NEED OF CORPORATE GOVERNANCE IN INDIA

Shareholder value get lost when things are done  illegally, when principles of corporate

governance are not adhered to, when cohesive action is not taken - Cyrus Pallonji Mistry

WHAT IS CORPORATE GOVERNANCE

DEFINE

Importance and need of corporate governance were felt after the Scams such as Satyam and

Sahara. It was recognized that good corporate governance not only improves transparency and

efficiency in a company but also increases the investor trust in the company. Corporate

governance focuses not only on shareholders but on all the stakeholders of the company.

The need for corporate governance was felt because of the increasing non-compliance of the

standards related to the financial reporting and accountability by the board of directors and

management which in turn was the reason of the huge losses to the investors of the company.

Not only in India, but companies around the world were not complying with the standards of the

financial reporting and the fallout of companies like Enron in US and Satyam in India lead to the

emergence and need of corporate governance in India for an enterprise. As it was said that these

companies fall out because of having bad corporate governance policies or framework and

because of the corrupt practices followed by the board of directors and the management of the
said companies and their financial consulting firms.

The need for corporate governance is highlighted by the following factors:

(i) Wide Spread of Shareholders:

Today a company has a very large number of shareholders spread all over the nation and even

the world; and a majority of shareholders being unorganised and having an indifferent attitude
towards corporate affairs. The idea of shareholders’ democracy remains confined only to the law

and the Articles of Association; which requires a practical implementation through a code of

conduct of corporate governance.

(ii) Changing Ownership Structure:

The pattern of corporate ownership has changed considerably, in the present-day-times; with

institutional investors (foreign as well Indian) and mutual funds becoming largest shareholders in

large corporate private sector. These investors have become the greatest challenge to corporate

managements, forcing the latter to abide by some established code of corporate governance to

build up its image in society.

(iii) Corporate Scams or Scandals:

Corporate scams (or frauds) in the recent years of the past have shaken public confidence in

corporate management. The event of Harshad Mehta scandal, which is perhaps, one biggest

scandal, is in the heart and mind of all, connected with corporate shareholding or otherwise being

educated and socially conscious.

The need for corporate governance is, then, imperative for reviving investors’ confidence in the

corporate sector towards the economic development of society.

(iv) Greater Expectations of Society of the Corporate Sector:

Society of today holds greater expectations of the corporate sector in terms of reasonable price,

better quality, pollution control, best utilisation of resources etc. To meet social expectations,

there is a need for a code of corporate governance, for the best management of company in

economic and social terms.

(v) Hostile Take-Overs:

Hostile take-overs of corporations witnessed in several countries, put a question mark on the

efficiency of managements of take-over companies. This factors also points out to the need for

corporate governance, in the form of an efficient code of conduct for corporate managements.
(vi) Huge Increase in Top Management Compensation:

It has been observed in both developing and developed economies that there has been a great

increase in the monetary payments (compensation) packages of top level corporate executives.

There is no justification for exorbitant payments to top ranking managers, out of corporate funds,

which are a property of shareholders and society.

This factor necessitates corporate governance to contain the ill-practices of top managements of

companies.

(vii) Globalisation:
Desire of more and more Indian companies to get listed on international stock exchanges also

focuses on a need for corporate governance. In fact, corporate governance has become a

buzzword in the corporate sector. There is no doubt that international capital market recognises

only companies well-managed according to standard codes of corporate governance.

The need of corporate governance is also felt as it provides for the better financial strength of a
company by maintaining a competitive environment which further provides for the financial
growth of a company and increased improvement in the accountability system which results in
risk mitigation substantially. Corporate governance policy laid great emphasis on the
transparency and disclosure in the company and provide that if there is transparency in an
organization and if an adequate framework of corporate governance is adopted by the company
then it will minimize the risk of the happening of scams which have been witnessed by the
corporates in the past.

Corporate Governance is needed to create a corporate culture of transparency, accountability and

disclosure.
Corporate Performance: Improved governance structures and processes ensure quality
decision-making, encourage effective succession planning for senior management and enhance
the long-term prosperity of companies, independent of the type of company and its sources of
finance. This can be linked with improved corporate performance- either in terms of share price
or profitability.

Enhanced Investor Trust: Investors consider corporate governance as important as financial

performance when evaluating companies for investment. Investors who are provided with high
levels of disclosure and transparency are likely to invest openly in those companies. The
consulting firm McKinsey surveyed and determined that global institutional investors are
prepared to pay a premium of up to 40 percent for shares in companies with superior corporate
governance practices.Better Access to Global Market: Good corporate governance systems
attract investment from global investors, which subsequently leads to greater efficiencies in the
financial sector.

Combating Corruption: Companies that are transparent, and have sound system that provide
full disclosure of accounting and auditing procedures, allow transparency in all business
transactions, provide environment where corruption would certainly fade out. Corporate
Governance enables a corporation to compete more efficiently and prevent fraud and
malpractices within the organization.

Easy Finance from Institutions: Several structural changes like increased role of financial
intermediaries and institutional investors, size of the enterprises, investment choices available to
investors, increased competition, and increased risk exposure have made monitoring the use of
capital more complex thereby increasing the need of Good Corporate Governance. Evidences
indicate that well-governed companies receive higher market valuations. The credit worthiness
of a company can be trusted on the basis of corporate governance practiced in the company.

Enhancing Enterprise Valuation: Improved management accountability and operational

transparency fulfill investors expectations and confidence on management and corporations, and
in return, increase the value of corporations

Accountability: Investor relations are essential part of good corporate governance. Investors

directly/ indirectly entrust management of the company to create enhanced value for their
investment. The company is hence obliged to make timely disclosures on regular basis to all its
shareholders in Corporate Governance is integral to the existence of the company. Lesson 3
Conceptual framework of Corporate Governance 47 order to maintain good investor’s relation.
Good Corporate Governance practices create the environment whereby Boards cannot ignore
their accountability to these stakeholders.

To Comply with SEBI Requirement

SEBI has made corporate governance compulsory for certain companies i.e for listed
companies to comply with its provisions. This SEBI requirement protects the interest of the
investors and other stakeholders. If any company doesn’t comply with SEBI rules, it can
bring a high penalty.

Need of Social Responsibility

Today, social responsibility is given a lot of importance. The Board of Directors (BOD) has
to protect the rights of the customers, employees, shareholders, suppliers, local
communities, government, etc. This is possible only if they use corporate governance.
Analysis

There is a lot that goes into building its position and image. Corporate Governance is one such
hidden force. After numerous scandals, maligned reputations and economic downturns,
companies are now realising that few concrete steps towards better governance could have saved
years of their labour.

Most companies chase only monetary gains and take corporate governance for granted. Due to
lack of trust on governance, investor sentiments go awry resulting in mass outflow of FII funds,
sale by majority shareholders, reduced market value and so on.

Designing the framework of corporate governance in India is no mean task in itself. The
requirement and fundamentals vary across sectors, industries as well as nationalities. Profound
corporate governance is a must for banks and healthcare in particular.

Other sectors, such as FMCG, IT and Retail need to prioritize good governance, but this may not
help them in enhancing their market value. The influence of governance on value also varies. It
gains more importance during tough times rather than smooth sailing periods.

Nevertheless, corporate governance in India will continue to be crucial no matter what. The
approach must be a perfect balance between excessive stringency and too much flexibility. Only
the framework must be holistic and take the interests of all the stakeholders into account.

SCOPE OF CORPORATE GOVERNANCE IN INDIA

The scope of Corporate Governance in India includes collecting processes, procedures, &
provisions through which the company operates & controls. It refers to the mechanism by which
an organization manages and directs its affairs. Business ethics play a vital role in Corporate
Governance & it is the substantial factor influencing Corporate Governance.

The ideal model of Corporate Governance excels on the globally accepted principles of corporate
Governance. As per the ideal model, the company conducts its business as per the stakeholder’s
desire to reap profits. Board of Directors (BODs) and other associated committees are
accountable for running the company and maintaining a balance between individual and societal
goals, and social goals, and economic goals.

 If the corporate governance of the company is proper it will ultimately lead to better
economic growth and more success rate.
 Better corporate governance helps in getting the confidence of the investor which will
ultimately help the company in raising and acquiring the capital fast and effectively. It
also lowers the cost of the capital that is required for investment.
  It also helps in increasing the share price of the company.
 Proper corporate governance help in attaining efficiency and also minimizes
mismanagement, risk, and corruption.
 It plays in building up the goodwill of the corporation.
 It helps in managing and running the operations in the organization according to the
interest of all of its stakeholders.

The scope of having corporate governance are

1. Accountability
2. Fairness
3. Transparency
4. Independence
5. Compliance with rules

1. Accountability – Accountability means a situation in which any person is responsible

and needs to give a satisfactory reason for anything wrong in work. Corporate governance
makes accountability. 

  (a) Accountability ensures that working management i.e. Managers, Employees is

responsible to the Board Of Directors ( BOD ).
  (b) Further, Accountability Ensure that the BOD is accountable to shareholders if anything
bad happens.

2. Fairness
  (a) Corporate governance ( CG ) protects the rights of Shareholders.
  (b) CG treat all shareholders equally including minorities 
  (c) Provides effective redressal for any violations i.e Customer care

3. Transparency
  (a) CG makes ensure timely, accurate disclosure on all material matters of the company
including the financial situation, performance, ownership.

4. Independence
   (a) CG makes procedures, rules, and structures in place to minimize or avoid conflicts of
interest
   (b) CG appoints Independent Directors and Advisers i.e. to take the free decision from the
influence of others

5. Compliance with rules

   (a) CG ensures compliance with all the laws and code of spirit.
   (b) Corporate governance is necessary to meet the requirement of  SEBI for listed
companies
FURTHER SCOPE

Brings Honesty & Transparency

2. Access Foreign Capital
3. Protection of Investor
4. Fairness In Financial Reporting And Accountability
5. Improves Shareholder Communication
6. Increases Goodwill and market reputation
7. Enhancing Company Valuation

1. Brings Honesty & Transparency

Corporate governance is important to promote the honest and transparent monitoring of each
and every activity of the company. It helps the company to maintain the rules and standards
of the company. Corporate governance also assists the training and development of directors
so that they can perform well in the decision-making process. 

2. Access Foreign Capital
Foreign capital means getting capital investment from foreign countries. Foreign capital
markets want high standards for efficiency & transparency of the company.  Good corporate
governance is important to bring efficiency & transparency to the company which helps the
global market players to gains credibility and trust. 

3.  Protection of Investor

The next importance of corporate governance is to protect the rights of investors. Every
investor wants their rights to be protected by companies. Bringing corporate governance in a
company can protect investors’ interests by improving the efficiency of corporate
enterprises.

. Fairness In Financial Reporting & Accountability

Financial reporting is the financial results of a company that are published to its
stakeholders and the public. Corporate governance ensures sound, transparent, and credible
financial reporting. Corporate governance also makes accountability ( Responsibility ) of
employees & managers for their work to increase their effectiveness.

5. Improves Shareholder Communication

Shareholder communication refers to the right to vote in the decision-making process. It is
the way in which investors can communicate with the companies. Corporate governance is
important to set up the right for shareholder communication. Nowadays more importance is
giving to corporate governance.

Example- In 2003, New provisions are added in corporate governance in order to improve

shareholder’s involvement in decision making.  

6.  Increases Goodwill and market reputation

 Corporate governance is important to increase goodwill and market reputation. As
corporate governance ensures the protection of rights, the efficiency of a company, right
decisions, etc.

7. Enhancing Company Valuation

 Improved management, accountability, good market reputation, and transparency fulfill the
investor’s need and confidence in the company. This increases the value of the company in
the market.