Corporate Governance
In today’s globalize and interconnected world, investors, creditors and other stakeholders have come to recognize that environmental, social, and governance responsibilities of a company are integral to its performance and long-term sustainability.
The global financial crisis in recent years has heightened the need for corporate boards of directors to provide well-informed strategic direction and engaged oversight that stretches beyond short-term financial performance. Doing so prepares companies to more comprehensively address risks, by anticipating potentially adverse impacts on people and the environment and managing tangible and reputational risks. It can also generate wealth by creating shareholder value through an increase in business opportunities and broader access to markets.
To generate confidence among the shareholders & other business constituents, to create a good image of the company in the public domain, to build confidence in the mind of both internal & external stake holders, among consumer for goods produced or service rendered & to access the capital market to raise fund for business expansion, good governance practices are of outmost importance. Good corporate governance practices are also indispensable for sustainable growth.
Good corporate governance plays a vital role in underpinning the integrity and efficiency of financial markets. Poor corporate governance weakens a company’s potential and at worst can pave the way for financial crisis and even fraud. If companies are well governed, they will usually outperform their peers and will be able to attract investors confidence & support which can help to finance further growth.
Authority all over the world have tried to define Corporate governance in their ways but no universally acceptable definition has yet come.
Corporate governance is all about optimum utilisation of resources by the trustee i.e Board of Directors on behalf of the owner, to enhance shareholder wealth while ensuring transparency & fairness to all stakeholders including the communities in which the business operates.
Good Corporate governance principle can be outline as under;
1. Transparency
2. Accountability
3. Responsibility
4. Independency
5. Fairness
Interestingly, all over the world, in many companies the person who manage the company are altogether different from the person who own it i.e the shareholder. This is because the diverse nature of ownership scattered in different geography & complex & giant nature of organisation which calls for professional management . In the eye of law, a company is a separate legal entity distinct from its members who own it. The resources of large number of shareholders are pooled together by creation of a company for attainment of social and/or economic need. The supreme executive authority in the control of a company & its affairs resides in persons known as board of directors. The responsibilities to recognise and safeguard the rights of stakeholders and to take ultimate responsibility for their company’s adherence to a high standard of corporate behaviour and ethics lies on board of directors. The success or failure of a company depends upon the corporate governance practice in vogue.
Board Role & responsibility:
a. Leadership & strategic guidance
b. Protecting stakeholder right & interest
c. Risk Management
d. Optimum utilization of resources & shareholders wealth maximization.
e. Creating long term sustainable business value
f. Adherence to a high standard of corporate behaviour and ethics
Compliances of Corporate governance guidelines
The regulators in many countries have set corporate governance guidelines for adherence by companies registered in their territories. Undoubtedly, regulation helps in bringing discipline & qualitative improvement in good corporate governance in a company to a great extent. But by mere quantitative application of guidelines by an enterprise will not serve the desired purpose. In some companies even compliance officer are appointed to tick off the compliance of guidelines by the company & report to the Board of Director. This shows that there is lack of mind by the board as to the whether it is governing in an acceptable manner. Since there are no rule of thumb which will fit all circumstances, there should be comply or explain provision in the guidelines. If the board believes that non compliance of the guidelines is in the best interest of the share holder & other stake holder they should explain their argument to them. Since market is the ultimate compliance officer, whether the shareholder will stick to the company or not answer itself.
What is essential for good governance is that the director must apply their mind which governance process are in the best interest of the business of the company, instead of blindly sticking to the guidelines. Because there is no rule of thumb which fit all business environment .
Corporate governance in Central Public Sector Enterprises ( CPSEs)
To promote the culture of better corporate governance practices in India, the Ministry of Corporate Affairs, Government of India, on 1st October 2003 has set up National Foundation for Corporate Governance (NFCG). The ICAI , ICSI ,ICWAI , CII & National Stock Exchange (NSE) are partner member.
The National Foundation for Corporate Governance (NFCG) has been formed with following mission:
a. To foster a culture for promoting good governance, voluntary compliance and facilitate effective participation of different stakeholders;
b. To create a framework of best practices, structure, processes and ethics;
c. To make significant difference to Indian Corporate Sector by raising the standard of corporate governance in India towards achieving stability and growth
According to the annual report of the department of Heavy Industries as much as Rs 5.30 lakhs crore has been invested in 246 CPSEs .The government realised that while the principles of corporate governance apply equally to both public and private sectors, there was a need to adopt and apply the good Corporate Governance practices in respect of CPSEs where huge public funds are invested.
Good corporate governance of state owned enterprises is of immense importance since it uses vast sums of hard earned public money in domestic & multinational operation. In view of this to bring transparency & accountability in the functioning of CPSEs, Govt of India for the first time in June 2007 had issued “Guidelines on corporate governance for CPSEs” on experimental basis. Based upon feed back received & experience gain during the experimental period, Government felt for continuation of adoption of Good corporate governance guidelines by CPSEs for ensuring high level of transparency. The earlier guidelines was suitably modified & made mandatory for adoption by all listed & non listed CPSEs. The revised guidelines on Corporate governance for Central public sector enterprises ( CPSEs) was notified by department of Heavy Industries & Public enterprises, Govt of India on 14th May 2010 vide Office Memo No.18(8)/2005-GM. Many of the guidelines are similar to the requirement prescribed in Clause 49 of the SEBI guidelines on listing agreement. The guidelines cover issues like composition of boards of CPSEs, audit committee, subsidiary companies, disclosures, code of conduct and ethics, risk management and reporting.
For applicability of the guidelines, Central Public sector enterprises (CPSEs) have been divided in to two categories:
a. CPSEs listed on the Stock exchanges
b. Other CPSEs
Enterprises falling under first categories are required to follow the SEBI guidelines on Corporate Governance as envisages in Clause 49 of the listing agreement. In addition, they shall follow those provisions in these Guidelines which do not exist in the SEBI Guidelines and also do not contradict any of the provisions of the SEBI Guidelines. The non listed enterprises are also mandatorily require to adopt the guidelines applicable for CPSEs.
Compliance with Corporate Governance Norms
In order to comply with the guidelines on corporate Governance an enterprise is required to satisfy following conditions:
1. Size & composition of the Board
The company shall have optimum combination of functional, nominee & independent Directors on the board. In case of listed company:
a. For Executive Chairman: Independent directors shall be atleast 50% of Board Member.
b. For Non -Executive Chairman: Independent directors shall be atleast 1/3rd of Board Member.
c. Nominee Director: Maximum Two (2)
2. Board Meeting
Frequency – atleast once in every three months
No of meeting – atleast four meeting in a year
Gap between any two meeting – Not more than 3 months
- Not more than 4 months
(as per Clause 49)
a. Responsibility: The roles & responsibility of board & individual directors should be clearly defined in board charter
b. Code of conduct: The board should lay down a code of conduct for all members & senior management of the company and it should be circulated & posted in company’s website. The Board member & senior manager has to sign compliance report to this effect on annual basis.
c. Restriction on Directors
As a committee member– Maximum 10
As a Chairman – Maximum 5
3. Qualified & Independent Audit committee
Every company shall have a “Audit Committee” of Board of director which will meet at least four times in a year & there shall not be a gap of 4 months between two meetings. The quorum shall be at least two members.
Chairman: Independent Director
Minimum member: 3 Director
Maximum member: To be determined by Board of Directors
2/3rd hall be other than MD & whole time Director
Terms of reference: To be specified by the Board of Directors.
4. Disclosure of transactions with related parties
Details of material transaction entered in to with related parties which are not at arm length price shall be placed before audit committee with proper justification.
5. Remuneration Committee
Every company shall have a remuneration committee which will decide the annual bonus/variable pay & policy for its distribution among executives & non unionised supervisors. If independent director on the board of a company, it will not be eligible for payment of performance related pay ( PRP).
Chairman: Independent Director
Min: Three Director ( Nominee/ Independent Director)
Max: To be determined by Board of director.
6. Compliance certificate on corporate Governance
There shall be a separate section on Corporate Governance in each Annual Report of company, with details of compliance on Corporate Governance. The company shall obtain a certificate from either the auditors or practicing Company Secretary regarding compliance of conditions of corporate governance as stipulated in the Guidelines and Annexes.
Benefit of good Corporate governance
Improved corporate governance can help an enterprise in many ways which include: accessing capital market or reducing the cost of capital; facing and responding to external market pressures; balancing (sometimes) diverging shareholder interests; resolving governance issues in family-owned businesses; ensuring company sustainability; and, achieving better operational results.
Good corporate Governance practice ensure management’s commitment in applying principles of openness, accountability, responsibility, independence, fairness and prudence in managing an enterprise. It Improve enterprise performance, efficiency and services to varied stakeholders. It also protect an enterprise from political intervention and lawsuits .
The benefits are real and measurable. For one, good governance leads to higher market valuation. Better corporate governance also decreases the cost of capital and helps to attract and retain shareholders.
Credit Rating agencies/analyst sometimes raised the valuation of a company from “hold” or neutral to “outperform” because of improvement in governances.
Tangible benefits also suggest that good governance helps enterprises through difficult economic times like the financial crisis, since well-governed companies tend to deliver not only higher but also more sustainable value.
Green initiative in Corporate Governance.
The Ministry of Corporate Affairs (MCA) has taken a "Green Initiative in Corporate Governance" by allowing paperless compliances by companies through electronic mode. In accordance with the recent circular bearing no.17/2011 dated 21.04.2011 and 18/2011 dated 29.04.2011 issued by the Ministry, companies can now send various notices /documents (including notice calling Annual General Meeting, Audited Financial Statements, Directors' Report, Auditors' Report etc) to their shareholders through electronic mode, to the registered email addresses of the shareholders.
It is a welcome move for the society at large, as this will reduce paper consumption to a great extent and allow public at large to contribute towards a greener environment.
By CMA. S K Mishra*
* The author is a Fellow Member of The Institute of Cost Accountants of India & Associate Member of The Institute of Chartered Accountants of India. He can be reached at surucan@gmail.com.
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