The Corporate Governance Practices in India

THE CORPORATE GOVERNANCE PRACTICES IN INDIA

By

Mrs.ShilpaJain

Faculty Members

ICFAI National College

Yamuna Nagar- Haryana

INTRODUCTION:

Corporate governance is defined as the system by which business entities are monitored, managed and controlled. Corporate governance practices have become an essential prerequisite for the ability to acquire and retain financial resources

necessary for restructuring long term investment and sustainable growth. At one end of the spectrum the shareholders are the owners of business entity as they are risk takers. At the other end the managers or the executive director of the company who are in control of its day-to-day affairs. It is the responsibility of entire board of directors for smooth running of the company; corporate disclosure and governance requirements though relatively low in some countries, are also changing. Awareness of the developments of accounting standards, securities regulation, globalization of financial markets, world wide effect of corporate strategic alliance has led to some alternative view of governance process. A good structure of corporate governance is that encourages balanced relationship among shareholders, executive directors and the board of directors. The governance mechanism is shaped by its political, economic and social history and its legal frame work. In the beginning most of the countries found company to be the convenient form of organizations that enabled entrepreneurs to raise money from large number of investors. Shareholders start agitating only when they perceive that the company is being highly mismanaged and the shareholder value is getting destroyed.

CORPORATE VALUES:

In recent years, There is a explosion of interest in corporate values like share holder value (Rapport,1986; Copeland, 1994; Jensen, 2000), stakeholder value (Freeman, 1984), customer value (Murphy et al., 1996), business ethics (Velasquez, 1998; Fort,2001), Corporate social responsibility (Carroll, 1999). But by and large, new value systems have been marketed as general solutions applicable to all kinds of business. These values are building blocks of corporate image. Corporate values are based on high ethical standards of managers and other employees. The firm values must ultimately be derived from the preferences or values of its stakeholders. In other words, corporate values are created when companies internalize the values of salient stakeholders. Stakeholders can influence a company directly through market transactions and contracts without imposing their values on the company, but transactional costs and information problems set a limit to use of contractual mechanisms. Internalization of stakeholder preference takes place in a hypothetical three-stage process as follows:

1. Allocation of ownership rights.

2. Board of composition.

3. The influence of important stakeholders

There is also a logical casual connection between the stages. Ownership determines the allocation of residual control rights across potential owners. The owners appoint board members and bestow the responsibilities to them. The board determines the nature of implicit contracts with the constituencies of the firm.

Figure1: Legal/ institutional/cultural regime

BASIC PRINCIPLES OF CORPORATE GOVERNANCE:

The Business Round table supports the following guiding principles:

1. The main duty of the board of directors of a public corporation is to select a Chief Executive Officer and to oversee the CEO and other senior management in the competent and ethical operation of the corporation on a day-to-day basis.

2. It is the responsibility of management to operate the corporation in an effective and ethical manner in order to produce value for stock holders. Senior management is expected to know how the corporation earns its income and what risk the corporation is undertaking in the course of carrying out its business. Management should never put personal interest ahead of or in conflict with the interest of corporation.

3. It is the responsibility of management under the oversight of the board and its audit committee to produce financial statements that fairly present the financial conditions and results of operations of the corporation and to make the timely disclosures investors need to permit them to assess the financial and business soundness and risks of the corporation.

4. It is the responsibility of the board and its audit committee to engage an independent accounting firm to audit the financial statements prepared by management and to issue an opinion on those statements based on Generally Accepted Accounting Principles. The board, its audit committee and management must be vigilant to ensure that no actions are taken by the corporation or its employee that compromise the independence of the outside auditor.

5. It is the responsibility of the independent accounting firm to ensure that it is in fact independent without conflicts of interest, employs highly competent staff and carries out its work in accordance with Generally Accepted Auditing Standards.

Another five key principles of corporate governance are as follows:

(1) Peoples are more important than processes

One lesson of recent corporate collapses in the U.S.A and in Europe seems to be that no corporate structure can guarantee success if the individual with in it do not operate with the right degree of independence with the right kind of expertise and do not devote the required amount of time to the important role of executive director. The main thing is too many companies no executive directors are chosen for reasons quite unrelated to their suitability for the task.

(2) Shareholders accountability.

It is found that shareholders accountability does not always work as effectively as one would like. It is because shareholders frequently do not vote on important resolutions. They do not vote on the appointment of Auditors and generally remains entirely passive until a crisis hits. In my view share holders must accept their own responsibilities if we are to achieve a truly robust corporate

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