Moving towards better corporate governance: 

Moving towards better corporate governance: 

Context:

21-member Committee on corporate governance headed by banker Uday Kotak has submitted its report to the Securities and Exchange Board of India (SEBI).

Introduction:

• The SEBI Panel recommendations on corporate governance will enhance transparency and effectiveness in the way boards of listed companies function.
• The panel was constituted by SEBI in June 2017. It was given four months to submit its recommendations.

Reasons of constituting panel:

• Many Indian companies are groaning under the weight of excess debt.
• Majority of banks also has a mountain of bad loans on its balance sheet.
• Few of the expensive acquisitions made in the previous decade have paid off for shareholders.
• Presently, the Indian economy is facing a problem of corporate governance as they are about the vagaries of the business cycle.
• Enhancing transparency and effectiveness in the way boards of listed companies function.
• Proper timelines for effective implementation and regulation.
• To protect the interest of small shareholders.
• Achieving corporate governance.

Key recommendations:

1-      Improving governance:

• The committee has recommended changes that will make corporate affairs more transparent as well as improve the standard of corporate governance in listed companies.
• Committee member Krishnamurthy Subramanian, suggest way to achieving this is by strengthening the three gatekeepers- the board, the auditors, and the regulator.
• The committee has made recommendations that will help improve governance and enhance investor confidence.
• The committee has focused on areas such as the size and composition of the board, number of independent directors, and their role, and disclosure and dissemination of information.

2-      Independent directors:

• The committee has recommended that a listed company should have a minimum of six directors, at least one independent woman director, and a minimum 50% of the directors should be non-executive.
• The committee has also suggested measures so that independent directors inducted in the board.
• Independent directors plays very important role because they protect the interest of all stakeholders, especially the small investors.
• The committee has recommended that at least half of the board members should be independent directors.
• It has recommended that listed companies should have to give detailed reasons if an independent director resigns.

3-      Chairperson and Managing director:

• The committee has also recommended the separation of roles of chairperson and managing directors, and the chairperson should be a non-executive director.

4-      Board meetings:

• The committee has suggested that the number of board meetings in a year should be increased from four to five.
• Aspects such a succession planning, strategy and broad evaluation should be discussed at least once a year.

5-      Small investors:

• The committee has advocated several changes that will help small investors.
• It has recommended that disclosures by companies to stock exchanges and on their own websites should be in a format that allows investor to find information with ease.

6-      Listed companies:

• The committee has recommended that all listed companies should publish cash flow statements on a half-yearly basis.
• This will help the common investors- who don’t have access to financial databases.

7-      Credit ratings:

• Updated list of all credit ratings obtained by the listed entity must be made available at one place, which would be very helpful for investors and other stakeholders.

8-       Risk management and IT committee:

• Top-500 listed companies should have risk management committee of boards for cyber security. In addition, listed  entities must constitute an information technology committee that will focus on digital and  technological aspects

9-      Miscellaneous:

• The committee has also recommended that SEBI should have the power to act against auditors if the need arises.

What is corporate governance?

• Corporate governance is about promoting corporate fairness, transparency and accountability.
• Corporate Governance deals with how a corporate is governed
• It is a set of system, processes and principles which ensure that a company is governed in the best interest of all stakeholders.
• It also helps in protection of shareholders interest, commitment of values and ethical conduct of business.

What are Objectives of Corporate Governance?

The objectives of the corporate governance include:

• Attaining disclosure and transparency in corporate structures as well as organizations.
• Fixing accountability of the controllers and managers towards the shareholders and others. This also includes bringing the interests of investors and manager into line and ensuring that firms are run for the benefit of investors.
• Fixing the corporate responsibility towards various stakeholders
• Create a framework for long term trust between the corporate and external providers of capital
• Rationalize the management and risk monitoring
• Efficient decision making
• Integrity and probity in the financial reports.

Corporate Governance and India:

• The Corporate Governance was launched in India in the mid 1990’s.
• Confederation of Indian industry came up with the first voluntary code of corporate governance, followed by Kumar Mangalam Birla committee constituted by SEBI, Naresh Chandra committee report 2002 and Narayana Murthy committee report submitted in 2003.

What need to be done in order to bring corporate governance into play?

• Corporate social responsibility is important in this regard. It helps in bringing social accountancy of firms towards the society at large while in turn pitching in their bit to help the government achieve socio-economic-political goals. It is significant in the following manner:

1. Clarity: Regarding the priorities of government thereby enabling corporates to channel the funds accordingly
2. Autonomy: To direct the receive to spend the fund
3. Incentives: Lack of incentives for complying with mandated provision.
4. Cooperation: Lack of cooperation and guidance from local bureaucracy to enhance the effectiveness of funds.

However, there are certain reinforcements that CSR bring in for corporates:

1. Goodwill: helps in brand building and loyal customers and greater retention of employees

2. No penalization: Government has not enforced any penalties in case of breach of targets thus avoided hurting the interests of donors.

Conclusion:

Corporate governance is very essential for overall growth of the companies. Therefore, CSR is noble initiative to improve societal conditions especially to foster unity and inclusivity. Greater synergy by addressing the concerns of donor will go a long way in making far more effective.