[Answered] Good corporate governance can play a crucial role in supporting the recovery of our economy in coming out of the COVID-19 crisis. In the light of the statement, highlight the importance and challenges of effective corporate governance for the economy.

Corporate governance is a set of rules, principles, regulations, or processes through which companies are controlled and directed. It is about making companies, owners and regulators become more accountable, efficient and transparent, which in turn builds trust and confidence.

Importance of good corporate governance for economy.

• Risk Mitigation and compliance: A well governed company will naturally work efficiently and ensure compliance with statutory law and guidelines. Which enables it to mitigate any risk or disruption arising out of political, technological and economic events.
• Improved organizational efficiency: Corporate Governance lays the foundation for behavior of the company, the utilization of resources, product/service innovation and overall corporate strategies. which ensures higher organizational efficiency.
• Enhances shareholder value: Effective Corporate Governance ensures protection of valuations of a company. The value accumulated by the company over the years can be wiped away by a single unlawful incident. Thus, internal controls at the right place are mandatory.
• Curbing the prevalence of Scams: India has witnessed many scams like Satyam Scam, Harshad Mehta Scam etc. that erodes faith of people in the markets and the corporate sector. Such scams can be mitigated by appropriate governance norms..
• Protection of Minority Shareholders: Without robust corporate governance provisions like mandatory appointment of independent directors, it is almost impossible to protect the interests of small investors..

However, as proved by NSE’s Co-location case, corporate governance of even well-established institutions is prone to issues. The following are some of the common challenges in the way of effective corporate governance for the economy.

• Board of director appointment: In majority of cases BoD are appointed by top management. It makes them hesitant to go against the decisions of management.
• Lack of effective Performance Evaluation of Directors which creates an inefficient board.
• Inadequate punishments: The quantum of punishments given to violators are often inadequate and fails to create effective deterrence for future discourse.
• Accountability to Stakeholders:Generally, the board tries to limit and escape from these kinds of accountability.
• Environment of mistrust: In recent years, many scams, frauds, misappropriation of public money, and corrupt practices have taken place and because of the doubtful practices of key executives and board members, confidence of investors and society has diminished.
• Concentration of powers: Ownership of corporations in India, is still held in a few hands. Many big companies are controlled by a single shareholder or family.

Good corporate governance could play a crucial role in supporting the recovery of our economy coming out of the COVID-19 crisis. We need to build a sound culture of Corporate Governance by strengthening independent directors, limiting the power of promoters and strengthening the power and accountability of regulators to handle corporate malfeasance.