The procedure of governing the corporate world with sets of rules, processes and practices by which a company is maintained and controlled involving the balance and interests of the stakeholders like management, shareholders, suppliers, financiers, customers, government and the community is corporate governance. It also prepares the framework for achieving the objectives of a company and hence involves every sphere of management, from action-plans and internal controls to corporate disclosure and performance measurement.
The Ministry of Corporate Affairs (MCA) and Securities and Exchange Board of India (SEBI) have undertaken many initiatives in the past in order to achieve success in corporate governance. Consequently, SEBI emerged with recommended changes to ensure effective governance in corporate sector.
The corporate governance agreements by various companies have been brought under trial of corporate governance by the recent disagreement between the TATA Sons and the expulsed chairman Cyrus Mistry. This incident has raised concerns about the level of compliances in the reputed companies including smaller organisations with a lesser reputation.
The objective of effective corporate governance is to allow the companies manage autonomously and prevent dominance by the owners so the differentiation between the management and shareholders is a must.
The Board of Directors influence corporate governance as they are the direct stakeholders. Again Shareholders or other board members elect or appoint the directors so shareholders of the company are represented by them. Hence, the task of the board is taking important decisions, such as compensation, appointments and dividend policy.
The boards often comprise of the inside, as well as independent members. Inside the body comprises major shareholders, founders and executives, while independent directors have no ties with the insiders, but they are opted as they are experienced in managing or directing other large companies. Independents are thought to be helpful for governance, because of their possibility to reduce the concentration of power, they also help aligning shareholders’ interest with those of the insiders.
As a result of the TATA Sons debacle, in addition to this, the clear message came out in open that the controller of dominant shareholders has the strong responsibility for making major decisions.
Such shareholders play the role of alternative power centres devoid of any responsibility or accountability. India is full of family-centred companies which have dominant shareholders. Hence, it is difficult to organise a Board that can be able to bring the dominant shareholders under the control of discipline because the shareholders give the Board all its powers. The idea of shareholder democracy appears to be imagination as power in a company depends upon the block of shares. Hence, The TATA Sons debacle also exposed the harsh reality that the guidelines on corporate governance are showy; rather they hide the reality of exercising power within the companies. The compliances of these guidelines are only official formality. They only execute manipulations. Practical obedience is the way behind the theoretical compliance just as the audit reports show to mislead the stakeholders.
Corporate governance is highlighted through reports and awards by organising decorative exhibition and fantasy-view of programmes. So, the true scenario is completely different from it seems on its outward views witnessed in the cases of the Satyam, Sahara and the Shardha scams.
Such major and vital problems are dangerous to India alone; these can even plague the most advanced economies like the USA. The banks in the USA have compelled to pay a large amount as fines to the authorities in order to avoid prosecution.
The regulators have already taken over steps the years to address abuses of power.The standards of corporate governance require standardisation and the interests of minority investors calls for the safeguard in the best possible way with a view to attracting investments from across the world, simultaneously preventing any untimely flight of capital. In the 2016, ease of Doing Business report by the World Bank, India ranked 13 in the world on the basis of ‘protecting minority investors’ while in overall index ranked 130.
The concentration of the controllers on governance standards needs companies to make a cooperative effort to assure compliances and provides an opportunity to match with the global standards and deliver additional gains for their stakeholders.