Constituents Of Good Corporate Governance
1. Board role and powers: The most important requirement of good corporate governance is the clear identification of the Board, CEO, and Chairman of the Board's powers, roles, responsibilities, and accountability.
2. Legislation: Effective corporate governance requires a clear and unambiguous legislative and regulatory framework.
3. Code of Conduct: It is critical that an organization's explicitly prescribed code of conduct is communicated to and understood by all stakeholders. There should be a system in place to measure and evaluate each member of the organization's adherence to the code of conduct on a regular basis.
4. Board Independence: Good corporate governance necessitates the presence of an independent board of directors. It implies that, the board of directors is capable of objectively evaluating the performance of managers. As a result, the majority of board members should be independent of the management team as well as the company's commercial dealings. Such independence ensures the board's effectiveness in overseeing management's activities and ensures that there are no actual or perceived conflicts of interest.
5. Board Skills: In order to effectively carry out its functions, the board must have the right mix of qualities, skills, knowledge, and experience to make a valuable contribution. It includes knowledge of government and regulatory requirements, as well as operational or technical expertise, financial skills, and legal skills.
6. Management Environment: This includes establishing clear objectives and an appropriate ethical framework, establishing due processes, providing for transparency and clear enunciation of responsibility and accountability, implementing sound business planning, encouraging business risk assessment, having the right people and skills for the job, establishing clear boundaries for acceptable behaviour, establishing performance evaluation measures and evaluating performance, and evaluating performance and supervision.
7. Board Appointments: In order to ensure that the most qualified individuals are appointed to the board, the board positions must be filled through a thorough search process. Reappointments and new director appointments both require a well-defined and transparent procedure.
8. Board Induction and Training: is necessary to keep directors up to date on all developments that affect or may affect corporate governance and other related issues.
9. Board Meetings: These are the places where the board makes decisions. Directors can discharge their responsibilities at these meetings. The effectiveness of board meetings is determined by carefully planned agendas and timely distribution of relevant papers and materials to directors.
10. Strategy Development: The Company’s goal must be clearly stated in a long-term corporate strategy that includes an annual business plan as well as attainable and measurable performance goals and milestones.
11. Business and Community Obligations: While a business entity's primary activity is inherently commercial, it is also responsible for the community's obligations. The approval of proposed and ongoing initiatives to meet community obligations must be communicated to all stakeholders.
12. Financial and Operational Reporting: In order to perform its function of monitoring corporate performance, the board requires comprehensive, regular, reliable, timely, correct, and relevant information in a format and quality that is appropriate.
13. Board Performance Monitoring: At regular intervals, the board must monitor and evaluate its overall performance as well as that of individual directors.
14. Audit Committee: is in charge of, among other things, liaising with management, internal and statutory auditors, reviewing the adequacy of internal control and compliance with key policies and procedures, and reporting to the board on key issues.
15. Risk Management: Risk is a critical component of corporate governance and operations. A clearly defined process for identifying, analysing, and treating risks that could prevent the company from effectively achieving its objectives should be in place. The board of directors is in charge of identifying major risks to the organisation, establishing acceptable risk levels, and ensuring that senior management takes steps to detect, monitor, and control these risks.
CODES AND GUIDELINES
• With the support of governments and international organisations, corporate governance principles and codes have been developed in various countries and issued by stock exchanges, corporations, institutional investors, or associations (institutes) of directors and managers.
• Compliance with these governance recommendations is not required by law in most cases, though codes linked to stock exchange listing requirements may have a coercive effect.
• The Principles of Corporate Governance of the Organisation for Economic Co-operation and Development (OECD) have been one of the most influential guidelines. Countries developing local codes or guidelines frequently refer to the OECD guidelines.
• The UN Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) drew on the work of the OECD, other international organisations, private sector associations, and more than 20 national corporate governance codes to produce their Guidance on Good Practices in Corporate Governance Disclosure.
This internationally agreed-upon standard includes more than fifty different disclosure items organised into five broad categories:
1. The Auditing Board, as well as the management structure and procedures
2. Corporate accountability and compliance in the workplace
3. Transparency in finance and information disclosure
4. The structure of ownership and the exercise of control rights
5. Corporate governance controls on the inside
6. The board of directors keeps an eye on things.
1. INTERNAL CONTROL PROCEDURES AND INTERNAL AUDITORS
• Internal control procedures are policies implemented by an entity's board of directors, audit committee, management, and other personnel to provide reasonable assurance that the entity will achieve its goals in terms of accurate financial reporting, operational efficiency, and compliance with laws and regulations.
• Internal auditors are employees of a company who examine the design and implementation of the company's internal control procedures, as well as the accuracy of its financial reporting.
2. BALANCE OF POWER
• The most basic balance of power is to require that the President and the Treasurer be different people.
• Separation of powers is further developed in businesses, where different divisions monitor and balance each other's actions.
• One group may propose company-wide administrative changes, while another reviews and can veto them, and a third group ensures that people's interests (customers, shareholders, and employees) are protected.
3. REMUNERATION
• Performance-based remuneration can take the form of cash or non-cash payments like stock options, superannuation, or other benefits.
• Large shareholders and/or banks and other large creditors may monitor the situation. Controls over corporate governance from the outside:
• The controls that external stakeholders have over the organisation are referred to as external corporate governance controls.
• Here are some examples:
1. Competition
2. obligations relating to debt
3. demand for and evaluation of performance data (especially financial statements)
4. legislation from the government
5. the labour market for managers
6. Pressure in the media
7. takeovers
BENEFITS OF CORPORATE GOVERNANCE
• For a long time, the concept of corporate governance has piqued the public's interest. Because of its relevance and importance to the industry and economy, it has gained widespread acceptance.
• It contributes not only to a company's efficiency, but also to the growth and development of a country's economy.
• Firms have gradually implemented good corporate governance systems on their own initiative for the following reasons:
a. Several studies in India and abroad have found that well-managed companies attract the attention of markets and investors, who respond positively to them. Such businesses have a good corporate governance system in place that gives the board and management enough leeway to make decisions about the company's progress and innovation while staying within the bounds of effective accountability.
b. In today's globalised world, businesses must be able to tap into global pools of capital as well as attract and retain the best human capital from around the globe. In such a scenario, a company will not be able to succeed unless it embraces and demonstrates ethical behaviour.
c. The credibility provided by good corporate governance procedures also aids in attracting more long-term capital by maintaining the confidence of investors – both foreign and domestic. This will eventually lead to more stable funding sources.
d. A corporation is made up of a variety of stakeholders, including customers, employees, investors, vendor partners, government, and society. Its expansion necessitates the participation of all stakeholders. As a result, adhering to the best corporate governance practises is critical for a corporation to be fair and transparent to all of its stakeholders in all of its transactions.
Corporate Governance standards add significant value to a company's operational performance by:
1. Enhancing strategic thinking at the top by bringing in independent directors with new ideas and experience
2. Rationalising risk management and constant monitoring of a company's global risk
3. Limiting top management and directors' liability by clearly articulating the decision-making process
4. Ensuring the accuracy of financial reports, and so on.
It also has long-term reputational effects, both internally and externally, among key stakeholders.
1. The financial crisis has brought the issue of corporate governance to the forefront. They've shifted the emphasis away from form and toward substance, bringing the importance of intellectual honesty and integrity into sharper focus. This is because any company's financial and non-financial disclosures are only as good and honest as the people who make them.
2. A good governance system, as evidenced by the adoption of good corporate governance practises, instils trust in current and potential stakeholders. Investors are willing to pay higher prices to companies that demonstrate strict adherence to internal corporate governance norms.
3. Effective governance reduces perceived risks, which lowers the cost of capital and allows the board of directors to make faster and better decisions, improving the bottom line of the company.
4. Adopting good corporate governance practises ensures long-term viability and strengthens relationships between stakeholders.
5. A good corporate citizen becomes a hero and is held in high regard. Potential stakeholders aspire to do business with companies that have excellent governance credentials.
6. Adopting good corporate governance practises ensures the enterprise's stability and growth.
The effectiveness of a corporate governance system cannot be merely legislated by law, and no corporate governance system can be static. As competition grows, so does the environment in which firms operate, and in such a dynamic environment, corporate governance systems must evolve as well. When competing for scarce capital in today's public markets, failure to implement good governance procedures comes at a significant risk premium.
LIMITATIONS AND FUTURE PROSPECTS OF CORPORATE GOVERNANCE:
• The issues of corporate governance, accountability, and transparency, as well as shareholder rights and the role of the Board of Directors, have never been more prominent than they are today.
• India has become one of the quickest emerging economies to catch up to international corporate governance trends. As a result, Indian businesses have been able to gain access to newer and larger markets around the world, as well as acquire more businesses.
• The government's and regulators' responses to the challenges of corporate delinquency have also been admirably quick.
• However, as the global environment changes, there is a greater need to adopt and maintain good corporate governance practises in order to create value and build future corporations.
• True, corporate governance lacks a distinct structure or design and is widely regarded as ambiguous. There is still a lack of understanding about various issues, such as the quality and frequency of financial and managerial disclosure, compliance with the code of best practise, the roles and responsibilities of the Board of Directors, and shareholder rights, among others.
• Many failures and scams have occurred in the corporate sector, including collusion between companies and their accounting firms, the presence of weak or ineffective internal audits, managers lacking required skills, improper disclosures, non-compliance with standards, and so on.
• As a result, both management and auditors are being scrutinised more closely. However, as India's economy becomes more integrated with global markets, industrialists and corporations in the country are being pressed to adopt more ethical and transparent business practises.
• The extent to which corporations adhere to basic corporate governance principles is becoming an increasingly important factor in making key investment decisions.
• Corporate governance standards must be credible, consistent, coherent, and inspiring if companies are to reap the full benefits of the global capital market, capture efficiency gains, benefit from economies of scale, and attract long-term capital.
The following factors determine the quality of corporate governance
1. Management integrity
2. Ability of the Board
3. Adequacy of processes
4. Level of commitment of individual Board members
5. Quality of corporate reporting
6. Participation of stakeholders in management
• Because this is such an important factor in determining a company's long-term financial health, good governance also necessitates an effective legal and institutional environment, business ethics, and awareness of environmental and societal concerns.
• As a result, corporate governance will become more relevant and acceptable around the world in the coming years. This is evident in the various activities undertaken by many companies in framing and enforcing codes of conduct and honest business practises; adhering to more stringent norms for financial and non-financial disclosures, as required by law; accepting higher and appropriate accounting standards; enforcing tax reforms coupled with deregulation and competition; and so on.
• Inappropriate application of corporate governance requirements, on the other hand, can have a negative impact on the governance system's participants' relationships. Institutional investors, as stockholders, are increasingly demanding a say in corporate governance.
• Individual shareholders, who rarely exercise governance rights, are concerned about receiving fair treatment from controlling shareholders and management.
• Creditors, particularly banks, play an important role in governance systems as external monitors of corporate performance.
• Employees and other stakeholders are also important contributors to the corporation's long-term success and performance. As a result, for a company's growth to be more successful, proper governance practises must be implemented.
• There is a greater need for entrepreneurs to become more knowledgeable about various aspects of corporate governance.
• Some areas that require special attention include: audit quality, which is at the heart of effective corporate governance; the role of the Board of Directors, as well as CEO and CFO accountability; the quality and effectiveness of the legal, administrative, and regulatory framework; and so on.
LEGAL FRAMEWORK FOR CORPORATE GOVERNANCE
• In today's rapidly changing national and global business environment, it is critical that corporate entity regulation keeps pace with emerging economic trends, promotes good corporate governance, and protects the interests of investors and other stakeholders.
• Furthermore, the forms of corporate organisations are constantly changing due to the continuous increase in the complexities of business operations.
• As a result, the law must take into account the needs of various types of businesses and seek to establish common principles to which all types of businesses can refer when establishing their corporate governance structure.
• Companies Act, 1956 is a key piece of legislation for regulating the entire corporate structure and dealing with various aspects of corporate governance (Now Companies Act 2013). These laws have been introduced and amended on a regular basis in order to increase transparency and accountability in corporate governance.
• That is, corporate laws have been simplified to allow for clear interpretation and to provide a framework that will allow for faster economic growth. Second, the Securities Contracts (Regulation) Act, 1956, the Securities and Exchange Board of India Act, 1992, and the Depositories Act, 1996, as well as the Securities and Exchange Board of India (SEBI), are all designed to protect investors' interests in the securities markets while also upholding corporate governance standards in India.
COMPANIES ACT 2013 (HIGHLIGHTS)
The Companies Act of 2013 replaced the Companies Act of 1956, which had been in place for decades. The following are the major highlights of the 2013 Act:
1. A private company's maximum number of shareholders is now set at 200. The previous ceiling was set at 50.
2. For the first time, the concept of a one-person company is introduced.
3. Establishment of the Company Law Appellate Tribunal and the Company Law Tribunal
4. According to the 2013 act, corporate social responsibility is now required.
SALIENT FEATURES OF THE COMPANIES ACT 2013
1. The concept of 'Dormant Companies' has been introduced. Companies that have been out of business for two years are considered dormant.
2. The National Company Law Tribunal was established. It is a quasi-judicial body in India that decides on business disputes. It was created to take the place of the Company Law Board.
3. Rather than relying on government approval, it allows for self-regulation in terms of disclosure and transparency.
4. Documents must be kept in electronic format.
5. For companies with net assets of up to Rs.1 crore, official liquidators have adjudicatory powers.
6. The process for mergers and amalgamations has been simplified and made faster.
7. This Act allows cross-border mergers (foreign companies merging with Indian companies and vice versa), but only with the Reserve Bank of India's permission.
8. The idea of a one-person business was introduced. This is a new type of private company that can only have one shareholder and one director. A private company must have at least two directors and two shareholders, according to the 1956 Act.
9. For public companies, having independent directors has become a legal requirement.
10. Women directors are required for a specific class of companies.
11. At least one director of each company must have resided in India for at least 182 days in the previous calendar year.
12. The Act allows the articles of association to be entrenched (given extra-legal protection).
13. The Act requires that board meetings be called with at least seven days' notice.
14. The duties of a Director are defined in this Act. The roles of 'Key Managerial Personnel' and 'Promoter' have also been defined.
15. There should be a rotation of audit firms and auditors for public companies. The Act also prohibits auditors from providing services to the company that are not audit related. An auditor faces significant criminal and civil liability if he or she fails to comply with the law.
16. In the event of a financial crisis, the entire process of company rehabilitation and liquidation has been made time-bound.
17. The Act mandates that businesses form CSR committees and develop CSR policies. Certain companies have been required to make mandatory CSR disclosures.
18. A single director should be appointed to a publicly traded company to represent small shareholders.
19. There is a provision for the search and seizure of documents without a magistrate's order during an investigation.
20. Requirements for accepting public deposits have been tightened.
21. Funding has been allocated for the establishment of the National Financial Reporting Authority (NFRA). It is responsible for establishing and enforcing accounting and auditing standards, as well as overseeing the work of auditors. (India is now eligible for membership in the International Forum of Independent Audit Regulators (IFIAR) as a result of the NFRA's notification.)
22. If a key manager or director is reasonably expected to have access to price-sensitive information, the Act prohibits them from purchasing call and put options on the company's stock.
23. The Act gives shareholders more power by requiring shareholder approval for many major transactions.
COMPANIES (AMENDMENT) ACT, 2019
The Parliament passed this Act in July of this year. The following are the changes recommended by the most recent amendment to the Companies Act:
1. Companies will be required to keep a portion of their unspent funds in a special account for CSR purposes.
2. If this amount is not spent within three years, it will be transferred to a fund established in Schedule VII of the Act. It's possible that this is the Prime Minister's Relief Fund.
3. Under this Act, the Registrar of Companies has the authority to take action to have a company's name removed from the Register of Companies if it is not conducting business or operating in accordance with the Company Law.
4. Act 16 of the minor offences have been decriminalised (made civil defaults).