Corporate Governance: Principles and Legal Aspect

Corporate Governance consists of two words “Corporate” and “Governance”. The general meaning of governance can be understood as the act of the company that is used to cater to the actions and affairs of the company. In short, Corporate Governance is a set of rules that is used to govern the actions of the company. It ensures that the work of the company is running smoothly, the company achieves its objectives, and provides benefits to its shareholders, employees, and workers. It also ensures that in the long run, the company caters to the needs of society with the help of certain activities without hampering their employees.

Geeky Takeaways:

• A good Corporate Governance of a company ensures that the company is reaching various heights and earning profit in business without hampering society or their employees.
• It creates a sense of confidence in investors’ minds and helps the company generate enough capital for their company.
• It also helps the investors, stakeholders, and all the involved companies in the company to get an idea of whether the company is heading and what is the future of the company.
• It encourages the stakeholders of the company to only engage in the best practices for the company.

What is Corporate Governance?

Corporate Governance is a certain set of rules and practices that are followed by the company to run their company smoothly. The Board of Directors is mainly responsible for ensuring a better corporate governance policy in the company. A company must have the best Corporate Governance policy as without these policies the company has to face various problems and in the long run the company will not suffice. Corporate Governance acts as a focal point and governs the company to follow transparency, accountability, fairness, proper responsibility, and risk management. It creates a set of rules that helps the company properly supervise, and control the actions of the company.

In our country, the rule for Corporate Governance emerged after 1998 with the help of various committees formed under the Ministry of Corporate Affairs (MCA) and Securities and Exchange Board of India (SEBI). The Companies Act, 2013 acts as a pivotal point along with any notification that has been published by the act or the Ministry of Corporate Affairs. The Limited Liability Partnership Act, 2008 also helps the Limited Liability Partnership companies in developing a good corporate governance policy in their company. Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 known as SEBI Regulations govern all the listed companies in our country and they must abide by all the rules. As the growth of the economy is happening in the country, the government is taking various proactive steps to ensure that every company has good Corporate Governance. The step of CSR (Corporate Social Responsibility) by the government of India is one step for good Corporate Governance.

Principles of Corporate Governance

There can be many principles for a good Corporate Governance in which a company believes, some of the most common are mentioned below:

1. Transparency

It is one of the most important principles of Corporate Governance for a company. The stakeholders and the employees of the company should know about the activities of the company. It will ensure that some steps can be taken, if necessary for the betterment of the company. It means that the company is open and willing to provide information to its stakeholders regarding their business. The stakeholders must have proper knowledge regarding the business and the finances of a company and will help them in making correct decisions for the company.

2. Accountability

This principle of Corporate Governance talks about the obligation and responsibility of the company to provide proper justification for their every step to the stakeholders. If the board is taking any step for the benefit of the company, the stakeholders must know the same. The board must properly analyze the situation of the company and present a clear report in front of all the stakeholders. The board should maintain a proper risk management channel to address any issue within the company. The board should communicate with the stakeholders to ensure that there are no issues with the company.

3. Responsibility

The Board of Directors of the company is responsible for any action in the company. The act provides them the responsibility to act in good faith for the company and its stakeholders. They have to accept this and act in a manner that is fruitful for the company. They are responsible for having a check over all the senior employees and the management of the company. They need to make sure that every person in the company is working towards only one goal that is in the best interest of the company.

4. Risk Management

The key survival to a company is to know the landscape of risk around it. The Board and Management must determine all kinds of risks and how to best avoid them. They must act on recommendations to manage risks and inform all the relevant parties about the risk status and existence. With this practice, it becomes feasible to pinpoint all kinds of risks, whether large or small, short term or long term.

5. Impartiality

The Board of Directors must treat all the shareholders, employees, and communities fairly and with equal consideration. Board must maintain a careful balance between their various responsibilities, the people who answer to them, and the people they answer to. They must ensure every decision with an independent mindset, ensuring that no personal interests come between them and their business decision.

Legal Aspects under Corporate Governance

Various acts and notifications help the company in achieving good corporate governance in their company such as the Companies Act 2013, Securities and Exchange Board of India (SEBI), Standard Listing Agreement of Stock Exchanges, Accounting Standards issued by the ICAI, and Secretarial standards issued by ICSI (Institute of Company Secretaries of India).

• The Companies Act, 2013 provides various provisions that ensures good Corporate Governance in the company. It mandates that every company should have a board of directors, an independent director, a woman director, and do some CSR activities. These provisions are included in the act to ensure that the company is following good corporate governance and that the shareholders of the company do not have to face any issues.
• SEBI act also mandates that the company should file various annual reports to the registrar of the company to have better clarity regarding the daily affairs of the company. SEBI ensures to curb any malpractice in the share market and protects the investor and the company from facing any difficulty.
• The Standard Listing Agreement of Stock Exchanges ensures that the company is following the basic norms that are necessary for them to be listed and it will ensure that the company is following good corporate governance.

Conclusion

Corporate Governance is not only company administration, rather it is a set of rules that governs all the activities of the company and ensures that the shareholders of the company do not have to face any issues because of the day-to-day operations of the company. The Board of Directors of the company must abide by the rules of Corporate Governance and they have to ensure a proper check on all the activities of the company as they are delegated with this power. These set of rules, if followed effectively will act in the benefit of all the stakeholders, shareholders, and the employees of the company.

Corporate Governance- FAQs

Explain the 4 Ps of Corporate Governance.

The 4 Ps of Corporate Governance is very necessary and it means People, Process, Performance, and Purpose.

Why is Corporate Governance necessary?

It is necessary because it creates a system of rules and practices for a company that is best for them and their shareholders.

What are the Principles of Corporate Governance?

The main three Principles of Corporate Governance for any company are Transparency, Accountability, Responsibility, Risk Management and Impartiality.

Who is responsible for Corporate Governance policy in their company?

The Board of Directors is mainly responsible for ensuring a better Corporate Governance policy in the company.

What is the effect of bad Corporate Governance?

Bad Corporate Governance can hamper the day-to-day operation of the company and also negatively the profit generation.