Corporate governance serves to define the rights, roles, and responsibilities of an organization’s stakeholders, from its promoters and employees to its external shareholders.
The conflict leading to lapses in corporate governance arises because of two different stakeholders in a company — principal and agent. The steering group, that is the top management, is the agent responsible for taking the company forward and for its day to day activities to achieve its objectives. The principal refers to the different kinds of stakeholders of the company who stand to gain or lose from such activities.
The checks and balances, and incentives a company needs to reduce and manage the conflicting interests between stakeholders are made stronger with good corporate governance practices.
The Four Pillars of Corporate Governance
There are corporate governance principles that dictate the scope of the rules and practices under corporate governance. These are often called the four pillars of corporate governance, and they are:-
Accountability — Accountability in corporate governance refers to the principle that decisions and actions taken by an enterprise should be subject to oversight to ensure they meet predefined objectives and don’t veer off the course.
Such accountability is ensured through the board of directors. They are held accountable for the company’s actions and decisions. The board of directors acts as a proxy for the different kinds of shareholders of an enterprise. It has an obligation to oversee the management of the company and is responsible to the shareholders for ensuring operations and processes meet the stated goals all the shareholders collectively agreed to.
Fairness — Fairness in corporate governance is ensuring the shareholders’ rights are upheld in an equitable way, without anyone getting an upper hand in profiting off an enterprise’s operations.
The corporate governance framework is expected to ensure fair and equitable treatment of all shareholders, including minority and foreign shareholders.
Related-party transactions and insider trading threaten fairness in corporate governance.
All shareholders should have access to the same amount of information and also the same opportunity of seeking effective redress for a violation of their rights.
Transparency — Transparency in corporate governance refers to the timely and ready access to information.
The availability of information on various aspects of a company goes a long way establishing its standard of corporate governance.
A company is expected to disclose all facts, both financial and non-financial to all the stakeholders in a timely manner.
This principle also emphasizes that the remuneration paid to the key managerial personnel of the company be disclosed.
This was an area where Infosys has been seen to trip up as have other Indian companies.
Responsibility — Responsibility in corporate governance refers to the awareness of each of the stakeholders’ roles in ensuring the enterprise functions and proceeds in a fair and transparent way towards agreed-upon goals.
The responsibilities are myriad and include the mandate for the board of directors to steer the company while maintaining good corporate governance.
The board members should understand their responsibility towards all the stakeholders of the company and should try to cooperate and work together with them for the development of the z.
The board of directors also has the additional responsibility of trying to align the interests of all stakeholders towards common goals.
Responsibilities also include the role of shareholders to appoint a non-partisan board of directors and auditors to oversee the checks and balances at their enterprise.
Responsibilities include the task of auditors to check for aberrations and conformity to stated objectives and processes at a company.
Of course, corporate governance is not a voluntary system that companies can opt-in. They are legally bound to adhere to many of its regulations.
Regulations Guiding Corporate Governance
India is not bereft of a regulatory framework to guide enterprises on corporate governance. There are regulatory vigilants and laws which define and safeguard the tenets of corporate governance.
We list the mainstay laws and guardians:-
1. The Companies Act, 2013
The Companies Act has fair corporate governance guidelines, covering issues like the independence of the board of directors, fair opinion of the auditors, related-party transactions, disclosure of facts in financial statements related to corporate governance.
2. Securities Exchange Board of India (Sebi)
Sebi being the regulatory body of Indian financial markets acts as a watchdog and regulates the companies through various regulations to protect the interest of the shareholders.
3. Institute of Chartered Accountants of India (ICAI)
The constitutional body for chartered accountants stipulates the accounting standards and dos-and-don’ts for the community to follow. Auditors and forensic auditors, who play crucial roles in corporate governance compliance, are expected to adhere to these rules.
4. Institute of Company Secretaries of India (ICSI)
Similar to ICAI, ICSI has issued secretarial guidelines for company secretaries to dispense their duties ethically.
5. Whistle Blowers Protection Act, 2014
India defines the whistleblowing as revealing unethical practices of an enterprise (or corruption or misuse of power in governments and agencies) under the Companies Act, 2013. A whistleblower, then, is anyone who exposes such wrongdoing, of course, with evidence. The Whistle Blowers Protection Act of 2014 (often called the Whistleblower Act) provides the much-needed protection of identity and against victimization for a whistleblower. It is meant to work in tandem with governance rules set by Sebi for listed, private, and government sector companies and the Companies Act.
Of course, to prevent baseless allegations, if proven wrong, the whistleblower may face incarceration.