DJN Blogs

Pranjal Vashisht, JEMTEC School of Law.
Date: 15.12.2021
CORPORATE GOVERNANCE AND INDIAN PERSPECTIVE
Either you run the day or
the day runs you. – Jim Rohn
Abstract
Corporate governance is the collection of blueprints
that are generated for determining a firm’s show and orientation. It is a
synopsis of rules and regulations for the individuals administering an
incorporated company. They are the ones who accept to take authority towards
the shareholders. Corporate governance is a wider expression in today’s
business surroundings. The juridical implements of corporate governance can be modified
to suit the diligent option of every wearer. The paper will put the light upon
corporate governance, followed by India’s viewpoint. It will examine the
barricades that a growing and developing economy like India has to encounter.
In addition, it will elucidate why it is necessary for any nation to chase good
corporate governance exercises. In the next segment, it will glance at how
corporate governance transmuted into an indissoluble function of Indian
economy. Next, it talks about participation of morals, internal governance, and
alternative of auditor and audit committee for India. In the conclusion, the
paper gives a summary of how corporate governance is shaping the current economic
environment of India.
Keywords
Audit committee, ethics, internal governance,
Indian corporate governance.
Introduction
Corporate governance is a comprehensive
sphere of study which comprises of an extensive range of subjects – accounting,
consulting, economics, morals, finance, law, and management.[1] The primary task of
corporate governance is to form negotiations that outline the entitlements and duties
of shareholders and the corporation. In case of disputes because of difference
of opinion or conflict of interest, it is the duty of corporate governance to
bring the public together. It also has the purpose of setting guidelines
against which firms tasks can be run and controlled.[2]
Corporate governance discusses the means
by which firms are controlled and supervised. Corporate governance has swelled
in eminence over the centuries. It has been a zone of swift evolution
especially after large corporate slumps, extensive course of actions were vital
to ensure adherence to good customs in corporate governance. Corporate or corporation
is extracted from Latin phrase ‘corpus’ which implicates a ‘body’. Governance means
instructing the techniques and structures put for gratifying partner aspiration.
The motive behind corporate
governance is to aid in building a surrounding of belief, lucidity and responsibility
obligatory for promoting long-term investment, financial lucidity and business solidarity,
thereby supporting terrific growth and more comprehensive societies. The morals
are calculated to assist policymakers, assess and revamp the judicial, directorial,
and institutional composition for corporate governance, with a vision to aid
economic effectiveness, sustainable progress and financial sense.[3]
The ABC of Corporate Governance
Corporate governance is as aged as the
corporate character itself.[4] Corporate
governance requires a collection of relationships between a corporation’s administration,
its panel, its shareholders and other stakeholders. Corporate governance also
come up with the formation through which
the goals of the firm are set, and the method of accomplishing those aims,
objectives and examining performance are set on.
Early efforts to interpret the notion
of corporate governance become visible in the United Kingdom Cadbury Report
(1992) and the South African King Report (1994), expounding corporate
governance as ‘the system by which companies are directed and controlled’.[5]
Righteous corporate governance is a crucial
factor as uprightness; capability and skills are the pillars of a firm. Below
par corporate governance can dilute a company’s aptitude, can guide to
financial instabilities and in some instances can give rise to long-term harm
to a firm’s name and esteem.
Corporate governance is the composition
of regulations, associations, affairs, managements and procedures within and by
which authorization is applied, advised and controlled in companies. It comprises
and circumscribes the operations by which firms, and those in power, are held
to judge.
Corporate governance refers usually to
the juridical and organizational composition within which, and the ethics and procedures
by which, companies are regulated. It refers in specific to the abilities, responsibility
and links of those who take part in the course and command of a corporation. Leader
among these party are the committee of directors, and administration. There are
characteristics of the corporate governance system that have an effect on the tie
– up between shareholders and the firm.[6]
Productive corporate governance forms motivate
the firms to produce worth, through entrepreneurism, revolution, evolution and investigation,
and provide liability and control systems corresponding to the threat involved.
[7]
Thus, the theory of ‘corporate
governance’ began to affect this new expression of ‘handling the company’, with
a principal focus on the interconnection between internal class and individuals
such as the council of directors, the shareholders in general meeting, personnel,
managing directors, executive directors, non-executive directors, executives,
audit committees and other bodies of the panel. However, exterior interests are
also at risk; for example, those of creditors, probable investors, and
consumers and the community at large.
Besides,
good or righteous governance is primarily about successful headship. Leaders
should stand up to the dares of contemporary governance. Such premiership is distinguished
by the moral principles of authority, accountability, impartial and limpidness
and established on moral obligations. Responsible heads instruct corporation policies
and performance with a vision of attaining feasible economic, social and
environmental production.
India and Corporate Governance
Corporate governance has played a
very principal character to play in the current economic situation of India.
India successfully began its progress towards unbarred and welcoming economy in
1991. From then on it has seen an astonishing rising trend in the magnitude of
its capital market, that is, number of listed companies was increasing proportionately.[8] If India wants to allure
more nations for foreign direct investments, Indian firms have to be more attentive
towards translucency and “Shareholders value maximization”.[9]
Even though corporate governance exercises
can be backdated to as early as 1961 around the globe, India was failing to maintain
the progress. It was not until 1991 when liberalization took place and
corporate governance accepted a global subject. The most salient scheme of 1992
was the refinement of Securities and Exchange Board of India (SEBI). The primary
target of SEBI was to look after and systematize stock trading, but it step by
step constituted a number of corporate governance rules and regulations. The succeeding
crucial change was evolution of Confederation of Indian Industry (CII) in 1996,
which developed the combination of laws for Indian firms as to start off the
act towards corporate governance. Then two boards, Kumar Mangalam Birla and
Narayan Murthy under Securities and Exchange Board of India commenced setting
down the basics for ratifying the prime applications on corporate governance. Established
on proposals from these councils, Clause 49[10] was instituted as part of
the listing contract for the firms listed on the Indian stock exchange.
However, due to smear campaign from companies like Enron, Satyam, WorldCom etc.
forced the clause 49 to be reformed to integrate and conquer the difficulties
that triggered these firms to crumble and fractured the economies of the
respective nations.[11]
Clause 49 of the listing agreement
of Indian stock exchange became operative from 2000 to 2003. It comprised all
the rules and essentials of least number of self – sufficient directors, council
members, different requisite committees, code of conduct, audit committee regulations
and limits, etc. Companies that were not backing these morals were removed from
the listing and were given financial punishments.[12]
Comparing the
Sarbanes-Oxley Act and Clause 49, Clause 49 was established on the concept of
Sarbanes-Oxley Act of 2002. It was developed for the firms listed on the US
stock exchanges. As far as the duties of administration and number of directors
were concerned, they are both the alike. They also have matching regulations concerning
insider trading, denial of loans to directors and so on. The salient difference
between the two is under Sarbanes-Oxley codification that if cheating or eradication
of records takes place, up to 20 years of imprisonment can be charged, but in instance
of Clause 49, there are no such circumstances. Being the administrator of the
market, SEBI can initiate a criminal proceeding. If in case SEBI determines to
give a harsh punishment then it can start off a criminal proceeding or increase
the penalty for not matching up with Clause 49, which automatically delists the
corporation.[13]
Business Ethics
Business ethics is established on
the broad subjects of reliability and justness. Business ethics means putting
in the universal moral fundamentals to business issues and detecting the
resolution that will be “fair” in all situations.[14] Business worries come to
light when the ruling made by the committee is going to influence either
profitability or its shareholders in the end.
Some rudimentary tasks that come
under business ethics patronage are defining accepted conduct, set up company
values, determining duties, present headship and counseling, relate interpretations
to stakeholders as well as shareholders, increasing liability, always aware of the
outcomes, continues examinations and alternatives for enhancement, etc.[15]
Corporate governance behaves as a
bridge between shareholders, stakeholders, and council of directors. It should
be able to reinstate the belief and sureness of management and the firm to the
shareholders in the corporation.[16]
Firms need to do much more than
just accomplishing the ethical corporate governance exercises; it should
continuously aspire for satisfying the foremost interest of all its members. It
focuses on determining the governing composition in any corporation such as committee
of directors, audit committee, shareholders committee, election of independent
auditors etc. The principal matter with the governance is that there is no intentional
measure against which it can be said if it is good or bad. Here the firm’s moral
comes into the attack.[17]
Corporate governance operations
should be organized in such a way that it will motivate an appropriate aura for
corporate communal duty, reliability, and morals. It is one of the ten core ideas
of corporate council of directors that was formulated by the National
Association of Corporate Directors, 2008. Business ethics mostly has to manage
with choice of conflict of interest and merit. Corporate directors have
fiduciary responsibility towards the stockholders. Committee members are the
eyes and ears for the shareholders.[18]
Internal Governance
·
Board of Director
The owner and shareholders are connected
to each other through board of directors. They are the connection between
managers sitting in the company office and the vast set of controllers of a
firm that are all over the globe. They have fiduciary responsibility towards
its shareholders, as shareholders are the ones who have appointed them as board
of director. The council comprises of internal and external directors. The
internal directors sometimes known as executive directors are usually superior
position bearer people from the company; they usually know confidential details
about the firm and its presentation. Whereas the external directors also called
as non-executive directors are not the staff of the firm, they are specialists
in their subject matter that is essential as per the firm.
Duty of caution and duty of faithfulness
are the most paramount parts of any director. The American Law Institute records
one of the duties as selecting, evaluating, and fixing the interests of the superior
executives, another charge is to keep a watch at the business and its future duties
towards the community, they also give assent to corporate schemes for the
future and the financial aim that the company has to establish, finally they
also focus at if the firm is making the desired changes as per the demand of
the society.[19]
·
Board Size and
Composition
There is no worldwide appropriate figure
for the most approvable size of board of directors. Even if the firm has a
small or a large committee, they both have their positive as well as negative
attributes. There is a very complex relation between board size, board
effectiveness, and business performance. According to the Corporate Library’s research,
the median board size is from 3 to 31 members. For India, there is no obligatory
number for the board of directors except the regulation of minimum of two
members in private limited firms and three for public limited firms.
·
Board Profile and
Diversity
Board profile refers to the extent
of expertness the board member brings to the table, whereas the board diversity
refers to the socio-cultural exposure of the member. There are ranges of surveys
that demonstrate the want of both flexible profile as well as variety. The resolutions
made by the board influence the company in day-to-day business. People with
same mentality tend to assist each other. This can on occasion lead the firm on
wrong course. For the reliable growth of the company, it needs assortment in
the board. For now though US lags Europe and Asian nations in case of board
diversity.
Auditors and Audit Committee
A firm can select to have internal
or external auditor. Internal auditors are generally full time firm employees
whereas external auditors are hired on a stipulated motive and are independent
of the organization they are examining. After the crumble of Enron,
Sarbanes-Oxley Act of 2002 provided various new regulations concerning the
auditors and their committee. First, the auditor of any firm will be involved
only in consulting activities. Second, auditing committee is appointed by
independent board of directors rather than by chief financial official. Third,
public chartered accountants supervise board regulating accountants; they keep
an eye on all the accounting companies too. Fourth, lead accounting partner is
rotated every five years just to evade any encounter between auditor and the firm.
Finally, to stay away from any other kind of deceitful conduct, SOX authorized
all the off-balance sheet negotiations to be declared in detail by the corporation.[20]
The Blue Ribbon Committee (BRC),
which is sponsored by NYSE-NASDAQ, systematized the part of audit committee as
the “ultimate authority and responsibility to select, evaluate, and where appropriate,
dismiss the outside auditor.” In addition to that, Securities Exchange
Commission (SEC) gave out the regulation that administration cannot dismiss an
auditor without the consent from audit committee.[21]
Over the years
Confederation of Indian Industries (CII), Kumar Manglam Birla Committee, new regulations
of the Securities and Exchange Board of (SEBI) and Company Law has aided in progression
of audit committee in India too. Now a day, audit committee is observed as
“oversight function of corporate governance, financial reporting process,
internal control structure, and audit functions”.[22]
Conclusion
Indian firms still have the reach
to color a dazzling future for them. They need to admit and go on with the
corporate governance reform, and always keep in mind that this glazing future
will have its own set of dares.
It follows that the
real burden of accomplishing the desired amount of corporate governance, lies
in the proactive schemes taken by the firms themselves and not in the external
measures like breadth and depth of a regulation or strictness of implementation
of norms. The degree of control, transparency and fairness, and the readiness
shown by the firms themselves in executing the code, will be the critical
factor in achieving the desired reliance of shareholders and other stakeholders
and satisfying the goals of the firm.
The future of corporate governance
is becoming a little transparent now, as in the future the investors would be advanced
to act like possessors rather than just dealers. Free – thinking directors will
have more defined positions and responsibilities. And the stimulus said to be
given out to others will be distributed to the shareholders. In long race, a
market-oriented and shareholder-centered order will evolve into a new emerged apparatus
as stakeholder-oriented system making finance itself liable to the public welfare.
It can very well be concluded
that, “As legal rules are, to a significant degree, endogenous to the political
economy context of the systems in which they operate and so are the corporate
governance practices”.[23]
[1] S. Li and A. Nair, “Asian corporate governance or corporate governance in Asia?” Corporate Governance: An International Review (2009), vol. 17, pp. 407-410.
[2] C.
S. V. Murthy, Business Ethics and Corporate Governance (Global Media, 2009).
[3] OECD, G20/OECD Principles of
Corporate Governance (OECD Publishing, 2015).
[4] J J du Plessis, ‘Corporate law and
corporate governance lessons from the past: Ebbs and flows, but far from “The
end of History: Part 1” ’(2009), Vol. 30 No. 2, pp. 43-51.
[5] Jean Jacques du Plessis,
Anil Hargovan and Mirko Bagaric, Principles of Contemporary Corporate Governance,
2nd Edn. Cambridge University press.
[6] HIH Royal Commission, Directors’ Duties and
Other Obligations under the Corporations Act (2001), Background
Paper 11(27), para 76.
[7] ASX, Principles of Good
Corporate Governance and Best Practice (2nd Edn, 2007).
[8] L.
Som, “Corporate Governance Codes in India” (2006), vol. 41, Economic and
Political Weekly, pp. 4153-4160.
[9] R.
Ramakrishnan, (Inter-relationship between business ethics and corporate
governance among Indian companies, 2007)
< http://ssrn.com/abstract=1751657> accessed 9 October, 2021.
[10] Listing
Agreement on the Indian Stock Exchange 2004, cl. 49.
[11] N.
Sanan and S. Yadav, “Corporate governance reforms and financial disclosures: A
case of Indian companies” (2011), vol. 10, IUP Journal of Corporate Governance,
pp. 62-81.
[12] K.
Han and Y. Lu, “Corporate governance reforms around the world and cross-border
acquisitions” (2013), Journal of Corporate Finance.
[13] Sanan
and Yadav (n11).
[14] Ramakrishnan
(n9).
[15] Murthy
(n2).
[16] L.
J. P. Singh, “Ethics, corporate governance & investment” (2013), vol. 2, Indian
Streams Research Journal.
[17] Ramakrishnan
(n9).
[18] S.
B. Young, “The ethics of corporate governance the North American perspective”
(2009), vol. 51, International Journal of Law and Management.
[19] M.
Bhasin, “Audit committee mechanism to improve corporate governance: Evidence
from a developing country” (2012), vol. 3, Modern Economy, pp. 856-872, 2012.
[20] M.
Becht, P. Bolton, and A. Röell, Corporate
Law and Governance (National Bureau of Economic Research 2002).
[21] V.
C. Joseph and L. N. Terry, “Audit Committee Characteristics and Auditor
Dismissals Following “New” Going-Concern Reports” (2003), vol. 78,
The Accounting Review, pp. 95-117.
[22] Bhasin
(n19).
[23] R.
V. Aguilera and G. Jackson, “Comparative and international corporate governance”
(2010), vol. 4, Academy of Management Annals, pp. 485-556.
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