Corporate Governance: Examples And Structures

Corporate Governance: Examples And Structures

India has the most publicly traded companies in the world, and the financial markets' efficiency and well-being are critical for the economy and society as a whole. As a result, it is critical to design and implement a dynamic corporate governance mechanism that protects the interests of relevant stakeholders while not impeding enterprise growth.
 
•    Corporate governance is a set of systems, processes, and principles that ensure that a business is run in the best interests of all stakeholders. It entails a series of interactions between the company's executives, board of directors, shareholders, auditors, and other stakeholders.
 
•    These relationships, which include a variety of rules and incentives, provide the framework for determining the company's objectives, as well as the methods for achieving them and monitoring performance. Transparency of corporate structures and operations, management and board accountability to shareholders, and corporate responsibility to stakeholders are all important aspects of good corporate governance.
 

PRINCIPLES OF CORPORATE GOVERNANCE

A company should:

1.    Recognize and publicise the board and management's respective roles and responsibilities.
 
2.    Have a board with the right mix of members, size, and commitment to fulfil its responsibilities and duties.
 
3.    Promote ethical and responsible decision-making as a priority.
 
4.    Establish a structure to independently verify and protect the financial reporting integrity of the company.
 
5.    Ensure that all material information about the company is disclosed in a timely and balanced manner.
 
6.    Respect shareholders' rights and make it easier for them to exercise them effectively.
 
7.    Establish a sound risk oversight and management system, as well as internal controls.
 
8.    Conduct a thorough review of board and management effectiveness and actively encourage it.
 
9.    Ensure that remuneration levels and composition are adequate and reasonable, with a clear link to corporate and individual performance.
 
10.    Recognize all legitimate stakeholders' legal and other obligations
 

Constituents of Corporate Governance

There are three key constituents of corporate governance:

Corporate Governance: Examples And Structures
1.    The Board of Directors: The board of directors plays a critical role in any corporate governance system. It is responsible to the stakeholders and manages and directs the management. 
 
•    It stewards the company, sets its strategic and financial goals and oversees their implementation, implements adequate internal controls, and reports the company's activities and progress to stakeholders on a regular basis in a transparent manner.
 
2.    Shareholders: The shareholders' role in corporate governance is to appoint the directors and auditors, as well as to hold the board of directors accountable for the company's proper governance by requiring the board to provide them with the necessary information on the company's activities and progress on a regular basis in a transparent manner.
 
3.    Management: The responsibility of management is to carry out the company's management in accordance with the board's direction, to put in place adequate control systems and ensure their operation, and to provide timely and transparent information to the board in order for the board to monitor Management's accountability to it.
 

Legal Framework

In India, the corporate governance legal framework is primarily comprised of the following statutes and regulations:

 
a.    The Companies Act of 2013: The Companies Act of 1956 has been replaced by the new Companies Act of 2013. The new Act aims to bring India's corporate governance and regulation practises up to par with the best in the world. With minimal government approvals, the corporate sector has been given more flexibility in regulating their affairs, subject to full disclosure and accountability of their actions. 
 
The Act expands opportunities for new entrepreneurs and allows corporations to use information technology more widely in their operations. Other provisions of the 2013 Act include:
I.    Independent directors should make up one-third of the board of directors of every publicly traded company, and the government may set a minimum number of independent directors in other public companies.
 
II.    The board of directors shall meet at least four times per year, with a maximum of four months between meetings.
 
III.    A qualified and independent audit committee comprised primarily of independent directors.
 
IV.    Independent directors' performance will be evaluated by the entire board of directors, with the exception of the director being evaluated.
 
V.    Establishment of a nomination and compensation committee.
 
VI.    The formation of a stakeholder relations committee.
 
VII.    To expedite company law cases, a national company law tribunal and a national company law appellate tribunal were established.
 
VIII.    Creating a system for directors and employees to report genuine concerns, as well as rewarding employees for their honesty.
 
b.    The Securities Contracts (Regulation) Act of 1956: It is a federal law that regulates the sale of securities. This Act applies to all tradable government paper, shares, stocks, bonds, debentures, and other types of marketable securities issued by corporations. The SCRA establishes the parameters for stock exchange conduct as well as its powers.
 
c.    The Securities and Exchange Board of India Act, 1992: This Act established the Securities and Exchange Board of India (SEBI), an independent capital market regulatory authority, with the goal of protecting the interests of investors in securities and promoting and regulating the securities market.
 

Corporate Governance and NPA’s

The increasing level of non-performing assets (NPAs) has brought into sharp focus the need to improve corporate governance and skill levels in public sector banks in a series of recent cases, beginning with the United Bank of India, Syndicate Bank Ltd, Dena Bank, Oriental Bank of Commerce, and PNB (PSBs). The following are some possible causes for this issue:
 
•    There is an excessive amount of centralization and concentration of power in the hands of top executives. Senior officials in the majority of the aforementioned banks were involved in the fraud. Their close ties to politicians also enable them to make loans that are nearly impossible to repay. As a result, there is a strong link between politicians, bank officials, and businessmen.
 
•    According to many reports, corruption may be a contributing factor to the high level of bad debts.
 
•    Compensation levels in private and public sector banks are vastly different.
 
•    Secrecy and a high level of discretion are required.
 
•    Poor supervision leads to non-compliance with lending procedures.
 
•    Inconsistency in the balance of accountability and autonomy.
 

Way forward:

In 2014, the P.J. Nayak committee recommended that the chairman and managing director positions in PSBs be separated. This will create dual control and prevent power concentration.
•    Good remuneration packages for bank employees.
 
•    Zero tolerance against corruption in form of quick disposal of case and strict punishment
 
•    PSBs should be depoliticized. Politicians will have no say in who is appointed to top positions or who is fired.
 
•    External auditing system is used on a regular basis.
 
•    To create a sense of competition, more private banks are needed.
 
•    Power and responsibility are inextricably linked.
 

Corporate Governance in Family Business

The storey of Kingfisher Airlines (KFA) exemplifies the governance philosophy of India's family-controlled business groups. To reduce the risk of family investment, groups frequently build a diversified portfolio of businesses. 
 
•    Diversification and other corporate strategies are decided at the family level, rather than by the board of directors of the holding company or Group Company. Those are frequently formulated in response to family needs, such as a succession plan, and reflect the family's aspirations. 
 
•    Every business family strives to preserve and grow their wealth. As a result, stakeholders' interests are safeguarded. However, promoters' exuberance and ambitions can sometimes expose the company to unwarranted risks, the family becomes obsessed with empire building, or a family feud destroys wealth. 
 
•    Independent directors protecting the company from undue risks arising from such exuberance and aspirations, family empire building initiatives, or poor family governance is a pipe dream. The board serves as a sounding board at best, with the family making the final decision. As a result, the family, not the board, makes the most important decisions.
 
•    Independent directors' monitoring role is secondary in family-managed businesses, while their advisory role is primary. Even if the law emphasises the monitoring role, this will remain the case. Furthermore, independent directors, who have no financial stake in the company, prefer to resign from poorly governed or crisis-ridden companies rather than continue and protect the interests of stakeholders, as was the case with KFA.
 

Corporate Social Responsibility (CSR)

The term "social responsibility" refers to moral behaviour in relation to a wide range of issues such as pollution, discrimination, poverty, unemployment, and inflation. As a result, a company whose practises contribute to such issues would be considered socially irresponsible. 
 
•    A car manufacturer with faulty brakes, a pharmaceutical company that makes false claims about its cold remedies, or a food company whose TV advertisements promote substandard food are all examples of social irresponsibility. Corporate social responsibility encompasses not only adherence to the law and ethical framework of the society, but also extends beyond that. 
 
•    CSR policy serves as a self-regulating mechanism that allows a company to monitor and ensure active compliance with the spirit of the law, ethical standards, and international norms. In some models, a company's CSR efforts go beyond compliance to include "actions that appear to further some social good, beyond the firm's interests and what is required by law."
 
•    CSR is a process that aims to embrace responsibility for a company's actions and encourage a positive impact on the environment, consumers, employees, communities, stakeholders, and all other members of the public sphere who may be considered stakeholders through its activities.
 
•    CSR programmes can range from community development to supporting specific causes such as education, the environment, and healthcare.
 
•    Even in ancient times, wealthy merchants recognised the importance of social responsibility. They used to donate a portion of their wealth to the general public by erecting temples dedicated to a religious cause.
 
•    Furthermore, by providing food and shelter, these merchants assisted society in overcoming famine and epidemics. Industrial families such as Tata, Godrej, Bajaj, Modi, and Birla were strongly influenced by economic and social considerations in the nineteenth century.
 
•    Many business houses established trusts for schools and colleges during the independence movement and even afterward, thanks to Gandhi's influence. They also assisted in the establishment of training and scientific institutions.
 

CSR Initiatives in India

Through its CSR activities, the ITC Group has been able to provide sustainable livelihood opportunities for six million people. Their e-Choupal programme, which aims to connect rural farmers via the internet to purchase agricultural products, now includes 40,000 villages and more than four million farmers. Its farm and social forestry programme helps farmers convert wasteland into pulpwood plantations.
 

Important case study: 

Corporate Governance: Examples And Structures
•    Bharath Petroleum Corporation Limited, Maruti Suzuki India Limited, and Hindustan Unilever Limited are some of the companies that have adopted villages and are focusing on holistic development. They improve medical and sanitation facilities, construct schools and houses, and teach villagers vocational and business skills to help them become self-sufficient.
 
•    The Tata Group, an Indian conglomerate, engages in a variety of CSR projects, the majority of which focus on community development and poverty alleviation. The Tata Institute of Fundamental Research (founded in 1945 in Mumbai), the Indian Institute of Science (founded in 1909 in Bangalore), and the Tata Institute of Social Sciences are all examples of educational efforts. TATA Steel's Maternal and Newborn Survival Initiative (MANSI) aims to reduce child and infant mortality in states such as Jharkhand.
 
•    Mahindra & Mahindra runs programmes like Nanhi Kali, which focuses on girl education, Mahindra Pride Schools, which provides industrial training, and Lifeline Express, which provides healthcare in remote areas. There is a project called Hariyali that has planted over 8 million trees to date.
 
•    SAP India has been working on short and long-term rebuilding initiatives for tsunami victims in collaboration with Hope Foundation, an NGO that works for the betterment of the poor and needy throughout India.
 
•    Reliance Industries Ltd. has launched "Project Drishti," a nationwide initiative to restore the vision of visually impaired Indians from economically disadvantaged backgrounds.
 
•    SBI is adopting villages in Uttrakhand as part of its "SBI Ka Apna Gaon" village adoption programme to address regional imbalances by developing rural social and infrastructure facilities.
 
•    Bharat Petroleum: Project BOOND, which has progressed from the construction of rainwater harvesting structures to the drought-freeing of villages.
 
•    Infosys: The Infosys Foundation's midday meal programme, which is run in collaboration with the Akshaya Patra Foundation, is spread across several Indian states.
 

Government Guidelines

The Corporate Social Responsibility Voluntary Guidelines were introduced by the Ministry of Corporate Affairs (MCA) in 2009. These guidelines have now been enshrined in the 2013 Act, giving them legal status. Section 135 of the 2013 Act aims to establish a corporate social responsibility committee of the board of directors for every company with a net worth of 500 crore INR or more, a turnover of 1000 crore INR or more, or a net profit of five crore INR or more during any financial year.
 
•    According to the 2013 Act, these companies must spend at least 2% of their average net profits over the previous three years on CSR activities, and if they do not, an explanation for why they did not must be included in the director's report (section 135 of the 2013 Act).
 
•    This CSR committee should be made up of three or more directors, with at least one of them being an independent director. 
 

The policy will be developed by the committee, which will include the activities listed in Schedule VII:

a.    Eradicating extreme hunger and poverty
 
b.    Promotion of education
 
c.    Promoting gender equality and women's empowerment
 
d.    Reducing child mortality and improving maternal health are two goals that we have set for ourselves
 
e.    Combating diseases such as the human immunodeficiency virus (HIV), acquired immune deficiency syndrome (AIDS), malaria, and others
 
f.    Ensure the environment's long-term viability
 
g.    Increasing vocational skills through work
 
h.    Projects in social entrepreneurship
 
Contributions to the Prime Minister's National Relief Fund, or any other fund established by the federal government or state governments for socioeconomic development and relief, as well as funds for the welfare of scheduled castes and tribes, other backward classes, minorities, and women.
 
•    Any other matters that may be required In 2012, SEBI mandated the inclusion of Business Responsibility Reports in the annual reports of the Top 100 listed entities on the BSE and NSE based on market capitalization. It is required that these reports be made available on the company's website. 
 
•    The MCA's introduction of the "spend or explain" approach to CSR has elicited mixed reactions. It may take some time for CSR to become ingrained in the corporate culture of India.
 
•    The activities listed in the Schedule, on the other hand, are not elaborate or detailed enough to indicate the types of projects that could be undertaken; for example, environmental sustainability or social business projects could cover a wide range of activities.
 
•    Overall, making a 2% investment almost mandatory can be viewed as a stronger approach to enforcing CSR on Indian companies that have not made significant progress in this area. Employee benefits, for example, are frequently transferred to CSR activities. For this act to succeed, a lot will be dependent on political will. Recently, the Chhattisgarh government requested that businesses deposit their CSR contributions in the Chief Minister's community development fund.
 

Recent trends in CSR spending in India

According to KPMG's annual 'India CSR Reporting Survey,' which looked at India Inc's CSR activities in 2017, the number of companies spending less than 2% of their profits has decreased over the last three years. More structured CSR budgets are now in place, and many organisations are looking for "external implementing agencies" to help them.
 
•    When it comes to the number of CSR projects implemented, Maharashtra, Uttar Pradesh, Tamil Nadu, Karnataka, and Odisha are the top five states. These projects and initiatives account for 32% (or 629 projects) of all CSR projects and initiatives in India.
 
•    Education and healthcare accounted for over 56% (Rs 4,045 crore) of India's total CSR spending (Rs 7,215.9 crore) in 2017. Part of it could be due to the government's 'Beti Padhao Beti Bachao' campaign, which promotes girls' education.
 
•    Companies with more women on their boards of directors had more programmes aimed at reducing gender inequality.
 
•    In 2017, public sector companies carried out 22% of all CSR projects, accounting for 31% of total CSR spending. Non-public sector organisations, on the other hand, completed 78 percent of the projects.
 
•    Only 5% of all CSR projects in 2017 were carried out by companies not based in India. These expenses accounted for only 3% of total CSR spending.
 
•    In April 2018, the Ministry of Corporate Affairs decided to set up a centralised system to track entities' compliance with CSR obligations under the company law of 2013. The move comes in the wake of a growing number of cases of non-compliance with corporate social responsibility (CSR) requirements. Currently, the Registrar of Companies (RoC) is in charge of ensuring that the entities in question are adhering to the Act's social welfare spending norms.

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