Corporate Governance | UPSC Mains: Ethics, Integrity & Aptitude PDF Download

What is corporate governance?

1. Corporate governance is a concept that revolves around the appropriate management and control of a company.
2. It includes the rules relating to the power relations between owners, the board of directors, management, and the stakeholders such as employees, suppliers, customers, and the public at large.
3. Sustained growth of any organization requires all stakeholders' cooperation, which requires adherence to the best corporate governance practices.
4. In this regard, the management needs to act as trustees of the shareholders at large and prevent asymmetry of benefits between various sections of shareholders, especially between the owner-managers and the rest of the shareholders.
5. In general, corporate governance corresponds to the fair, transparent and ethical administration giving maximum benefits to the shareholders.
6. Ethics is at the core of corporate governance, and management must reflect accountability for their actions on the global community scale.
7. Corporate governance is a relatively new term used to describe a process, which has been practised for as long as there have been corporate entities. This process seeks to ensure that the business and management of corporate entities are carried on according to the highest prevailing standards of ethics and efficacy upon the assumption that it is the best way to safeguard and promote the interests of all corporate stakeholders.

Guidelines for Corporate Governance At International Level

• Cadbury Committee Report-The Financial Aspects of Corporate Governance (1992).
• Greenbury Committee Report on Directors' Remuneration (1995).
• Hampel Committee Report on Corporate Governance (1998).
• The Combined Code, Principles of Good Governance and Code of Best Practice, London Stock Exchange (1998).
• CalPERS' Global Principles of Accountable Corporate Governance (1999).
• Blue Ribbon Report (1999).
• King Committee On Corporate Governance (2002).
• Sarbanes Oxley Act (2002).
• Higgs Report: Review of the role and effectiveness of non-executive directors (2003).
• The Combined Code on Corporate Governance (2003).
• ASX Corporate Governance Council Report (2003).
• OECD Principles of Corporate Governance (2004).
• The Combined Code on Corporate Governance (2006).
• UNCTAD Guidance on Good Practices in Corporate Governance Disclosure (2006).
• The Combined Code on Corporate Governance (2008).

Corporate Governance Initiatives in India

• In India, the Ministry of of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI) have undertaken corporate governance initiatives.
• The first formal regulatory framework for listed companies specifically for corporate governance was established by the SEBI in February 2000, following Kumarmangalam Birla Committee Report's recommendations. It was enshrined as Clause 49 of the Listing Agreement.
• Further, SEBI is maintaining corporate governance standards through other laws like the Securities Contracts (Regulation) Act, 1956; Securities and Exchange Board of India Act, 1992; and Depositories Act, 1996.
• The Ministry of Corporate Affairs had appointed a Naresh Chandra Committee on Corporate Audit and Governance in 2002 in order to examine various corporate governance issues. It made recommendations in two key aspects of corporate governance: financial and non-financial disclosures: independent auditing and board oversight of management. It is making all efforts to bring transparency to corporate governance structure through the enactment of the Companies Act and its amendments.
• India's SEBI Committee on Corporate Governance defines corporate governance as the "acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company."
• It has been suggested that the Indian approach is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution. Still, this conceptualization of corporate objectives is also prevalent in Anglo-American and most other jurisdictions.
• Intending to promote better corporate governance practices in India, the Ministry of Corporate Affairs, Government of India, has set up National Foundation for Corporate Governance (NFCG) in partnership with the Confederation of Indian Industry (CII), Institute of Company Secretaries of India (ICSI) and Institute of Chartered Accountants of India (ICAI).

Need of Corporate Governance:

• The need for corporate governance has arisen because of the increasing concern about the non-compliance of financial reporting standards and accountability by boards of directors and management of corporate inflicting heavy losses on investors.
• The collapse of international giants likes Enron, World Com of the US and Xerox of Japan are said to be due to the absence of good corporate governance and corrupt practices adopted by the management of these companies and their financial consulting firms.
• The failures of these multinational giants bring out the importance of good corporate governance structure making clear the distinction of power between the Board of Directors and the management which can lead to appropriate governance processes and procedures under which management is free to manage and the board of directors is free to monitor and give policy directions.
• In India, SEBI realised the need for good corporate governance and for this purpose appointed several committees such as Kumar Manglam Birla Committee, Naresh Chandra Committee and Narayana Murthy Committee.

Importance of Corporate Governance

The term is highlighted whenever there are corporate frauds. Corporate Governance and Code of corporate governance calls for ethical and accountable corporate administration. The best practices of corporate governance are essential not only for the public or shareholders but also for the company's very existence. Adopting corporate control will increase the value, sustainability and long-term profits. These days, it is not enough for a company to merely be profitable; it also needs to demonstrate good corporate citizenship through environmental awareness, ethical behaviour and sound corporate governance practices. Corporate governance became a pressing issue following the 2002 introduction of the Sarbanes-Oxley Act in the U.S., which was ushered in to restore public confidence in companies and markets after accounting fraud bankrupted high-profile companies such as Enron and WorldCom. The importance of corporate governance was highlighted at Satyam Fraud and when Kingfisher Airlines was making a loss.