In a study under the chairmanship of Sir Adrian Cadbury called (the Cadbury Report), a fundamental concept of corporate governance was offered that has become generally recognised. This term of corporate governance has been recognised in various talks on the subject, including the final report of the Committee on Financial Aspects of Corporate Governance from 1998.
“Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the directors include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The Board’s actions are subject to laws, regulations and the shareholders in general meeting”
What is the definition of corporate governance?
The structures and methods for the direction and control of businesses are known as corporate governance. Good corporate governance is required to avoid mismanagement by allowing organisations to function more efficiently, enhance access to capital, limit risk, and protect stakeholders. It covers the principles governing power dynamics among owners, board of directors, management, and other stakeholders such as employees, suppliers, customers, and the general public. The long-term success of any firm requires the cooperation of all stakeholders, which involves the use of optimal corporate governance principles.
In general, corporate governance refers to a corporation's fair, transparent, and ethical administration that maximises shareholder value. Corporate governance is a phrase that has only recently been coined to define a process that has existed for as long as there have been corporations. On the idea that it is the best approach to safeguard and promote the interests of all corporate stakeholders, this procedure attempts to ensure that the business and management of corporate entities are conducted in line with the highest prevalent standards of ethics and efficacy.
What is the significance of corporate governance?
Compliance and risk mitigation
Governance, risk mitigation, and compliance all have a direct relationship. If a business is conducted according to basic principles, it will run smoothly and comply with all applicable rules and regulations. Following the regulations and legislation ensures that the company is well-prepared for any eventuality and has risk mitigation procedures in place. The more disciplined a company's operations are, the better equipped it is to deal with any risk or interruption caused by political, technological, or economic developments.
Enhances shareholder value
While there is no proven link between corporate governance and a company's market worth, it does improve shareholder happiness. Because the ultimate purpose of good governance is to maximise the interests of all stakeholders, corporate governance in India is critical for maintaining business valuations. A single unlawful incidence can wipe out the value that the company has built up over the years, therefore having the correct internal controls in place is essential.
During economic downturns, we have a better image
We've heard a lot of stories about banking fraud and financial misdeeds in the previous several months. People assume that all banks and financial institutions are involved in this, but this is not the case. People will believe an organisation only if it can reassure them about its underlying governance practices. The ability to maintain the company's image in the face of adversity is dependent on the trustworthiness that has been built over time.
Enhanced organisational efficiency
Corporate governance is a critical aspect in determining an industry's competitiveness. Many questions about how a firm is governed have been raised recently. Better corporate governance leads to improved company performance and economic outcomes. The framework for a company's behaviour, resource allocation, product/service innovation, and general corporate strategies is established by corporate governance.
During mergers and acquisitions, this is critical
Corporate governance is essential in India during restructuring events such as mergers and acquisitions. Not only does a business's corporate governance help to distinguish between good and bad acquisitions, but M&A activity by a company with effective corporate governance is also better accepted by market stakeholders. Another point worth mentioning is that mergers and acquisitions have the potential to improve the organization's corporate governance.
India's Corporate Governance Initiatives
The Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India have both taken corporate governance measures in India (SEBI).
Following the recommendations of the Kumarmangalam Birla Committee Report, the SEBI developed the first official regulatory framework for listed businesses expressly for corporate governance in February 2000. Clause 49 of the Listing Agreement codified it.
SEBI also enforces corporate governance norms through laws such as the Securities Contracts (Regulation) Act, 1956, the Securities and Exchange Board of India Act, 1992, and the Depositories Act, 1996.
The Naresh Chandra Committee on Corporate Audit and Governance was established by the Ministry of Corporate Affairs in 2002 to look into different corporate governance issues. It presented recommendations in two critical areas of corporate governance: financial and non-financial disclosures, as well as independent auditing and management oversight by the board of directors. Through the implementation of the Companies Act and its revisions, it is making every effort to introduce transparency to the structure of corporate governance.
Corporate governance is defined by the SEBI Committee on Corporate Governance in India as “acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and their 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.”
The Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution has been cited as inspirations for the Indian approach, but this view of corporate objectives is also found in Anglo-American and most other jurisdictions.
The Ministry of Corporate Affairs, Government of India, has established the National Foundation for Corporate Governance (NFCG) in collaboration with the Confederation of Indian Industry (CII), Institute of Company Secretaries of India (ICSI), and Institute of Chartered Accountants of India (ICAI) to promote better corporate governance practises in India.
In India, there are numerous examples of corporate governance failure
Harshad Mehta case: role of the regulator
Satyam Scam: failure of auditing
ICICI bank: Conflict of Interest
PNB fraud: Internal Mechanism
Tata Case: Role of promoter
Infosys Case: Role of Independent Director
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