Corporate Governance is a wholesome mix of measures that are necessary for creating a corporate culture of accountability and transparency. The term refers to a combination of transparency related practices, laws, rules, regulations, procedures and voluntary initiatives on the part of the companies to maximise the shareholders’ long term value and maintain accountability to different stakeholders. These initiatives enhance customer satisfaction, maximise shareholders’ value and result in employee delight. The Board of Directors is responsible to the stakeholders for the performance and governance of the business. It has been seen over the years that business organisations that measure up to the expectations of the stakeholders in the arena of corporate governance are rewarded with loyalty by different stakeholders and are looked upon as responsible corporates.
The term corporate governance (CG) have come to lime light in early 1990’s in midst of capital market scams. It was an eye opener and myth breaking.
In common understanding, CG mean some set of principals by which a company should ideally be directed and controlled for the benefits of all stake holders.
CG has come a long way since Kumara Mangalam Birla committee, until the implementation of the recommendation of Kotak Committee. Due to the separation of management and ownership aspects, the need for accountability and responsibility was felt which led to birth of corporate governance. Corporate Governance requires the organisation to uphold the interest of its stakeholders bound by principles and ethics.
The need for overhaul of corporate governance has been felt over the years, with timely amendments, especially in recent times owing to certain headline grabbing cases such as Satyam, Kingfisher, Fortis and so on.
Purpose of Kotak Committee
To create rules at
- Instances of management overreach
- shareholder activism
- outright fraud
- imposition of will on the Boards of founders
Above situations where the integrity of the corporate existence is questioned called for further tinkering of the corporate governance rules for which the Kotak Committee was set up. SEBI eventually amended the Listing Regulations by accepting the committee’s recommendations and it was a major overhaul of regulations.
- Modifying the definition of Independent Director vis-à-vis in relation to the Promoter group and other listed companies.
- The ambit of Related Party, Material Subsidiary, Senior Management have been revised.
- The requirement for Quorum for meetings has been revised.
- Norms for minimum number of directors, responsibilities of Committees has been stated.
- The aspect of materiality of Related Party Transaction and voting by related parties has been modified.
- Evaluation norms of Independent Director have been widened. They are now required to furnish declaration pertaining to their independence’ in line with the revised norms.
- Companies need to obtain Directors and Officers (D&O) Insurance for their Independent Directors.
- Resignation of Independent Directors now requires detailed reasons for resignation, confirmation from such director that there are no ‘material reasons’ for resignation other than those provided by the director.
- The requirement of appointment of independent women directors is a key reform in the sphere of independent directorship.
Major point of controversy was the separation of roles of Chairman and Managing Director. The amended norms stipulate clear cut eligibility requirements for a chairperson which also includes that the Chairperson should not be related to the MD/ CEO.
The most important thing to be noted was the committee was not shown any hurry burry to implement the changes and allowed sufficient time to companies to implement the changes. It was required as the companies require time to fully understand the implications and implement them.
The increase in the composition of the members of the board will facilitate the board with directors from varied backgrounds and even in the event of deadlock situations the process of arriving at decisions can be expedited.
The remuneration of the promoter executive directors and non-executive directors beyond a certain threshold will require the consent of the shareholders via a special resolution; this will enable the shareholders to have a check-balance in relation to the inconsistent compensation paid to such promoter directors. The skills/expertise/ competence of the board of directors are required to be disclosed in the annual report of the company.
Having several laws makes no sense, unless otherwise there exists a proper implementation system. A proper understanding and application of various corporate governance guidelines will help the corporates to grow. This would inspire confidence of all the stakeholders and the effective and timely enforcement will act as a good deterrent for wrongful acts.
Various steps taken by the Ministry of corporate Affairs and other regulators may not be the last word for unethical corporate practices, but it will help to clean the system. For the growth of a national economy and corporate confidence, a proper corporate governance culture driven by transparency and ethics, are very important.
Just filling up of various forms will not serve any purpose, as the proper corporate governance practice and system is highly technical and need a whole hearted approach. As such, despite having laws in place, we come across various corporate fiascos happening every now and then.
Informing the minority stakeholders of all the major decisions will bring more management accountability and it will hence increase the transparency which might attract good investors, and enhance company image. We are yet to see where minority shareholders have regularly challenged the errant management except one-off cases.
Independent directors need to be diligent and enquire about every matter which comes before them and red flag them, if required – which did not happen some years back in the case of an Indian IT major; ironically the happenings went against its very name.
So to conclude we can say that, corporate governance is not one another forms to be filled up, it is a system evolved and implemented based on ethics and transparency and with ownership attitude for every actions for the benefits of all stake holders.