Answer of the day-Corporate Governance

Q-What is Corporate Governance? What are its present status in India? How can it be improved?(12.5 marks)

Governance is the way or rules to govern or run any institutions be it a Government or private organisation. When corporate is governed on the basis of rules it is called Corporate Governance.

Aimed at---balancing the interest of many stakeholders like Directors, shareholders, customer, supplier, government etc

Does-distribution of rights and responsibility between various stakeholders

It included following things

1.Division between board of directors and CEO

2.Executive being accountable to board of director

3.Company working on the interest of shareholders

4.no inside trading being allowed

Law

1.Companies act,2013---under Clause 49

2.SEBI introduced guidelines for the enforcement of corporate governance

Present Provision

1.Need of independent director in some types of companies

2.need of women director in some types of companies

3.mandatory rotation of external auditor

Various scams which necessiate corporate governance

1.UTI scam

2.Ketan Parikh scam

3.Satyam scam

Present issue of corporate governance

1.Many companies are following it in letters not in spirit

2.Firms have appointed friends or relatives to the position of women and independent directors

3.external auditor hasn't given much result due to nexus between company and external auditor

4.issue of executive remuneration

5.control of founder or one main figure on board of directors for eg-in TATA-Mystry controversy, it was reported that Ratan Tata had huge influence over board of directors

Ways to improve

1.Immediate and continous disclosure rather than periodic ones

2.requiring approval by stakeholders  for disinvestment of major division/subsidies

3.approval of managerial renumeration by disinterested shareholders

4.improving selection mechanism of independent directors

5.clarity on liability and remuneration of independent director

6.providing training to independent director on the business of the company

7.investor education

8 specialised court dealing with issue of corporate governance

----Extra Information-----

History of its development

1.Many firms failed in 2000-01 and financial crisi of 2008 due to accounting fraud---thus issue become an important topic

Principles

1.Right of shareholders and their responsibility

2.respext of rights of other stakeholders like employee, community, investors etc

3.ethical behaviour---code of conduct for executive to make them accountable to shareholders

4.Roles and responsibility of board--skills, independency and numbers in board of director should be large

5.disclosure and transparency---clarifying roles and responsibility of management and boards. Also transparency in financial reporting

SEBI definition

1.The 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

Provisions of corporate governance in India

• One or more women directors are recommended for certain classes of companies
• Every company in India must have a resident directory
• The maximum permissible directors cannot exceed 15 in a public limited company. If more directors have to be appointed, it can be done only with approval of the shareholders after passing a Special Resolution
• The Independent Directors are a newly introduced concept under the Act. A code of conduct is prescribed and so are other functions and duties
• The Independent directors must attend at least one meeting a year
• Every company must appoint an individual or firm as an auditor. The responsibility of the Audit committee has increased
• Filing and disclosures with the Registrar of Companies has increased
• Top management recognizes the rights of the shareholders and ensures strong co-operation between the company and the stakeholders
• Every company has to make accurate disclosure of financial situations, performance, material matter, ownership and governance