CORPORATE GOVERNANCE FRAMEWORKS

Abstract

In the present era, business extends far beyond profit margins; it operates as a complex ecosystem encompassing service delivery, corporate responsibility, risk management, and stakeholder engagement. When a business is well-established and performing successfully, much of that success can be attributed to its corporate governance framework. Corporate governance is a system that can both build and sustain a business or, if poorly implemented, undermine it. It is the process by which companies define relationships among the Board of Directors, executive management, employees, shareholders, and stakeholders. Corporate governance provides a framework of rules, processes, and practices used to control and direct a company, balancing the interests of all stakeholders for long-term organizational growth.[1]

Corporate governance serves as a value driver not only for high-profile corporations but also for startups. It provides clarity to investors and maintains market trust. Businesses with strong corporate governance demonstrate transparency and reduce risk. Corporate governance functions as a quality seal when approaching international clients and companies. Many international investors prioritize companies with strong ethical standards and robust governance structures.

I. Introduction

Business plays a vital role in India’s economic development. Corporate governance is a core area of business that contributes to sustainable growth for both organizations and the nation. Without corporate governance, there is no foundation for trust in business operations.

Today’s Indian companies are well-structured and comply with both national and international laws and regulations. Various agencies establish specific rules for transparency and reporting in corporate governance. In India, the primary regulatory bodies include the Ministry of Corporate Affairs (MCA), the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), and the Insurance Regulatory and Development Authority of India (IRDAI), all of which set standards for corporate governance. The Government of India maintains high corporate governance standards due to the country’s extensive evolution in this area.

Several committees have contributed significantly to corporate governance in India. In 1999, the Kumar Mangalam Birla Committee focused on financial reporting and accountability, providing recommendations for Board composition, audit committee membership, board meetings, and introducing Management Discussion and Analysis (MD&A). This committee is often referred to as the founding father of corporate governance in India.[2] The Naresh Chandra Committee examined auditor-company relationships, focusing on auditor independence and strict disqualifications for audit firms to prevent conflicts of interest. In 2003, the Narayana Murthy Committee strengthened audit practices, established personal accountability, and provided protections for whistleblowers.

The Dr. J.J. Irani Committee, established in 2004, reformed the Companies Act, 1956, creating a modern, globalized framework that paved the way for the Companies Act, 2013.[3] The committee focused on simplifying laws that were difficult to amend, enabling companies to update rules more easily and align with international management practices. It provided equal protection to both large and minority shareholders and introduced groundbreaking recommendations, including new corporate entities such as One Person Companies (OPCs) and small companies. The committee also recommended removing age limits for company directors while requiring disclosure of their age.

The Uday Kotak Committee, formed by SEBI, is famously known as the modern gold standard of corporate governance. It shifted the focus from “following the letter of the law” to “following the spirit of the law.”[4] This committee actively addressed the separation of roles, board size and diversity, and the implementation of skill matrices. In recent years, SEBI and MCA have emphasized Environmental, Social, and Governance (ESG) considerations, including technology-related risks. In 2022, SEBI mandated that transactions involving 10% or more of a promoter’s holdings require audit committee approval. RBI and SEBI have also directed companies to establish separate IT strategy committees to address digital data privacy concerns.

India’s robust corporate governance framework provides security to investors, making it an attractive destination for foreign investment.

II. Definitions of Corporate Governance

Sir Adrian Cadbury: “Corporate governance is the system by which companies are directed and controlled.”[5]

Bob Tricker (The Academic Pioneer): “If management is about running the business, governance is about seeing that it is run properly.”[6]

Shleifer and Vishny: “Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment.”[7]

III. Understanding Corporate Governance

How do companies operate? How are companies held accountable for their actions? How do companies make decisions? How do companies comply with laws and regulations? Corporate governance answers all these questions. It balances the interests of directors, employees, stakeholders, senior management, customers, suppliers, lenders, government regulators, and even local and national communities. Strong corporate governance creates the best version of a business and drives organizational growth.

Corporate governance ensures security, trust, transparency, and high investor confidence. It is a system that coordinates the entire business entity. Governance establishes rules for directors on how to conduct business operations. Corporate governance guides companies in maintaining relationships with shareholders and stakeholders, controlling both internal and external affairs. It is primarily based on accountability, transparency, responsibility, fairness, and independence, ensuring ethical behavior, effective oversight, and protection of rights. Without robust corporate governance, a company cannot achieve success or earn the trust of millions of potential investors.

IV. Principles of Corporate Governance

1. Accountability: Accountability means being obligated to take responsibility for actions and being answerable for those actions. In this context, a company’s management team and employees are answerable to senior leadership regarding their decisions: what they undertake, why they do it, how they determine it is appropriate, and where it applies. The management system is accountable to the Board of Directors, and the Board of Directors is accountable to shareholders and stakeholders.

This principle provides clarity and assurance to shareholders and stakeholders. If any unfavorable situation arises, the responsible person can be identified and held accountable.

2. Fairness: Fairness is a fundamental principle requiring that every shareholder be treated equally and fairly. Under this principle, if a company violates any shareholder rights, shareholders have the right to raise the issue. Even if a minority shareholder raises a concern, it must be taken seriously, and the company must provide a response.

3. Transparency: Transparency maintains trust among employees, senior management, the Board of Directors, shareholders, and stakeholders. Every financial statement, report, contract, document, value increase or decrease, and profit or loss must be shared with all shareholders. It is mandatory to inform them about business risks and how the company plans to address them.

4. Independence: Board members must have the authority to work independently, make decisions without undue influence, and take action impartially. The company appoints directors or advisors to provide proper guidance without seeking personal profit. They must work independently without influence from others.

5. Responsibility: Corporate governance carries significant responsibility toward employees, customers, the broader community, stakeholders, and shareholders. Companies must treat all parties fairly and operate ethically. Companies must be aware of social issues and risks they may face currently and in the future. By addressing and resolving these issues, companies create additional value in the eyes of the industry and shareholders.

6. Risk Management: Corporate governance encompasses risk management by identifying and evaluating risks. External risks are often complex and challenging to resolve, while internal risks can create gaps in systems and decision-making. Corporate governance identifies these gaps and addresses the complexity of external risks. It develops operational plans and acts on them, resolving issues as quickly as possible.

V. The Necessity of Corporate Governance

Corporate governance provides strong market value and maintains a positive reputation among shareholders and stakeholders. It upholds organizational values and serves as the foundation for company operations. It is not merely a foundation but also a driver of company growth.

Strong corporate governance attracts investors, shareholders, and employees. It demonstrates policies, plans, risk assessments, and transparency, which appeal to the industry. Corporate governance ensures commitment to responsibilities and obligations. It provides a framework for analyzing internal and external risks. When companies have well-developed governance structures, they gain easier access to capital. Investors readily invest in such companies and recommend them to others. A company’s sustainability is reflected in its environmental, social, and governance practices, which significantly impact today’s business landscape.

VI. Basic Structure of Corporate Governance in India

1. Shareholders: Shareholders are entities who invest capital in the company by purchasing shares or promoting company shares. They appoint the Board of Directors, who represent and operate the company. Shareholders approve company decisions and provide guidance.

2. Board of Directors: The Board represents the company and makes decisions in the interests of the company, shareholders, and other stakeholders. They provide reports and financial statements. They manage both internal and external company affairs.

3. Board Committees: In India, five committees are mandatory: the Audit Committee, Nomination and Remuneration Committee, Stakeholders Relationship Committee, Risk Management Committee, and Corporate Social Responsibility Committee. Board members delegate authority to committee members, who work on behalf of the company. Board committees make decisions and inform Board members accordingly.

4. Management: Management creates balance in business operations. It develops and implements plans within the company, coordinating with Board members and employees. The management system is the most critical aspect of a company. If management fails, the company will suffer significantly, and growth will slow.

5. Auditors: Auditors are appointed by shareholders to maintain and verify the company’s financial statements for accuracy. Companies may also require external auditors who examine company records and provide accurate information regarding company finances.

6. Regulators: Regulators ensure company governance by continuously implementing laws, rules, and regulations. When any negligence occurs, they take immediate action against the company.

7. Stakeholders: The stakeholder category includes employees, creditors, customers, government agencies, regulatory authorities, shareholders, and society at large. Stakeholders have a direct or indirect interest in the company.

VII. Conclusion

Corporate governance is an essential aspect of company growth. It maintains trust, fairness, accountability, responsibility, risk management, and equality among all shareholders. It has its own pillars that support the authority and growth of the company. It regulates laws and implements them within the company. Corporate governance helps maintain healthy relationships between shareholders and stakeholders, ultimately contributing to sustainable business success.

References

[1] James Chen, Corporate Governance: Definition, Principles, Models, and Examples, INVESTOPEDIA, https://www.investopedia.com/terms/c/corporategovernance.asp. 
[2] For a comprehensive discussion of the Kumar Mangalam Birla Committee’s recommendations, see BYJUS, Principles of Corporate Governance, https://byjus.com/current-affairs/corporate-governance/. 
[3] The Companies Act, 2013, No. 18 of 2013, INDIA CODE (2013). 
[4] For analysis of the Uday Kotak Committee recommendations, see HARV. L. SCH. F. ON CORP. GOVERNANCE, https://corpgov.law.harvard.edu/. 
[5] This widely-cited definition appears in the Cadbury Report. See ADRIAN CADBURY, REPORT OF THE COMMITTEE ON THE FINANCIAL ASPECTS OF CORPORATE GOVERNANCE (1992). 
[6] BOB TRICKER, CORPORATE GOVERNANCE: PRINCIPLES, POLICIES AND PRACTICES (1984). 
[7] Andrei Shleifer & Robert W. Vishny, A Survey of Corporate Governance, 52 J. FIN. 737 (1997).