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Corporate Governance in India

Corporate Governance in India

Corporate Governance states the set of principles, processes, and systems that regulate the Company. On the basis, these principles, processes, and guidelines company directs and control the decisions to fulfill its goals and objectives, to add the value to the company and proves beneficial for all the stakeholders in the long term. Further, in this blog, we will try to understand the essentials of corporate governance. Who are the stakeholders? How corporate Governance in India affects these stakeholders.

Corporate governance states the collection of procedures, processes, and relations through which the company controls and operates. It refers to the mechanism by which the company directs and manages its affairs. As per the good corporate governance, the company carries out the business according to the stakeholders’ desire to earn profits. Board of directors and other related committees responsible to run the organization conduct these business decisions to maintain a balance between individual & societal goals, and economic & social goals.

Who are the Stakeholders in a Company?

Stakeholders include various people ranging from members of the company, members of the general public, elected officials, etc. The list includes:

  • The directors, shareholders, government, employees, suppliers, creditors, community, etc. The Company’s actions, objectives, and policies affect these groups of people at the same time. Basically, as a whole, they are the owner of the Company.
  • In every company, there is a time to time communication with the stakeholders through transparent and effective communication by demonstration of general and annual reports and holding meetings.
  • The company must have the most effective governance to retain these stakeholders and have their confidence. Your company must be able to understand the requirements of various stakeholders so that you can address them in the best way possible. It eventually leads to the investor’s satisfaction.
  • You must know when an employee wants a bonus, a shareholder looking for controlling rights, or a government wants you to fulfill the new compliance, etc.

What do Shareholders Expect from Corporate Governance?

There is a social responsibility of business to make profits along with social welfare.

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To increase the share value of the investors in the short-term, company may take some irrational steps such as putting off the safety corners, or reducing expenditure on research and development, or compromising with the workplace safety, or stopping the customer support, etc.

But these will only create a short-term increase in the share value and satisfy the investors. However, this is not what shareholders want. Any shareholder invests his or her money, once they have trust in a company as a whole. These shareholders want better returns but not only in the short run. They are looking for steady and increasing dividends out of their investments.

And this all will only be possible with the perfect essentials corporate governance of a company involved.

What are the Rights of a Shareholder?

The company must look to protect and ease the way to exercise the rights of shareholders. Below are the rights of shareholders-

  • The company should grant rights to the shareholders to participate and get information regarding the decisions related to fundamental corporate changes.
  • Shareholders have a right to participate actively and vote in shareholders meetings
  • The organization must inform the shareholders about the rules, voting procedures that regulate the shareholder meetings
  • Shareholders can ask questions to the board of directors, featuring new items on the list of agenda, recommend resolutions, subject to the limitations
  • Participation in the selection, nomination of board members
  • Shareholders have the power to exercise their right of ownership

Consequences of Corporate Governance focusing on short-term Maximization of wealth

  • The Short-term goal towards the stakeholders (such as employees, customers, suppliers, creditors, etc.) of the company affects the long-term growth of the company.
  • Annoyed employees, dissatisfied customers, outstanding creditors, or supplies do not stay with the company in the long run
  • This affects the business and fluctuates the profits of the company
  • If the company tends to cut back on the critical aspects of the company, investors lose their faith in the company. It ultimately damages the relationship with the already existing customers.
  • Every shareholder looks for a stable and continuous return in the next five or ten years, rather than short-term goals and growth
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What are the elementary Principles of Corporate Governance?

We will further discuss these elementary principles of good corporate governance-

  • Good corporate governance focuses on conducting the business with all integrity, fairness and be as transparent as possible regarding all the transactions.
  • The company makes all the necessary disclosures and decisions by complying with all the laws of the land.
  • It takes accountability and responsibility towards the stakeholders. Commit to conducting business in an ethical manner.
  • As per the SEBI reports on the essentials of corporate governance, the controller of the companies must be able to distinguish between personal and corporate funds.

Importance of Corporate Governance

Corporate governance plays an important role in every company. Let’s see how it is important for an organization-

  • There is a level of confidence between the company and its stakeholders, because of the good corporate governance
  • For better corporate governance, your company must have an active group of independent directors on the board. It ensures confidence in the market.
  • Foreign institutional investors consider corporate governance before investing in any of the company. It is one of the most important criteria in foreign investors list.
  • Good corporate governance puts a positive influence on the share price of the company
  • If the company is maintaining a clean record and has a positive image on the corporate governance front, then it is much easier for the companies to source capital at a more reasonable cost.
  • Companies having good corporate governance are far away from scams and other bad exposures.

Benefits of Corporate Governance

If the company is practicing good corporate governance in India, it ensures lots of benefits to the Company-

  • If the company has good corporate governance, it leads to corporate progress and economic growth
  • In the case of strong corporate governance, the company has the investor’s confidence. Also helps in raising the capital efficiency and be effective in its corporate matters
  • It ensures a lot of saving by lowering the capital cost
  • It leads to a positive impact on the prices of a share
  • Corporate Governance stimulates the owners and managers of the Company to fulfill the objectives that are in the interest of the shareholders and the organization.
  • Governance mitigates the risk, reduces corruption, minimizes wastage etc. and ensures better management
  • It helps in the formation of the brand and development of an organization
  • Corporate governance makes the management of the company work in a way that fits the best interest of all.
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Corporate Governance Forums

There is an institutional framework for corporate governance in India that lay out the constitution of Corporate Governance. Below is the list of noticeable forums and institutions of corporate governance-

  • Conference Board
  • Institute of Directors
  • The Institute of Company Secretaries of India
  • The Asian Corporate Governance Association
  • International Corporate Governance Network
  • National Foundation for Corporate Governance
  • Corporate Secretaries International Association
  • Organization for Economic Co-operation and development
  • The European Corporate Governance Institute
  • The Institute of Company Secretaries of India
  • Global Corporate Governance Forum

Conclusion:

For the smooth and better operation of the company, the Ministry of Corporate Affairs[1] has mandated good corporate governance in India. It keeps the stakeholders intact with the company. The company could focus on long-term growth and huge profits. The company needs to follow the fundamental principle of the essentials of corporate governance for better profits and keep the shareholders happy. In case of not practicing the good corporate governance, companies face brutal consequences, losing their shareholders, drop in share prices etc.

Read our article:Corporate Governance Failures from the Global and Indian Perspective

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