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Legal Article by - KETAN ASATI(This Article was written by him during his Internship)
All of us are aware of the historical background of having a number of large business houses and main-line business organizations, which are more than 80% family managed and dominated. And, has it ever crossed the mind that majority of these businesses do not even make it to the third generation in most cases because of lack of governance structures? This shows that with proper and enhanced structure of governance businesses are capable of attaining the next phases.
In layman’s language, therefore, governance can be described as the system through which an organisation functions effectively, legally, and in a manner most beneficial to the stakeholders to yield better results. And when this structure is applied in business it transforms to corporate governance.
According to the Institute of Company Secretaries of India, the corporate governance is the ability and techniques of best management practices, the compliance of law in its literal sense and spirit and maintaining the standard of ethics so that the management and distribution of wealth as well as social responsibilities may be fulfilled in a corporate body for the development of all the related or concerned persons.
Corporation management is the process by which an organisation establishes mechanisms in order determine how to achieve the intended strategic management. It also does concern with another important aspect that is accountability of the management. That is why the concept of corporate governance is based on the principle of free negotiation of the balance of stakeholders’ rights and interests, including the promoters, stakeholders, employees and customers. The various stakeholders of a business includes the shareholders, employees, vendors, creditors, society, government and customers by which the company’s performance is assessed in the long run.
A single organisation of this corporate world practices good corporate governance as they seem to share a close relation with stakeholders and they act in a transparent manner and directly contribute to balanced economic activity.
The components of the corporate governance are;
Laws and regulations governing businesses in India today bear closely relationship with the philosophy of Indian epics for instance Mahabharata and Ramayana and formal codes of conduct such as Arthashasthra authored by Kautilya and the highly recognized Bhagavad Gita has its roots in framing principles of corporate governance deeply rooted in the country’s constitution. Some of the principles from these epics can be summed up in following points: Some of the principles from these epics can be summed up in following points:
1. In lieu of structure, the governance should be streamlined in a manner that propounds the intervention of mutual trust and love.
2. Governance should ensure that people have commitment in their duties.
3. EVERYONE should act in a way that the public interest prevails over one’s own interest or interest of the group to which he belongs to.
4. Persevere in the proper “Dharma” despite of the conflicting self-interest.
King (Head) here is the servant of the state.
5. Leaders should be responsive, accountable and removable are basic behavioural characteristics of leaders.
6. Exaggerated idea of stakeholders.
In today’s context of large complex corporations a well governed corporate entity that adopts these principles in his governance structure will always be easily distinguishable from others in the eyes of the stakeholders.
The corporate governance in India is crafted by the companies act 2013/sebi (listing obligations and disclosure requirement) regulation 2015/secretarial standards issued by institute of company secretaries of India. Such legislations put down some provisions in them to develop a sound corporate governance system;
o Engagement of Independent directors to prompt more openness and introduced the corporate tool of reporting of wrong doings or ‘Blow The Whistle’.
Other for disclosure requirements, risk management policies and corporate social responsibility.
o Limited rules applying to the audit and allied accountability.
The formation of different internal committees in the establishments help in the responsibility and working of the organisations.
o More pressure on directors/ promoters. The effectiveness of these provisions in inculcating corporate governance framework and ethical behaviour in the companies can be assessed through following heads:
Independent Directors: They are assigned the role of being the watchdogs for the investors and lie with the duty to balance between the interest of the shareholders and the management team.
The Companies Act recommends that at least 2 directors should be independent on the board of company on crossing the mentioned threshold. SEBI (LODR) Regulations encourages one-third of the board to be independent, however, the law mandates it.
Independent directors have the responsibility of enforcing the corporate governance principles in an organisation and have the following functions;
Serve as the key reference point for the firm by acting as a consultant, tutor or counsellor.
The important functions include:
Make the independent assessment of all financial, strategic, organizational performance and risk management issues as well as the key appointments.
The Independent directors of these organizations had also contributed to uncover multi-billion-dollar scams in organization such as seen in Yes bank scam and Videocon case where until the independent director left the board of the companies or until there were reports of some scraping going on, all the regulatory bodies had no clue of any of these scams
⦁The Audit Committee: This committee oversees the organisation’s financial reporting process and the disclosures made thereunder with a view of enhancing the organisation’s transparency in its transacting financial business.
The Companies act suggests formation of an audit committee having the minimum of three directors of which the majority are independent.
⦁Corporate Social Responsibility: Businesses have started operating with the aim of improving the society, as commented by Mr. Ratan Tata saying that, ‘‘current and future businesses have to get beyond the interests of their firms to the people they serve.’’
Today the investors care more how the company is building value mainly in the long-term rather than the short-term objectives, it means they, need to take consideration with both the other non-financial aspects as well as the financial when they are investing.
The act says a company must spend 2% of their average net profits of the last 3 financial years in corporate social responsibilities if the company’s net worth or turnover or capital exceeds the following limit.
*Company having paid up capital of Rs. 500 Crores or more.
*Company having turnover of Rs. 1000 Crores or more.
*Company possessing net profit of Rupees Five Crores or more
⦁Check on compensation of Executives and the Key Managerial Persons: In 2018, directors of the company and the majority of shareholders passed a shiny package of rewards for Tesla Motors’ CEO, Elon Musk. It was also easily the largest pay raise in corporate America, at least as measured in stock, even if no part of it was actually in cash. In the subsequent few years, Musk would receive incremental 12% of the company’s shares depending on certain goals set by the Board. And in the recent case, the Chairman of the company, Gautam Adani pays Rs. 9. 26 Crores in the financial year 2024 which was somehow lower than his peer group and the executives.
According to the Companies Act of 2013, section 197 described the limits of the remuneration to be paid to the directors of the company. Although it places a condition that its remuneration should not exceed an equivalent of twenty five times the basic pay of the executives, the remuneration shall be deemed to be determined by the performance of the executives as described in the evaluation report. And, therefore, there shall be Nomination and Remuneration Committee to overseeing the nomination and remuneration of executives in that ‘it is not who you know, but what you know’ basis.
Good corporate governance impacts the confidence of investors which is a core ingredient that defined the competitiveness of companies with entities listed on stock exchanges. Developing the new corporate values for the stakeholders is important since good corporate governance policies and practices enhances the additional values which in turn strength and balance the economic development through transparency. Corporate governance makes sure that all the stakeholders’ claims are protected and all dealings that are being done are ethically sound. The fundamental principle of corporate governance as opposed to the pure notion of shareholder value theory is to generate value for all the stakeholders as opposed to the values being maximized for the shareholders.
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