What is Corporate Governance?
Corporate Governance is the method by which corporations are managed, monitored, and held accountable to their stakeholders. It is the set of rules, regulations, procedures, and policies that direct the management of the organization to act as per guidelines and managed in an ethical, transparent, and responsible manner. In India, Corporate Governance is controlled by the Companies Act, 2013, and the Securities and Exchange Board of India (SEBI) through clause 49 of the listing agreement.
The Primary objectives of Corporate Governance in India include:
- Ensuring Shareholder accountability and transparency.
- Enhancing Corporate performance
- Providing Protection to Minority Stakeholders
- Creating a conducive corporate atmosphere for growth and development
The main benefit of corporate governance is that it helps in bridging the gap between the owner and the management of the company, which ensures that the management of the company is acting and taking decisions cautiously to protect the interest of all its stakeholders and the people associated with that company.
In India, corporate governance is regulated by the Companies Act, 2013, and the Securities and Exchange Board of India (SEBI). The regulations and guidelines set by these bodies ensure that organizations are managed transparently and in a responsible manner, which also promotes the efficient and effective utilization of available resources while adhering to legal compliance.
Furthermore, the National Stock Exchange (NSE) also regulates corporate governance in India. The NSE’s regulations promote corporate transparency by releasing a report on corporate governance quarterly to assist the shareholder, customers, and Government Institutions to access the information of the company or organization they require for making informed decisions.
Corporate Governance in India helps to make sure that the company’s board of directors acts in the best interest of the company and policies of the companies are adhering to the legal compliance and guidelines set by regulating authorities. It helps to make certain that the company’s management is held accountable for its decisions and actions. It helps the company to closely watch its operations whether they are conducted in a responsible and accountable manner or not, while protecting the rights and interests of all its stakeholders. It builds and maintains a culture of accountability and transparency within the organization.
Importance of Corporate Governance
Corporate Governance is intended to ensure the integrity of a company’s management and actions. It has become increasingly important as companies are becoming more complex and working on a global level, with directors often located in different countries.
In India, corporate governance has been underlined by various regulators to improve the performance of companies and strengthen investors' confidence. The Reserve Bank of India (RBI) has emphasized the need for good corporate governance in banks, while the SEBI has laid out a set of rules and guidelines for listed companies. The main reason behind these efforts is to build an effective system that adheres to high standards of ethics and transparency.
Additionally, it encourages accountability by requiring external auditors to audit the financial statements every year. This increases confidence in financial reporting by providing assurance that the financial statements are accurate, reliable, and prepared to adhere to necessary rules, regulations and guidelines. Furthermore, having an effective corporate governance structure helps companies respond quickly to compliance violations or changes in accounting standards in order to remain competitive.
Objective of Corporate Governance
Corporate Governance is an important part of any organization’s operations and India too has been emphasizing its importance. The objective of corporate governance is to make sure that there is a clear understanding of rights and responsibilities among all stakeholders and to ensure transparency, accountability, and fairness in decision-making. It aims to promote a culture of strong ethical values.
The ultimate goals of corporate governance are stated below:
- To build investor confidence in the market
- To encourage the effective use of available resources
- To increase profits while developing strong accountability among stakeholders
- To mitigate or reduce the risk and increase the value of the company over time
- To protect the interest of all stakeholders, customers, government institutions, and other associated members, through an effective legal framework.
- To promote business ethics through implementing transparent rules, regulations, and principles that guide organizational decision-making processes.
Models of Corporate Governance
There are various corporate governance models but in this post, we will talk about and understand the difference between only two of them which are globally well-known and are followed in India. These models are stated below:
- Anglo-Saxon Model (also known as Anglo-US and Anglo-American Model)
- German Model
Understanding these two main models of corporate governance is useful to understand the comparison of the different ideal types of corporations. The Anglo-Saxon model is used in the U.S., U.K., Canada, and Australia, is based on stakeholder value, and puts control mainly in the hands of stakeholders, with boards of directors performing a supervisory role. By contrast, the German Model is based on stakeholder dialog and takes a more collaborative approach to decision-making among key stakeholders such as employees, suppliers, shareholders, and customers
In terms of cost efficiency and shareholder returns, both models offer advantages that can be adapted to suit different situations or countries. For example, the German model tends to be favored for its ability to protect workers' rights and take into account, other stakeholders. However, some countries view this as too slow-moving when compared to the Anglo-Saxon model's effectiveness in allowing companies to make quick decisions that benefit shareholders most.
In India's context, corporate governance is especially important due to its existing framework that works towards protecting business interests while maintaining ethical business practices. Even though India has adopted aspects from both Anglo-Saxon and German models in its regulatory framework, it appears that a combination of both could prove to be beneficial given its rapidly changing market environment characterized by increased international competition.
India's Corporate Governance : History, Challenges and Recent Developments
In India, the Kumar Mangalam Birla committee has recommended corporate governance reforms this committee was established in 1999 by the Securities Board Exchange of India (SEBI) to examine and recommend improvements in corporate governance practices.
The Kumar Mangalam Birla committee led by Industrialist Kumar Mangalam Birla, submitted its report in 2000. The report outlines several recommendations to enhance corporate governance standards in Indian companies. Some key recommendations include:
- Strengthening the role of independent directors on company boards
- Separation of the roles of Chairman and CEO.
- Improving transparency and disclosure practices
- Enhancing the Effectiveness of audit committees
- Strengthening the Rights of minority stakeholders
After these recommendations, SEBI and other regulatory bodies implemented various reforms to enhance corporate governance practices in Indian companies, which increased the attention of policymakers, organizations, and investors toward corporate governance. Corporate governance aims to enhance the long-term value of a company by maintaining transparency between the board of directors and stakeholders. It is focused on helping the board manage its risks effectively and promoting a culture of ethical and accountable decision-making.
There are several challenges confronting India's corporate governance system – including lack of transparency, weak enforcement mechanisms, lack of accountability among directors and other senior management personnel, inadequate disclosure standards, etc. To address these issues, several initiatives have been undertaken in recent years such as the introduction of codes for responsible business practices, increased disclosures required from companies listed on stock exchanges, etc.
It is also important to note that corporate governance does not replace business ethics; rather it is an approaches that helps ensure that organizations meet their obligations to all stakeholders.
Why Corporate Governance is Important for Banks
Corporate governance is necessary for banks due to several reasons. first, it ensures accountability and transparency within the organization. By implementing effective governance practices, Banks are held responsible for their action and required to provide clear and accurate information about their operations. This transparency allows stakeholders including depositors and regulators to access the bank’s performance and management. Second, it plays a crucial role in managing risk. Banks are exposed to various risks such as credit risk, market risk, and operational risk. A robust governance Framework helps establish risk management systems and internal control to identify, measure and mitigate these risks. By implementing these strong governance practices. Banks can safeguard their financial stability and protect the interest of depositors and shareholders. Corporate governance helps maintain public trust and confidence in the banking system.
There have been many cases where lack of corporate governance caused huge losses to banks. Some of them are stated below where banks suffered huge losses:
- Punjab National Bank (PNB) Fraud: In 2018, Punjab National Bank, one of India's largest public sector banks, faced a massive fraud involving unauthorized transactions worth over ₹14,000 crores ($2 billion). The fraud, orchestrated by jeweler Nirav Modi and his associates, highlighted lapses in the bank's internal controls and governance mechanisms.
- Yes Bank Crisis: In 2020, Yes Bank, a prominent private sector bank, faced a crisis due to governance and financial mismanagement issues. The bank had significant exposure to stressed sectors and non-performing assets. The Reserve Bank of India (RBI) intervened and took control of the bank, initiating a reconstruction plan to stabilize its operations and protect depositors' interests.
- ICICI Bank-Videocon Loan Controversy: ICICI Bank, one of India's leading private banks, faced allegations of conflict of interest and corporate governance lapses in 2018. The bank was accused of extending loans to the Videocon Group, while its CEO, Chanda Kochhar, had family connections with the Videocon promoter. The controversy raised concerns about corporate governance practices within the bank.
- Axis Bank Money Laundering Allegations: In 2013, Axis Bank, a private sector bank, faced allegations of money laundering after an investigation by India's central enforcement agency. The investigation revealed irregularities in the bank's operations, including the opening of fictitious accounts, violation of anti-money laundering norms, and lapses in know-your-customer (KYC) procedures.
These are just a few examples, and it's important to note that corporate governance challenges can arise in any organization, including banks. Regulatory bodies and institutions in India continue to focus on strengthening corporate governance norms and mechanisms to mitigate such challenges and ensure transparency, accountability, and stability in the banking sector.
Difference between Business Ethics and Corporate Governance
The terms 'business ethics' and 'corporate governance' are often used interchangeably, but they have different definitions. Business ethics refers to an individual or organization's code of conduct, while corporate governance is the system by which a company is managed and held accountable.
Although corporate governance can facilitate ethical behavior, business ethics, and corporate governance are not the same:
- Business Ethics - Business ethics relates to the moral obligations an organization has towards its stakeholders, such as its customers, suppliers, employees, shareholders, and society at large. It is primarily focused on how a company deals with various issues like product safety, employee welfare, and environmental protection.
- Corporate Governance - Corporate governance refers to the system of rules and regulations adopted by a company to ensure efficient management of its operations. It focuses on proper oversight of a company’s activities by its directors and senior executives. It also involves monitoring their actions to ensure accountability for their decisions.
Ultimately, strong corporate governance helps ensure that business decisions are made in the best interests of all stakeholders involved in an organization. It is crucial for companies in India to have effective corporate governance structures in place in order to reach their growth potential and remain competitive in today’s marketplace.
Conclusion
Corporate governance is a structure of rules, policies, and regulations that guide a company's operations and activities. It helps to protect the interests of shareholders, employees, and other stakeholders and ensures that the company is run responsibly and ethically. India is in the middle of a major shift towards corporate governance, which is expected to increase the transparency and efficiency of India’s businesses. By understanding the basics of corporate governance, organizations, individuals, and stakeholders can ensure that India’s businesses are held to the highest standards of corporate governance. Ultimately, this will help to create a more equitable and fair marketplace where ethical business practices can thrive.
