A company or organization
forms the largest structure of any business scenario globally which has
numerous stakeholders in its governance. Attaining higher transparency merged
with integrity and accountability form the integral part of organizations
philosophy on corporate governance. Policies, Procedures and systems should
adhere to the best practices of able governance and satisfy expectations of the
stakeholders (employees, suppliers, customers,
shareholders, management) and the society. The broader principles of corporate
governance should be supported by the Directors of the company’s and emphasis
should be made to align actions to achieve organizational objectives.
Core Factors Influencing Corporate Governance in India:
1 Formation of Company Boards and its
Ownership Structure: Core Factors Influencing Corporate Governance in India:
The structure
of ownership defines the extent of control and management it has in the
Organization. In India corporations are characterized by Public sector, Private
sector and MNC Enterprises. Institutions or small investors hold shares of
companies except the public sector ones, where as the bigger shareholders are
more active on company boards in general body meetings and Annual General
Meetings (AGM’s). The structure of the Company’s Board along
with the ownership structure plays a duel influencing role in managing and
controlling the organization. Establishing corporate objectives, formation of
policies, strategic decision making and finalizing top managers form the core
responsibilities of the board. Management’s performance also reflects on the
board to enhance company’s image and safeguard shareholders interests. There
are various formulations in size and structure for setting the Company Board’s
like single tired or two tired boards with respect to the size of the
corporation. Board members may vary from 5, 10 to even 15 in size.
Deep implications in the quality of the company’s
governance like appropriate proportion between debt and equity is reflected
through its financial aspects governing the structure formulations. Financial
Institutions and Lending houses lay and exercise considerable influence on the
parameters that manage and control a company. They perform regular checks and
control parameters of screening and monitoring the same on every stage as they
have a deeper understanding of the company’s financial structure as compared to
the other investors. At times banks favor long term projects against non viable
shorter ones as they yield higher benefits for mutual growth. In times of
financial distress also they tend to play more favorable role in comparison to
others.
The Legal and Political Regulations surrounding the
Organizations parameters influence them in their operational capacities and it
is reflected in its quality of corporate governance. Political Implications are
imbibed in governance mechanisms in accordance with economic and legal
institutions. Company Law defines the corporate control and managing criteria’s
through its mechanisms.
Ensuring Corporate Governance In India Through Diversified Mechanisms:
1. The Companies Act of 1956 – Indian Companies are regulated through this act having
658 Sections including 15 schedules, and so making it one of the biggest
legislations. It confers legal rights to the shareholders for ensuring
corporate governance through diversified parameters such as, by voting on every
resolution placed before any annual general meeting, electing directors responsible for policy
formulation / implementation and achievement of organizational objectives,
fixing remuneration of CEO / Directors, removing or dismissing the Directors,
actively participating in the Annual General Meetings, formulating and
implementing globally accepted corporate governance practices and compliance
social norms strengthening corporate democracy, protecting interests of
minority shareholders and all stake holders by providing maximum flexibility as
per market needs. Important amendments among these include liberalizing inter corporate investments and permitting
the companies to buy back their shares
2. The Securities Law- The Principal security law governing the company is the SEBI Act incepted in 1992. Among the numerous initiatives initiated by the board to attend to investor’s protection is mandating information disclosures in the prospectus and the annual accounts. It strengthens the Company’s Act which on its part also rules certain standards of information disclosure and these attempts make the documents more significant. As per SEBI regulations it is also mandatory for the promoter to take a 20% stake in the capital of the company in most public issues and retain the shares for a lock in period of 3 yrs. The board has also formed a committee to underline means to promote listed companies and add to the existing standards of corporate governance. Also as per clause 49 for the finest composition of executive and the non executive directors, a autonomous and experienced audit committee be formed. Remuneration fixed for the directors, the analysis and discussion report of the management should all be part of the annual report submitted to the shareholders with a particular section adhering to the intricacies of corporate governance compliances followed included in the report being certified by the Auditor.
3. Maintenance of Discipline in the Capital Market – There are sturdy incentives for the corporate management in a healthy capital market to willingly follow transparency and get themselves monitored by external agencies to generate faith among potential and present investors. We have seen that in the past few years that though they are not legally binding, the Indian organizations are themselves complying to the international accounting and audit standards. So there has been image cultivation management by bringing in more transparency in their financial dealings and concern towards share holder’s value maximization. The capital market is regularly taking most of the micro decisions and judgments timely which is a positive sign, its success makes it a proficient allocator of the capital. So it makes sense for the regulator to pass most of the burden of implementing corporate governance to the markets and concentrate in making the markets more endearing and appealing.
4. Nominees on Company Board – Bigger investors or Equity holders have their favored nominees in the boards of the companies who at times effectively cast their opinions and votes against policies and resolutions which don’t suit their business interests.
5. Compliances & Statuary Audits- Auditors & Compliance Bodies are part of the mechanism ensuring good governance, acting as ethical partners of Shareholders, lending parties and other parties who own commercial stakes in the organizations. They also act as one of the corner stones through their regular and annual audits and act as means of reporting on their stewardship along with creating hindrance to financial irregularities. The checks and balances by external parties serves the objective of transparent scrutiny to their financial statements.
6. Conduction Codes- The Board of Directors and the Chief Executive Officer (CEO) have their measuring and evaluating parameters for reporting and controls such as KPI (Key Performance Indicators) . They are based in accordance to the checks and balances required in accordance to safeguard against excessive absorption of power and at the same time enable those who are entitled to get the feedback they need to exercise their rights. The four sections that illustrate them are- Role of the Board of Directors, Role of Non Executive Directors, Executive Directors, and Financial Reporting & Controls.
Manjul Thapliyal
Principal Consultant
www.visionsahead.com
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