative for reviving investors’ confidence in the corporate sector towards the economic development of society.

(iv) Greater Expectations of Society of the Corporate Sector

Society of today holds greater expectations of the corporate sector in terms of reasonable price, better quality, pollution control, best utilisation of resources etc. To meet social expectations, there is a need for a code of corporate governance, for the best management of company in economic and social terms.

(v) Hostile Take-Overs

Hostile take-overs of corporations witnessed in several countries, put a question mark on the efficiency of managements of take-over companies. This factors also points out to the need for corporate governance, in the form of an efficient code of conduct for corporate managements.

(vi) Huge Increase in Top Management Compensation

It has been observed in both developing and developed economies that there has been a great increase in the monetary payments (compensation) packages of top level corporate executives. There is no justification for exorbitant payments to top ranking managers, out of corporate funds, which are a property of shareholders and society.

This factor necessitates corporate governance to contain the ill-practices of top managements of companies.

(vii) Globalisation

Desire of more and more Indian companies to get listed on international stock exchanges also focuses on a need for corporate governance. In fact, corporate governance has become a buzzword in the corporate sector. There is no doubt that international capital market recognises only companies well-managed according to standard codes of corporate governance.

Nature of Corporate Governance

• Good corporate governance ensures corporate success and economic growth.
• Strong corporate governance maintains investors’ confidence, as a result of which, company can raise capital efficiently and effectively.
• It lowers the capital cost.
• There is a positive impact on the share price.
• It provides proper inducement to the owners as well as managers to achieve objectives that are in interests of the shareholders and the organization.
• Good corporate governance also minimizes wastages, corruption, risks and mismanagement.
• It helps in brand formation and development.
• It ensures organization in managed in a manner that fits the best interests of all.

Scope of Corporate Governance

Corporate Governance refers to the way a corporation is governed. It is the technique by which companies are directed and managed. It means carrying the business as per the stakeholders’ desires. It is actually conducted by the board of Directors and the concerned committees for the company’s stakeholder’s benefit. It is all about balancing individual and societal goals, as well as, economic and social goals.

Corporate Governance is the interaction between various participants (shareholders, board of directors, and company’s management) in shaping corporation’s performance and the way it is proceeding towards. The relationship between the owners and the managers in an organization must be healthy and there should be no conflict between the two. The owners must see that individual’s actual performance is according to the standard performance. These dimensions of corporate governance should not be overlooked.

Corporate Governance deals with the manner the providers of finance guarantee themselves of getting a fair return on their investment. Corporate Governance clearly distinguishes between the owners and the managers. The managers are the deciding authority. In modern corporations, the functions/ tasks of owners and managers should be clearly defined, rather, harmonizing.

Corporate Governance deals with determining ways to take effective strategic decisions. It gives ultimate authority and complete responsibility to the Board of Directors. In today’s market- oriented economy, the need for corporate governance arises. Also, efficiency as well as globalization are significant factors urging corporate governance. Corporate Governance is essential to develop added value to the stakeholders.

Corporate Governance ensures transparency which ensures strong and balanced economic development. This also ensures that the interests of all shareholders (majority as well as minority shareholders) are safeguarded. It ensures that all shareholders fully exercise their rights and that the organization fully recognizes their rights.

Corporate Governance has a broad scope. It includes both social and institutional aspects. Corporate Governance encourages a trustworthy, moral, as well as ethical environment.

Corporate governance is the matter which involves a set of rules, principles, ethics, values, regulations, and procedures. Corporate governance Sets up a system of where directors and directors are entrusted with duties and responsibilities in relation to the direction of company matters. For effective corporate governance, its policies need to be such that the directors of the company should not abuse their power and instead should understand their duties and responsibilities towards the company and should act in the best interests of the company in the broadest sense.

The concept of ‘corporate governance’ is not an end; it is just a beginning towards growth of company for long term prosperity. In this article we will learn about the History pf corporate governance and then we will talk about evolution of corporate and all governing bodies which have legal authority towards corporate governance and case law finally It ends with a conclusion.

Corporate administration is to a huge degree, a lot of components through which outcast financial specialists shield themselves from confiscation by insiders (La Porta et al. 2000). The theme of corporate governance has attained prominence particularly since the 1980s and all the more so after the code of corporate administration issued by the Cadbury advisory group. The well-known Cadbury Committee characterised “corporate governance” in its report (Financial Aspects of Corporate Governance, distributed in 1992) as “the framework by which organisations are coordinated and controlled”.

History

Emergence of corporate governance happened in India after mid 1996 when economic liberalization and deregulation of business and industries came into picture. Concept of corporate governance India exists from a long back also can be said as Arthshastra. Earlier instead of CEO India kings and subjects used to exist but now are replaced with shareholders but still principles still are the same.

After independence, there was interest among industrialists and Businessmen for production of a lot of necessary products for which the Government directed and recited fair prices. This was the point at which the Bureau of Industrial costs and prices and Tariff Commissions were set up by the Government.  Industries (Development and Regulation) Act and  corporations Act were introduced into the system in 1950. 1960s was a time of setting up of big industries in addition to the existing routine affairs. The period between 1970 to mid-1980 was a time of cost, volume, and profit examination, as a vital piece of the cost accounting activities.

Reformation to Corporate Governance

First phase of India’s corporate Governance reform 1996-2008

The initial or first phase of India’s corporate governance reform aimed at making Boards and Audit committees much more transparent and Independent, they aimed at building more focused and powerful supervisors of management they were also aiding shareholders which includes both foreign and institutional shareholders. Efforts of this reform were channeled in number of different paths under Securities and exchange board of India (SEBI) and Ministry of corporate affairs (MCA)

CII-1996

In 1996, CII took up the very first initiative in the Indian industry and made an essential step towards corporate governance. The basic aim was regarding promotion and development of a code of companies, irrespective of whether it is a public sector or private sectors, financial institutions, or all corporate entities.

The initiative taken by CII addressed the public concern regarding the security of interest and concern of investors which includes especially small investors, the promotion of transparency within business and industry, it was required for the as it was necessary to procced towards International standards of disclosure information by corporate bodies. Through this way a confidence will be developed in business and industry. Final draft of code was introduced in April,1998.

Report of Committee on Corporate governance

Renowned Industrialist,  Mr. Kumar Mangalam Birla was appointed by SEBI to provide an aspect towards a concern of insider trading to secure the rights of our investors. The companies were asked to show their annual report separately, A report on corporate governance mentioning the steps taken to comply with the recommendations of the committee. The objection was to allow the shareholders to know in which company they have invested and stand with the initiative that are taken to ensure robust corporate governance.

Clause-49

There was realization about the importance of auditing body to the committee and many specific suggestions were made related to constitution and board Audit committees. These rules and regulations were mentioned in Clause 49, new section of the listing agreement which came into force in phases of 2000 and 2003.

Report of the consultive group of directors of banks April 2001

Reserve bank of India constituted the corporate governance of directors of banks and financial institutions to review the supervisory roles played by the board of banks and financial institutions and to get a feedback on activities of the board that is regarding compliance, disclosure, transparency, and audit committee etc. Also provide with ways for making the role of board of directors much more of effective with a perspective to reduce the risks.

Report of the committee on corporate Audit and governance committee: December 2002 

The committee took the responsibility to analyze and suggest some changes like statutory Auditor, company relationship, appointment of auditor and audit fee measures to ensure that management and companies put forth a true and fair statement of financial affairs of the company.

SEBI report on corporate governance ( N.R Narayan Murthy) Feb-2003

In order to improve governance standards, SEBI introduced a Committee to analyze the role of Independent directors, risk management, director compensation, code of conduct and financial disclosure

Clause 49 Amendment: Murthy Committee

In 2004, After Murthy Committee’s recommendations in accordance to that SEBI brought about changes in Clause 49

Second stage of corporate governance: Post satyam scam

India’s corporate community got a shock after, Jan 2009 with damaging revelations about colossal fraud and board failures in the financials of satyam .it can also be considered as satyam scam worked as a catalyst for Government of India to improve corporate governance, accountability, disclosures, and enforcement mechanisms. Industry reacted shortly after information of the scandal broke, the CII began investigating the corporate governance issues arising out of the Satyam scandal.  corporate governance and Ethics Committees were formed by industry groups to study the impact and lessons of the scandal.

Legal framework on corporate governance

The Companies Act, 2013: It describes about the laws of provisions concerning the constitution of the board, board meeting, board processes, Audit committee, general meetings, party transactions, disclosure requirements in the financial statements etc.

SEBI Guidelines

SEBI can be considered as governing body which has the power and carries jurisdiction over the listed companies and issues regulations, rules and regulation to ensure safety of the investors

Standard listing agreements of stock exchange: it is made for those companies whose shares are listed in the stock exchanges.

Accounting standards issued by the institute of chartered accountants of India (ICAI)- ICAI ca be said an independent body, which provides accounting standards mentioning guidelines about the disclosure of financial information. If we talk about new companies Act, 2013 Section 129 provides that the financial statements would give a fair view of the situation of the companies, following the accounting standards given under Section 133 of the Companies Act, 2013. It is further given that the things contained in such financial statements should be following the accounting standards.

Secretarial Standards issued by the Institute of Company Secretaries of India (ICSI). ICSI can also be considered as independent body, which carries secretarial standards according to the terms of conditions in the new companies Act ICSI has issued secretarial standards on “Meetings of the Board of Directors” (SS-1) and secretarial standards on “General Meetings” (SS-2). Given secretarial standards have come into force from 1-7-2015. Companies Act, 2013, Section 118(10) provides that every company (other than one person company) shall observe secretarial standards specified as such by the ICSI with respect to general and Board meetings.

It was the role of the Board in hurriedly giving a clean chit to its CEO without the results of an independent investigation released within the property right in an apparent case of alleged nepotism, and its refusal to require any questions on the matter.