Study Notes on Corporate Governance for UGC NET Commerce Exam

By Tanuj Bansal|Updated : April 22nd, 2020


Study Notes on Corporate Governance

1. What is Corporate Governance?

Ans: Corporate governance is about promoting, corporate fairness, transparency and accountability (As defined by World Bank President, J. Wolfensohn-Quoted in Financial Times, June 21, 1999).

2. Meaning of Corporate Governance:

  • Governance is the process of making decisions and implementing those decisions.
  • Corporate Governance ensures that the business is responsive to the present and future needs of all the stakeholders, i.e interests of all the stakeholders are taken into account in decision-making.
  •  Corporate Governance requires:
    • Meeting business, legal and ethical expectations;
    • Optimum utilisation of resources;
    • Risk monitoring; and
    • Full disclosure of operations.

3. Fundamental Principles of Corporate Governance:

  1. Independence: For fair Corporate Governance, the board of directors of the company has to be an independent, strong and non-partisan body where all decision making is based on business prudence.
  2. Accountability: In good Corporate Governance, accountability is of great importance. The chairman, board of directors and chief executive of the company must fulfill their accountability to the stakeholders, customers, workers, society and the government.
  3. Transparency: It means accurate, adequate and timely disclosure of relevant information to the stakeholders.
  4. Reporting: Good corporate governance also involves adequate reporting to the shareholders and other stakeholders.

4. Benefits of Corporate Governance:

  1. The investor enjoys higher market valuations.
  2. Ensures commitment of the management in managing the business organisation.
  3. Creates strong capital markets by increasing investors and lenders confidence.
  4. Protects and promotes investors interest by providing a sustainable competitive return to the investors.
  5. Ensures compliance with laws, rules and regulations, thus avoiding scams and scandals.
  6. Ensures optimum utilisation of resources, effectiveness and efficiency in business operations, thus improving the performance of the business.

5. CII Code of Corporate Governance: In 1997, the Confederation of Indian Industries (CII) finalised a code entitled “Desirable Corporate Governance in India-A Code” which is fairly comprehensive and contains provisions for bringing about qualitative changes in the corporate governance practices prevailing in India.

The important features of the CII’s code are:

  • As the key to good corporate governance lies with the well functioning board of directors, the full board which should be single-tiered should meet at intervals of two months and at least six times a year.
  • The non –executive directors should comprise 30 percent of the board if one of them is the chairman.
  • The non-executive director should comprise at least 50 percent of the board if the chairman and the managing director is the same person.
  • No individual should be a director on the boards for more than 10 companies at any given times.
  • Directors who have not been available for in any event 50 percent of the board meetings should not be reappointed.
  • Non-executive directors ought to be paid commission and offered with investment opportunities for their expert sources of info other than their sitting charges.
  • Details of defaults, payments for intangibles and foreign exchange exposures should be reported to the board.
  • An audit committee consisting of at least three non-executive directors should be set up and given access to all financial information.

6. SEBI Code of Corporate Governance

  • To promote the standard of Corporate Governance among the companies listed in Indian Stock Exchange, the SEBI appointed a committee on Corporate Governance under the chairmanship of Kumar Manglam Birla.
  • On the basis of the recommendations of this committee, the SEBI issued certain guidelines for Corporate Governance.
  • The guidelines which are required to be incorporated in clause 49 of the listing agreement between the company and the stock exchange are as follows:

a. Board of Director

  • The governing body of the organization will have an ideal blend of official and non-official chiefs with at the very least 50% of the directorate containing non-official executives.
  • The number of independent directors would rely upon whether the chairman is executive or non-executive.
  • In case of non-executive chairman, at least 33% of board ought to involve independent directors and if there should be an occurrence of an executive chairman, at least half of board should include of independent directors.

b. Audit Committee

  • The audit group will have at least three individuals, all being non-executive directors, with most of them being independent, also at least one of those directors must have financial and accounting knowledge.
  • An independent director shall only be the chairman of the audit committee.
  • The chairman shall be present at a yearly general meeting to answer investors queries.
  • The audit committee should meet at least three times a year.

The audit committee will have powers which should comprise the following:

  • To investigate any movement inside the terms of reference.
  • To look for data from any worker.
  • To get outside lawful or other expert guidance.
  • To verify the attendance of outsiders with important skills if it considers necessary.

c. Remuneration of Directors

The compensation of non-executive directors will be chosen by the governing body. The accompanying disclosures ought to be made in the section on the corporate governance of the yearly report are as follows:

  • All components of compensation bundle of all the directors,
  • Salary benefits, reward,
  • Stock options, pensions etc.
  • Details of a fixed part and performance-linked incentives, along with the performance criteria.
  • Administration contracts,
  • Notice period, severance charges.
  • Stock options details, if any.

d. Board procedure

  1. The board meeting shall be held at least four times a year, subject to a maximum four months of time gap between any two meetings.
  2. A director will not be a member of more than 10 committees or act as chairman of more than five committees across all organisation in which he is a director.

e. Management

A major aspect of directors report or as an addition thereto, a management discussion and Analysis Report should form part of the yearly report to the investors. This report should include:

  • Industry structure and developments
  • Opportunities and threats
  • Segment-wise or product-wise performance Outlook
  • Risks and concerns
  • Internal control systems and their adequacy.
  • Discussion on financial performance with respect to operational execution.

f. Report on Corporate Governance

There will be a separate segment on Corporate Governance in the yearly reports of the organization, with a point by point report on Corporate Governance. Non-compliance of any obligatory requirements with reasons thereof should be specifically highlighted in the report.

g. Compliance

The organization will procure a certificate in regards to compliance of conditions of corporate governance from the auditors of the association as stipulated in this provision. And this certificate would be annexed with the Director’s Report, which is sent yearly to all the shareholders of the company. The same certificate shall also be sent to the stock exchange along with the annual returns filed by the company.

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