History of Corporate Governance

The article 'History of Corporate Governance' encompasses to elucidate the history and evolution of corporate governance in India along with the underlying challenges in their implementation.

Update: 2023-05-06 09:19 GMT
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The article 'History of Corporate Governance' encompasses to elucidate the history and evolution of corporate governance in India along with the underlying challenges in their implementation. Corporate Governance is a matter of how corporations are run, governed, controlled and accountable to their shareholders. Due to Globalisation, many companies have had to turn to International Financial Markets and thus are exposed to more competition than ever before. The shift is linked to several...

The article 'History of Corporate Governance' encompasses to elucidate the history and evolution of corporate governance in India along with the underlying challenges in their implementation. Corporate Governance is a matter of how corporations are run, governed, controlled and accountable to their shareholders. Due to Globalisation, many companies have had to turn to International Financial Markets and thus are exposed to more competition than ever before.

The shift is linked to several key factors in India based on economic and financial policy reforms initiated in the 1990s which is collectively and loosely referred to as ‘liberalisation’. This process represents a paradigm shift from a strictly regulated welfare economy to one in which there are significantly more freedom and orientation. The effect has been that an unprecedented need for attracting and maintaining external investment has arisen. Thus, the concept of corporate governance has certainly paved the way for determining the growth of a company in the long run. 

Introduction

“It is clear that good corporate governance makes good sense. The name of the game for a company in the 21st Century will be confirmed while it performs” - Mervyn King

In light of intense competition and dynamics prevailing in Indian business right now, it seems that one of the keys to long-term growth and success is talent finding a good balance between good governance on the one hand and a model of sustainable growth on the other hand. Business management has become an integral part of a myriad of issues from business standards to accounting standards and corporate social issues. Responsibility for supply chain management as a means of preventing a potential financial crisis is a means of ensuring macroeconomic/microeconomic stability, promoting systemic improvement general political economy.

Almost all interdisciplinary studies in law, economics and the financial sector have already felt the scope and impact of corporate governance. There was a connection between business administration and several business interests and disciplines but ideological and mainly theoretical, the influence of scientific work in the same field.

The company's management was at best, ignored and at worst, mocked for its perceived impeccable business efficiency. However, it is pertinent to note that India has one of the best corporate governance laws but poor implementation combined with the socialist policies of the pre-reform era has severely affected corporate governance.

Evolution of Corporate Governance in India

The concept of good governance is very old in India, dating back to the third century BC. where Chanakya elaborated the fourfold duties of a king viz. Raksha, Vriddhi, Palana and Yogakshema. The principles of corporate governance related to the protection of shareholder wealth (Raksha), the increase of wealth by proper use of wealth (Vriddhi), the preservation of wealth through profitable projects (Palana) and mainly to protect the interests of shareholders (Yogakshema or protection).

Corporate governance was not on corporate India's agenda until recently in the early 1990s, and did not find many references to this subject in the law book at the time. In India, systemic weaknesses like undesirable stock market practices, Government without adequate fiduciary duties, poor disclosure practices, lack of transparency and chronic capitalism required to reform and better governance.

The financial crisis of the year 1991 and the subsequent need to turn to the IMF led the Government to adopt a reform initiative to stabilize the economy through liberalization. The pace picked up, albeit slowly when the economy opened up and the liberalization process began in the early 1990s. To like as part of the liberalization process, the government amended the Companies Act 1956 in 1999. Later in 2000, 2002 and 2003 further changes took place. The most important corporate governance initiatives have been introduced in India since the mid-1990s. Different reforms directed several paths, and the Security Exchange Board of India (SEBI) and Ministry of Corporate Affairs, Govt in India (MCA) played an important role in it.

Committees on Corporate Governance

1. Confederation of Indian Industry (CII)

The Confederation of Indian Industry formed a working group in 1995 under the leadership of Rahul Bajaj, a famous industrialist. In April 1998, the CII published a code called "Preferred Corporate Governance". It dealt with several aspects of corporate management and was the first criticism director candidates and suggested diluting the properties of the state in companies

2. Kumar Mangalam Birla Committee Report

Although the CII code was well received by the corporate sector as well as some progressive companies In Indian circumstances, it was felt that a statutory rather than a voluntary code would have accommodated this to be more important. As a result, the securities made another important initiative and the Stock Exchange Board of India (SEBI), which constituted the commission as Chairman Kumar Mangalam Birla in 1999 to promote and uplift good company management. In early 2000, the SEBI Board approved and ratified the key recommendations of this committee and contained in clause 49 of the list ing Agreement.

3. Department of Enterprises (DCA)

In May 2000, the Department of Corporate Affairs (DCA) established a broad study group led by Dr. P.L. Sanjeev Reddy, Secretary of DCA. The group received the ambitious task of exploring ways to “implement the concept of corporate excellence relentlessly" to "rehabilitate India's global competitive advantage and grow further entrepreneurial culture in the country". In November 2000, the Corporate Excellence working group established a report prepared by the group, which included some recommendations to improve management standards among all Indian companies.

4. Naresh Chandra Committee Report

The Ministry of Finance and Commerce appointed the committee in August 2002 under Naresh Chandra President to review and recommend amendments to the agreement, among others, the law relating to audit-client relations and the role of independent directors. The commission made recommendations in two key areas of corporate governance: financial and non-financial information: independent audit, and management control.

5. Narayana Murthy Committee Report in 2002

SEBI constituted a committee headed by Narayana Murthy for the review implementation of the code of corporate governance of listed companies and issuance of the revised clause 49. Some of the committee's most important recommendations mainly concerned control committees, audit reports, independent directors, related transactions, risk management, governance and directors' compensation, codes of conduct and financial information.

Clause 49 of the List of Agreements

After liberalisation, serious efforts were made with SEBI to reform the system clause 49 of the listing agreements, which deals with the general management of the company. Article 49 of the listing agreement to the Indian stock exchange came into effect on December 31 2005. It contains the following basic requirements.

• Board independence: Listed companies must have a minimum number of board-independent directors.

• Audit committees: Listed companies must have at least a board audit committee of three directors, of which two-thirds must be independent.

• Disclosure: Listed companies must regularly disclose various financial information to ensure transparency.

6. J.J. Irani Committee Report

The Companies Act, 1956 was passed based on the recommendations of the Bhaba Commission that was set up in 1950 with the aim of consolidating existing company law and creating a new foundation doing business in independent India. With the introduction of that law in 1956 The Companies Act 1913 was repealed.

From time to time the need to organize the law was felt when the corporate sector grew at the pace of the Indian economy and up to 24 changes The most important changes in the law were made through the Companies (Amendment) Act, 1998 based on the recommendations of the Sachar Committee with further changes in 1999, 2000, 2002 and finally in 2003 by companies (Amendment) Bill 2003 R.D. Based on the Joshi Committee Report. After some hesitation since 1980, India started its economic reform program in the 1990s and the need of the hour. For a comprehensive revision of the Companies Act, of 1956. The government, therefore, introduced a new solution initiative and established in December 2004 as the president of the commission Dr. J.J. Iran with the role to advise the government on the proposed changes in the Companies Act 1956.

7. Central Coordination and Control Committee

The High Power Central Coordination and Monitoring Committee (CCMC), headed by The department, established the Secretary and President of SEBI Business Affairs to monitor actions taken against failing businesses and unscrupulous advertisers who used funds raised from the public.

8. National Enterprise Management Foundation

The Ministry of Enterprise recently established the National Enterprise Fund Management (NFCG) in association with the Confederation of Indian Industry (CII), the Institute of Company Secretaries of India (ICSI) and the Institute of Chartered Accountants of India (ICAI).

9. Ownership structure

There are two issues related to the ownership structure of listed companies in India. First, the concentration of ownership is high, which gives certain individuals or families de facto or effective control in most companies, even listed companies. Second a large number of firms in India are consolidated under one common control shareholder or family.

10. Creation of the NSE Center of Excellence in Corporate Governance

To promote and maintain the best corporate governance standards of Indian companies In December 2009, NSE established the Center of Excellence in Corporate Governance (NSE CECG). It is an independent expert advisory board which consists of recognized experts, researchers and professionals in the field.

Legal Framework on Corporate Governance

Companies Act, 2013- It describes the laws on the composition of the board, board meetings, board processes, audit committee, general meetings, political party events, requirements for disclosure of financial statements, etc.

The new Act replaced the Companies Act, of 1956 and aimed to improve corporate governance standards, simplify regulations and enhance the interests of minority shareholders.

i. Board of Directors (Clause 166): The new Act provides that the company can have a maximum of 15 directors on the Board;

ii. Independent Director (Clause 149): The concept of independent directors (IDs) has been introduced in the Company Law in India.

iii. Related Party Transactions (RPT) (Clause 188): The new Act requires that no company should enter into RPT contracts about the sale, purchase or supply of any goods or materials

iv. Corporate Social Responsibility (CSR) (Clause 135): The new Act has mandated that profit-making companies spend on CSR-related activities

v. Auditors (Clause 139): A listed company cannot appoint or reappoint (a) an individual as auditor for more than one term of five consecutive years,

vi. Disclosure and Reporting (Clause 92): In the new Act, there is a significant transformation in non-financial annual disclosures and reporting by companies as compared to the earlier format in the Companies Act, 1956.

vii. Class action suits (Clause 245): For the first time, a provision has been made for a class action under which the order passed by the Tribunal shall be binding on all the stakeholders including the company and all its members, depositors and auditors.

SEBI Guidelines: SEBI can be considered a regulatory body which has power and jurisdiction over listed companies and issues statutes, rules and regulations to ensure the safety of investors.

Standard listing agreements of the stock exchange are concluded for companies whose shares are listed on the stock exchange.

Secretarial Standards published by the Institute of Company Secretaries of India (ICSI). -ICSI can also be considered an independent body with secretarial norms under the terms of the new Companies Act. ICSI has published Secretarial Standards for Board Meetings (SS-1) and General Meeting Secretarial Standards (SS-2).

Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI) – ICAI can be said to be an independent body that provides accounting standards that specify guidelines for financial disclosure.

Challenges

The Company must be fair and open to its stakeholders in all transactions. It has become important in today's globalized business world that companies must enter the global capital stock, the need to attract and retain the best human capital from across the country.

If a company does not adopt and demonstrate ethical behaviour, it cannot bloom corporate governance goes beyond corporate law. Running a business is an ethical business. Ethics is about core values and principles that enable a person to choose between good and evil. However, ethical problems arise from the conflicting interests of the parties. Perhaps the most important challenge we face is better governance people's mentality and organizational culture. This change must come from within. Another important aspect is to understand that ultimately the spirit of corporate governance form is more important. The substance is more important than style. Values are the core of the management and control system of the company and these must be articulated, as well as systems and procedures designed to practice these values.

Banks trade on trust. If trust is suspected, damaged or lost, financial loss will follow and the actual risk cannot be measured.

Finally, transparency about a company’s governance process is critical. Implementing Corporate Governance structures is important but instilling the right culture – work culture is Most Essential.

Conclusion

The management and control system concept is based on full transparency, honesty and responsibility management and board. Whether it is finance, taxation, banking or the legal framework every place requires good governance. Corporate governance is a tool and not the end, and Corporate Excellence should be the end. In India, the need for corporate over-involvement was highlighted in connection with the frauds that occurred Often after the concept of liberalization was born in 1991.

We had Harshad Mehta Scam, Ketan Parikh Scam, UTI Scam, Vanishing Company Scam, Bhansali Scam and so on. The Indian business world needs to adopt global standards, at least initially. However, the possibility of fraud may exist, but it can at least be minimized. Company governance and ethical behaviour have several advantages.

First, they help to create a good corporate brand image. If the brand image is there, there will be more loyalty if it exists greater loyalty, there is more commitment to employees and if there is a commitment to employees, employees become more creative. In the current competitive environment, creativity is critical to gaining a competitive advantage. Corporate governance cannot exist in the public sector avoid and therefore acceptable. But the management of the company should be accepted because it has a lot to offer the public sector. Good business management, good Government and Good Business go together.

References

[1] A Brief Overview of Corporate Governance Reforms In India, Available Here

[2] Evolution of Corporate Governance in India Available Here

[3] Corporate Governance in India - Evolution and Challenges, Available Here

[4] Corporate Governance in India – Past, Present & Future, Available Here

[5] Evolution of corporate governance in India and its impact on the growth of the financial market: An empirical analysis (1995-2014), Available Here

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