Corporate governance is the system of rules, practices, and processes by which a company is directed and controlled. It is a fair, efficient and transparent functioning of the corporate management system. Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community.
Corporate governance is a process set up for the firms based on certain systems and principles by which a company is governed. The guidelines provided ensure that the company is directed and controlled in a way so as to achieve the goals and objectives to add value to the company and also benefit the stakeholders in the long term.
The board of directors is the primary direct stakeholder influencing corporate governance. Boards are often comprised of inside and independent members. Insiders are major shareholders, founders and executives. Independent directors are chosen because of their experience managing or directing other large companies. In this way, a concentration of power in the company is also diluted.
Importance of good corporate governance
Good corporate governance creates a transparent set of rules and controls in which shareholders, directors, and officers have aligned incentives. It ensures a strict and efficient application of management practices along with legal compliance in the dynamic business environment. Good corporate governance generates the higher level of confidence amongst the shareholders associated with the company.
The concept of corporate governance was guided by Clause 49 of the Listing Agreement before the introduction of the Companies Act, 2013. SEBI has also approved certain amendments in the Listing Agreement so as to improve the transparency in transactions of listed companies which are as follows:
- It is mandatory for companies to maintain a resident directory
- A maximum of 15 directors can be appointed in a public limited company. If more directors have to be appointed, it can be done only with the approval of the shareholders after passing a Special Resolution
- The Independent directors must attend at least one meeting a year
- Every company must appoint an individual or firm as an auditor.
- Every company has to make correct and detailed revelations of financial situations, performance, ownership, and governance
- Related Party Transactions must be approved by the shareholders through special resolutions.
- The e-voting facility has to be provided to the shareholder for any resolution
- Corporate Social Responsibility – The company has the responsibility to promote social development in order to return something that is beneficial for society.
- Whistle Blower Policy – This is a mandatory provision by SEBI which is a vigil mechanism to report the wrong or unethical conduct of any director of the company.
Principles Of Corporate Governance:
- Transparency: It implies an accurate, adequate and timely disclosure of relevant information on the corporate enterprise to its stakeholders. It helps to develop higher public confidence in the corporation.
- Accountability: It refers to the responsibility of the Chairman and the Board of Directors for the use of company’s resources in the best interest of the company and its stakeholders.
- Independence: The Board of Directors must be an independent and non-partisan body. It must take all business decisions with corporate prudence.
SEBI Code of Corporate Governance:
To promote good corporate governance, SEBI issued the following guidelines:
- The Board of Directors shall have an optimum combination of executive and non-executive directors.
- If the chairman is non-executive, at least, one-third of the board should comprise of independent directors. If the chairman is executive, at least, half of the board should comprise of independent directors.
- The company shall form an independent audit committee having a minimum of 3 members (all of them must be non-executive directors). The chairman of the committee shall be an independent director who shall be present at AGM to answer the queries of the shareholders.
- Board meetings shall be held at least 4 times a year. The maximum gap between any two meetings shall not be more than 4 months.
- All elements of the remuneration package of the directors must be disclosed in the Annual Report.
- Shareholders grievance committee shall be set up in the company.
- In case of appointment of a new director, shareholders must be given information about his resume and the nature of his expertise.
- The annual report should contain a management discussion and analysis report.
- There shall be a separate section on corporate governance in the annual report.
- The company shall obtain a certificate from the auditors of the company regarding the compliance of conditions of corporate governance. This certificate shall be annexed with directors’ report sent to shareholders and also sent to the stock exchange.