Oxford dictionary defines ‘governance’ as the activity of governing a country or controlling a company or an organization. Begin with the sentence ‘corporation governance’ means that bunch of rules, practices, systematic procedures which a firm is directed and controlled. It fulfils the desires of the stakeholders and looks after the external and internal factors that affect the interests of the organization. The board of directors plays a significant role in the corporate governance in which they are responsible to oversee and manage the company as well as to monitor the strategic plans for the firm. The corporate governance involves shareholders, senior management executives, customers, financiers, government and society are individually balanced by its own. It is the interaction between these various participants to frame the corporate field.
IMPORTANCE OF CORPORATE GOVERNANCE
The major function of corporate governance is to protect the stakeholder’s investment and corporate success to the company which leads to economic growth. It is a way of governing the corporate system that is sort of a sovereign state, establishing its own customs, policies and laws to its employees from a higher level to lower level. It enhances the strategic plan to recruit independent directors who bring a wealth of experience and introduce new ideas to build up the confidence and strength of investors, shareholders and stakeholders by the board of directors. Good corporate governance avoids massive disasters such as wastage, corruption, risks and mismanagement. Strong corporate governance raises the impact on the share price. The company handles the latest technology to increase their participants which enterprises observe the essential principles of excellent corporate governance to attract foreign investment. Due to this, there is a development of globalization and this connection between corporate governance and flows of foreign investment has become more important.
PRINCIPLES OF CORPORATE GOVERNANCE
Transparency: It means the one who can choose whether inside or outside the company can review and verify the company’s action. Incorporate governance, large-scale in part is the interest of shareholders. They approach and bend the community who necessarily don’t hold an interest within the company but still can enjoy the goods or services. Approaching the members of the community to encourage and follow up the communication that develops company transparency.
Equity: The company should treat the shareholders equally and make sure all the shareholders are aware of the rights and how to operate them. The Board of directors shall give all shareholders the change to get effective redress for violating their rights.
Responsibility: The board of directors were responsible and authorized on behalf of the company. The responsibility approaches the power to exercise socially and to protect the interest of the company. These directors of the company are amenable to maintain the management of the business, selects the chief executive and supervises the achievement of the organization.
Accountability: Although all the principles cited thus far are vital, their effects are going to be limited if the knowledge concerning them isn’t properly disclosed, during this context of accountability, the last principle to be mentioned to show its accountability is nothing quite the method of disclosure of all practices and results. Referring to the aforementioned principles, by the company’s challenge. Lastly, it’s important to stress that so as to take care of the principle of transparency. The disclosed information must be completely true, no matter whether it’s positive or negative. It takes a lot of accuracies to build integrity as a company. It also has accountability, which is meant by duty or liability.
INTERNAL AND EXTERNAL CONTROLS
The internal mechanism of corporate governance has been recognized by the constitution and the formation of various committees and laws. The various kinds of committees are:
- AUDIT COMMITTEE
- EXECUTIVE COMMITTEE
- RISK MANAGEMENT COMMITTEE
- STAKEHOLDERS RELATIONSHIP COMMITTEE
- CORPORATE AND SOCIAL RESPONSIBILITY COMMITTEE
- NOMINATION AND REMUNERATION COMMITTEE
- ETHICS AND SUSTAINABILITY COMMITTEE
AUDIT COMMITTEE: This committee is charged by the board of directors, to manage the principles of the financial statement of the company, it oversees the systematic process of effects of the internal control over financial reporting, independent certified public accounting firms, eligibility of company’s compliance with legal and regulatory principles. The committee shall be appointed by the directors of the board consisting of at least three directors, each of whom are individually managed as per the company’s bylaws.
EXECUTIVE COMMITTEE: Group of director’s acts on behalf of and within the power granted to them by the board of directors, typically it consists of a chairperson, vice-chairperson, secretary and treasurer. The executive committee consists of senior-level executives and board officers. According to the charter or bylaws of the company follows exactly who provides on the executive committee. Also, all the officers of the board are invited to provide on the executive committee, further with the company’s President or CEO. Mostly in executive committees are limited, with only three to seven members. In some companies, the board of chairperson appoints the members of the executive committee.
RISK MANAGEMENT: This committee shall be consisting of not less than three members. The chairperson of the board will be a member of the risk management. The goal of this committee is to support the board to implement the company’s responsibility with the aspect of recognition, valuation of strategic, operational and external community risk. The framework of the committee ensures to control and venture the risks practised by the company.
STAKEHOLDERS RELATIONSHIP COMMITTEE: The function of this committee to solve the grievance of shareholders of the company. Analyse the efficient activity by voting the rights of shareholders and observe the service norms adopted by the various services of the committee. The committee shall be appointed a minimum of three directors and the chairperson will be considered as the non-executive director of this committee. The chairman should be presented in general meetings to explain the questions to the shareholders of the company.
CORPORATE AND SOCIAL RESPONSIBILITY: This committee is assigned by the board of directors to promote the practices that highlight and sets high specification for corporate social responsibility and review the company acts against those specifications. The company will consider the impact of the company business, operations and programs from a social responsibility perspective. The committee shall consist of three or more directors, each of them must be determined to be independent in accordance with the company’s corporate governance guidelines.
NOMINATION REMUNERATION COMMITTEE: To ensure and identify the equivalent remuneration to employees and directors as a matter of quality of stakeholders, achievements and skills in the company and also to provide progression plans and balance the skills in an appropriate manner. The committee consists of a minimum three members which is appointed by the directors. It permits to follow any instruction required by any employee in the company and therefore any application made by the committee is controlled by the administration of the company. It has access to other lawful or outside experienced instructs with reference to concerning issues in remuneration, incentives and relating company performance as per the requirement.
ETHICS AND SUSTAINABILITY COMMITTEE: In principles of corporate governance due to lack of compliance adhere to many reasons and conflicts of interest and fulfils its duty for public disclosure by ensuring the implementation of sustainability principles. Compliance and ethical form of company culture and make a recommendation of the directors. The committee decisions shall be made unanimously. The committee decision shall be advisory but the final decision made by the board of directors. The committee covers the company’s social, environmental, economic and ethical responsibility by the management of the company. Maintain over the group of the compliance function.
EXTERNAL CONTROLS: To control the stakeholder’s practices is meant by external control. corporate governance is likely active in academic subject and policy debate throughout the world. so, the competition was controlled by the company which lays the external control. And to ensure the members of the company follow up the government regulations and control managerial labour market. Also, manage media pressure and takeover of the company. The strategies of the managers which minimize their utility. The external control can add any rules and regulations which have an effective action of the company.
POOR CORPORATE GOVERNANCE; Its failures on the part of directors to discharge the trusted duty owed by shareholders. The managers could make poor investment decisions which benefit them but are disturbing the company’s shareholders. Corporate governance which won’t cooperate with regulators, auditors, analysts etc of the financial results and red flags. Non-independent and audit committee who plays multiple roles in every field. poor executive compensation packages fail an optimal encouragement to corporate officers. And supporting illegal activities can create scandals which are some of the poor corporate governance.
It is evident from above that good governance of corporations effectively implement self-regulation and voluntarily adopt the ethical code of business. It extends beyond corporate law. It is an attractive destination for local and global capital. In further the structure of the evolution of corporate governance rapidly changes the aspects of economic and industrial development of the country. In a perceptive way of liberalization and globalization, there is a growth of economies including the developing country like India. The country’s business should be maintained to improve the investors’ confidence which increases both the domestic and foreign investors.
BY- Shilpa Prasad | Lloyd law College