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Poor Governance can harm national economic performance. Poor disclosures and aud
it procedures result in deteriorating financial conditions of the Corporations.
Poor governance undermines the confidence in the markets and hold the financial
system hostage.
Factors behind the Origin of Corporate Governance
In the era of globalization, foreign investors have become very careful about in
vesting their money. Kumar Mangalam Birla Committee Report appointed by SEBI has
formulated some guidelines. Increasing active rate of investigative reporting i
n business journalism. Mergers and acquisitions taking place at a fast pace.
Important issues of Corporate Governance
Good public governance is about putting public good over private good and being
a good corporate citizen. Corporate governance translates into fairness, transpa
rency, raising the trust and confidence in shareholders and understanding societ
al responsibility.
Corporate Governance in India
Private Sector
Public Sector
Private Sector- categories of shareholders
Promoter director – Called as a functional director and belongs from the promoter
group. Professional director - Category of directors who are invited by the prom
oter group on the basis of competence and favourable personal equation. Institut
ionally nominated – These positions are fulfilled by senior activities or person o
f good reputation.
Public Sector – categories of directors
Functional directors – Full time employees of the PSUs. Govt. directors – They are t
he bureaucrats from different controlling administrative ministry. Outside direc
tors
Distinction between management and control
Management -Initiation ( proposals for managing the resources of the firms are d
eveloped) Implementation ( execution of approved proposals) Control Ratification
( proposals developed in the initiation stage are evaluated, if suitable, appro
ved) Monitoring ( Assessment of executive’s performance and implementation of prop
er reward system)
Active role of Institutional Investors
Ensure that the Board is well equipped with information. Information should be a
vailable on long term plans, budgets, competitive developments, quarterly result
s etc.,
Size of the Board
Optimum size of the Board (10-12) Bigger boards would be less effective as there
will be a problem of coordination.
Improve Accounting and reporting Practices
Financial scams Legal and administrative framework in India provides for excelle
nt scope for current practices.
Specific steps to improve corporate governance
Abolition of the Sick Industries Companies Act (SICA) and BIFR. Banking Secrecy
Act – Reveal those who are wilful defaulters. Benami Transactions Prohibition Act
and Prevention of Money Laundering Act
The Power of Ethical Management
Is the decision you are taking legal? If it is not legal, it is not ethical. Is
the decision you are taking fair? It should be a win-win situation for both the
parties entering into an agreement or if it is a general policy or a multi – level
agreement, there should be equal risk and reward to all concerned. Eleventh Com
mandment test – If the decision you are taking is such that if it is known in the
public through media, will you feel ashamed? If you are feeling ashamed then it
is not an ethical decision.
Conclusion
Corporate governance is the net result of the individual sense of values, the va
lues held in society or part of a society like professional bodies or business a
ssociations and finally the system of public governance. If those who violate th
e norms are effectively punished then there is a fear and there will be adherenc
e of the principles of
Kumaramangalam Birla Committee recommendations: Three Constituents
absolutely essential for the framework of corporate governance and virtually for
m its core which can be enforced through the amendment of the listing agreement
Applicability
The Board of a Company provides leadership and strategic guidance, objective jud
gment independent of the management to the Company and exercises control over th
e Company. The Board must fulfils its legal requirements and also must be aware
and understanding of its responsibilities. An effective corporate governance sys
tem is one, which allows the Board to perform these dual functions efficiently
Functions of the Board Of directors
Directs the Company by formulating and reviewing the Company’s policies. Controls
the Company and its management by laying down the code of conduct. Is accountabl
e to the shareholders for creating, protecting and enhancing wealth and resource
s of the Company. Is not involved in day to day
Composition of the Board Of directors
Executive directors are involved in the day to day management of the Companies N
on executive directors bring external and wider perspective and independence to
the decision making. Non executive directors may be independent or non-independe
nt.
Independent directors
Receive director’s remuneration Do not have any other material pecuniary relations
hip or transactions with the Company, its promoters, its management etc., Emphas
is on the calibre of the non executive directors.
Mandatory Recommendations
Optimum combination of executive and non-executive directors with not less than
50% of the board comprising the non executive directors. At least one third of t
he board should comprise of independent directors
Nominee Directors
The role of the Chairman is to ensure that the board meetings are conducted in a
n effective manner. The Chairman’s role should in principle be different from that
of the Chief Executive.
Non mandatory recommendation
Oversight of the finance function and monitoring Relies on the senior financial
management and the outside auditors.
Mandatory recommendation
The Board of Directors should decide the remuneration of the non-executive direc
tors The annual report must contain : - all elements of the remuneration package
of all the directors - Details of fixed component and performance linked incent
ives - Service contracts, notice period, severance fees - Stock option details,
if any
( this is a mandatory recommendation)
Board procedures
The Board meetings should be held at least 4 times in a year with a maximum time
gap of 4 months between any two meetings. A director should not be a member in
more than 10 committees or act as a Chairman of more than 5 committees across al
l companies in which he is a director. Every director must inform the Company ab
out the Committee positions he occupies in other Companies and notify changes as
and when they take place.
Management
Have acquired large stakes in the equity share capital of listed companies . The
y have a bigger role to play in corporate governance as retail investors look up
on them for positive use of their voting rights.
Conclusion
Corporate governance must ensure commitment of the Board in managing the Company
in a transparent manner for maximising long term shareholder value.