Corporate Governance

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Corporate governance is a system by which corporates are directed and controlled. The Board of Directors have a fiduciary duty to the shareholders, and thereby are responsible for overseeing the operations and activities of the company. It is about commitment to values, ethical business conduct, and transparency. The broad objective of Corporate Governance is:

  1. Protect interest of shareholders.
  2. Improves commitment value, ethical business conduct, transparency, etc. towards corporate funds.
  3. Capital performance in terms of profitability.
  4. Autonomy in business expansion and international operations.

Fundamental Drivers:

The Guidelines on Corporate Governance were given by Department of Public Enterprises (DPE, 2010) and it provides a broad structure of Board of Directors to supervise Central Public Sector Enterprises (CPSEs). As per the guidelines, the main drivers are:

  1. Chief Managing Director (CMD)
  2. Functional Director(s)
  3. Government Director(s)
  4. Non-Official Directors (NODs) / Independent Directors (IDs)

Despite, the above guidelines of DPE got superseded by the Companies Act, 2013, the broad structure of the Board of Directors remained the same. The composition of these Directors varies for listed or unlisted public and private companies. The CMD and Functional Directors are full-time operational Directors responsible for day-to-day functioning/execution of the enterprise whereas Government Directors are nominated officials in the rank of Joint Secretary or Additional Secretary from the administrative Ministry of the CPSE. The NODs are Independent Directors who have professional acumen to judge the operations, planning and decision making of the Board of CPSE. Thus, the above Directors are the fundamental drivers of every Board of a company.

Functions of Board:

As per Corporate Governance Guidelines (DPE, 2010) and Companies Act, 2013, the Board of a company is responsible to ensure composition of the Board including Non-Official Directors, holding Board meetings and constituting sub committees for Audit, Remuneration, Corporate Social Responsibility (CSR), etc. The Board is collectively responsible to ensure compliance, code of conduct, risk management and capacity building.

Key aspects and principles of corporate governance include:

  1. Transparency: Companies should provide accurate, timely, and relevant information to shareholders and other stakeholders so that they can make informed decisions.
  2. Accountability: Company leaders and management should be responsible for their actions and decisions and should be held accountable for the company's performance.
  3. Fairness: Corporate governance should ensure that all stakeholders' rights are respected and protected.
  4. Independence: The board of directors should be independent of the company's management to avoid conflicts of interest and ensure objective decision-making.
  5. Responsibility: The board should actively oversee the company's strategic direction, risk management, and financial performance.
  6. Ethical behaviour: Companies should adhere to ethical standards and promote a culture of integrity and responsible business practices.
  7. Shareholder rights: Corporate governance should protect and facilitate the exercise of shareholders' rights.
  8. Board composition: The board of directors should be diverse and include members with relevant expertise and experience to effectively oversee the company.
  9. Risk management: Companies should have effective risk management practices to identify, assess, and manage risks that could affect the business.

Good corporate governance is vital for maintaining investor confidence, attracting capital, and fostering long-term sustainable growth. It helps prevent corporate scandals, fraud, and mismanagement while ensuring that companies operate in a manner that benefits their shareholders, employees, and society at large. Many countries and organizations have developed codes and guidelines for corporate governance to help companies adhere to best practices and principles.