Corporate Governance: Concept, Principles and Best Practices

Basics and Concept

[1]Corporate Governance is a concept and administrative framework to introduce basic directions and viewpoints for managing a business unit with best interest. It shows and determines a new and creative vision of business, where a set of core values, better managerial control, compassing human rights, making better coordination between business and society may be possible. It is concerned with holding the balance between social and economic goals and between individual and communal goals. It is also a conscious, deliberate and sustained system to make a judicious balance between its own interest and the interest of various constituents in the environment in which it is operating.

The Cadbury Report which was released in the UK in 1991 outlined that “Corporate governance is the system by which businesses are directed and controlled. he concept of corporate governance is gaining momentum because of various factors as well as the dynamic business environment. The principles of good governance are as old as good behavior, which needs no formal definition. However, in reference to the corporate world, it has been defined by various persons, some of whom is described below just in order to satisfy that the vital details and spirit of the term are not missed out. Good governance is integral to the very existence of a company. It inspires and strengthens investor’s confidence by ensuring company’s commitment to higher growth and profits. Corporate governance refers to the accountability of the Board of Directors to all stakeholders of the corporation i.e. shareholders, employees, suppliers, customers and society in general; towards giving the corporation a fair, efficient and transparent administration. Corporate governance refers to a code of conduct; the Board of Directors must abide by; while running the corporate enterprise. Corporate governance refers to a set of systems, procedures and practices which ensure that the company is managed in the best interest of all corporate stakeholders.

Need For Regulation, Evolution, Scope And Relevance Regulation

[2]Corporate governance is the corner stone of any good business. It encompasses the processes, practices and policies that a company relies on to make formal decisions and to manage the company. Good corporate governance will ensure that the board of directors meet regularly, retain control over the business and are clear in the division of their responsibilities, as well as maintaining a system of risk management. The company secretary will be responsible for duties such as ensuring that board procedures are followed and that all pertinent rules and regulations are abided by. They must also ensure the company keeps Companies House up to date with any necessary filings.

 Corporate governance can encompass many more duties, although the system of governance will often vary from company to company. In an attempt to refinance or even sell the company, investors and buyers will look for a well-organized business model. A company without up to date books and registers is unlikely to attract the finest buyers. Additionally, companies are becoming increasingly aware of their public image and the need to behave ethically. By employing good corporate governance, holding board meetings and making decisions as a board, these goals can be kept in mind.

Evolution of Concept of Corporate Governance

[3]Corporate Governance is viewed as a statutory requirement guided through the regulatory body that is concerned with company affairs. It was seen, till recently, as limited to listed companies that needed to comply with disclosure norms to protect investor rights, especially those of minority shareholders. [4]As long as management and investors were balancing the affairs of the business in a congenial atmosphere, there was no special attention being diverted to this subject. In 1997, the East Asian financial crisis saw the economies of Thailand, Indonesia, South Korea, Malaysia and the Philippines crumble. It was then that the debate on quality of governance, again surfaced. The crisis led to foreign capital flight after property assets collapsed. In 2002, the US federal government passed the Sarbanes-Oxley Act (SOA), intending to restore public confidence in corporate governance.

Earlier, the Cadbury report, titled Financial Aspects of Corporate Governance (1992), a report by a committee chaired by Sir George Adrian Hayhurst Cadbury, a pioneer in raising/awareness and stimulating the debate on corporate governance, had set out recommendations on the arrangement of company boards and accounting systems to mitigate corporate governance risks and failures. The report’s recommendations had been adopted in varying degrees by the European Union, the United States, the World Bank, and others. Today, the SOA works as a predominant guiding framework on corporate governance in the US.

Scope of Corporate Governance

• [5]If the corporate governance of the company is proper it will ultimately lead to better economic growth and more success rate.
• Better corporate governance helps in getting the confidence of the investor which will ultimately help the company in raising and acquiring the capital fast and effectively.
• It also lowers the cost of the capital that is required for investment.
• It also helps in increasing the share price of the company.
• [6]Proper corporate governance help in attaining efficiency and also minimizes mismanagement, risk, and corruption.
• It plays in building up the goodwill of the corporation.
• It helps in managing and running the operations in the organization according to the interest of all of its stakeholders.

Corporate Governance ensures transparency which ensures strong and balanced economic development. This also ensures that the interests of all shareholders (majority as well as minority shareholders) are safeguarded. It ensures that all shareholders fully exercise their rights and that the organization fully recognizes their rights.

Corporate Governance has a broad scope. It includes both social and institutional aspects. Corporate Governance encourages a trustworthy, moral, as well as ethical environment.

Relevance of Corporate Governance

[7]Corporate governance has reached centre-stage in the global agenda. The principles and codes evolved in several countries have furthered the cause of efficiency, transparency and equity particularly in the interest of the shareholders. Sustainable shareholder value has become the mantra for corporate immortality translating eventually into welfare of the society. Corporate governance can be defined as the way the management of a firm is influenced by many stakeholders, including owners / shareholders, creditors, managers, employees, suppliers, customers, local residents and the government. Different economies have systems of corporate governance that differ in the relative strength of influence exercised by the stakeholders and how they influence the management.

Looking at conventional firms, management will usually have an informational advantage over other stakeholders and hence the need for corporate governance. Good corporate governance means governing the corporation in such a way that the interests of the shareholders are protected whilst ensuring that the other stakeholders’ requirements are fulfilled as far as possible. For example, it means that the directors will ensure that the company obeys the law of the land while still remaining in business. The Board’s power is still based more on personal politics than good governance.

Principles of Corporate Governance

[8]The Principles are intended to be concise, understandable and accessible to the international community.  On the basis of the Principles, it is the role of government, semi-government or private sector initiatives to assess the quality of the corporate governance framework and develop more detailed mandatory or voluntary provisions that can take into account country-specific economic, legal, and cultural differences.

• TRANSPERANCY-Transparency means the quality of something which enables one to understand the truth easily. In the context of corporate governance, it implies an accurate, adequate and timely disclosure of relevant information about the operating results etc. of the corporate enterprise to the stakeholders. In fact, transparency is the foundation of corporate governance; which helps to develop a high level of public confidence in the corporate sector. For ensuring transparency in corporate administration, a company should publish relevant information about corporate affairs in leading newspapers, e.g., on a quarterly or half yearly or annual basis.

• ACCOUNTABILITY-Accountability is a liability to explain the results of one’s decisions taken in the interest of others. In the context of corporate governance, accountability implies the responsibility of the Chairman, the Board of Directors and the chief executive for the use of company’s resources (over which they have authority) in the best interest of company and its stakeholders.

• EQUALITY- When we speak of good management practices, we refer to operational strategies that benefit, equally, all partners and investors of the company. For this reason, one of the fundamental principles of corporate governance is equity among shareholders. If it is not properly performed, the business’ image may be tarnished, which jeopardizes its relationship with partners, investors, financial Institutions, and even with customers. In addition, bad practices in this area can lead to lawsuits, which would further undermine the company’s reputation.

• SOCIAL RESPONSBILITY-[9]There are a growing number of managers who understand the importance of their company regarding social issues and are adopting policies aligned with them. It is important to emphasize that this process should begin internally, creating an environment that is appropriate for the company’s employees to perform their duties.

• SECURITY-An increasingly important aspect of corporate governance is security. Shareholders and customers/clients need to feel confident that their personal information is not being leaked or accessed by unauthorized users. It’s equally important to ensure that the company’s proprietary processes and trade secrets are secure. A data breach is not just very expensive. It also weakens public trust in the company, which can have a drastically negative effect on its stock price. Losing investor trust means losing access to capital that is necessary for corporate growth.

• [10]INDEPENDENCE-For ethical reasons, corporate governance seems to be independent, strong and non-participatory body where all decision-making is based on business and not personal biases

• REPORTING-Good corporate governance involves adequate reporting to shareholders and other stakeholders, for example, a company should publish quarterly, half yearly and yearly performance and operating results in newspapers. It should also report functioning of various committees set by the board of directors for efficient administration. It is important on ethical grounds of the society.

Policies of Corporate Governance

[11]IIFL Wealth Finance Limited (hereinafter referred to as the “Company”) is committed to conducting its business in accordance with applicable laws, rules and regulations and the highest standards of business ethics and ethical conduct. Corporate Governance is about maximizing shareholders’ value on a sustainable basis and ensuring fairness to all other stakeholder of the Company. The Company shall continue to ensure good governance through the implementation of effective policies and procedures, which is mandated and regularly reviewed by the Board or the committees of the members of the Board. The Company shall continue to function under the able direction of the Board of Directors and through the procedures and policies mandated by the Board.

Written corporate governance policies ensure that organizations are run in a transparent, ethical manner, promoting good business practices. Corporate governance policies, formulated by the board and management and made available to all stakeholders, should ideally address the following:

• Election of directors to the board.
• The proportion of executive and non-executive directors on the board.
• Disclosure of information on finance and operations.
• Composition and independence of audit, nominating and compensation committees.
• Executive remuneration.
• Board meetings and operations.
• Shareholder rights.

Best Practices of Corporate Governance

[12]Good corporate governance improves overall performance and promotes trust among shareholders and other stakeholders. Good corporate governance provides for sound strategic planning and better risk management. Corporations that embrace best practices for governance continually move toward long-term sustainability. Good governance prevents litigiousness and provides far-reaching legal protections for corporations.

Governance Frameworks
Governance frameworks can often be overlooked, however, they are the bedrock of how a company/organisation is governed and should be designed so as to ensure:

• effective boards,
• transparency around roles and responsibilities,  
• accountability to, and engagement with, stakeholders, and
• driving sustainable business practices.

Governance Documentation
[13]It is imperative that governance documentation is accurate and kept up to date.  These documents establish the rules by which the business is governed, set out the rights and obligations of the shareholders/owners, and provide evidence for regulators/stakeholders of the governance processes/procedures in place. 

Documenting Procedures and Processes
It is important that governance processes/procedures are adequately documented. Often a company/organisation has good corporate governance practices; however, have gaps in terms of documenting the actual processes/procedures in place. 

Director Training and Board Evaluations
Directors need to ensure they keep up to date with regulations and legislation, which can prove challenging.  Additionally, increased responsibility and expanding regulatory demands means higher expectations for board performance.

Subsidiary Governance Policies

Subsidiaries are a common feature of today’s business structures, as corporations operate across multiple jurisdictions and business areas.  To ensure that corporate governance principles are cascaded, consistently and effectively down to its subsidiaries and that subsidiary boards are aware of their responsibilities.

Agenda and Minutes
[14]It is imperative that the board deals with the most pressing/important strategic matters at meetings, therefore, we find that by grouping items together under headings and by putting routine items together for simultaneous approval by the board will ensure that agenda time can be best utilised during the meeting.

Effective Board Reporting

Boards perform best when they receive good quality reports that contain sufficient information for them to make well-informed decisions and to develop business strategies for short and long-term growth and overall sustainability of the organisation.

LANDMARK CASES UNDER CORPORATE GOVERNANCE

1. Saurashtra Cement Ltd. And Anr. vs Union Of India

[4]A group of writ petitions had been disposed of by the Gujarat High Court, dismissing the same, following the judgment of the said High Court dated 22nd of June, 1994 in Special Civil Application No. 6226 of 1994. While dismissing the writ applications, though the interim orders stood vacated, the Court had not passed any order with regard to payment of interest. But in Special Civil Application No. 6226/94, while vacating the interim order and discharging the rule, the Court has specifically ordered for payment of interest @ 18% per annum. On application for clarification being filed in that group of writ petitions, where no order with regard to payment of interest had been made, the High Court directed the payment of interest @ 18% per annum, which direction had not been made while disposing of the writ petitions. Those orders of the High Court, clarifying the earlier order directing payment of interest @ 18% per annum, are also subject matter of appeals in some of these appeals including Civil Appeal No. 3119/95. We have heard the learned counsel for the parties and in our considered opinion, the direction to pay interest @ 18% per annum must be held to be unreasonable. We, therefore, modify the same and direct that the interest would be paid @ 9% per annum. Civil Appeal Nos.7607/95 & 7472/94 and SLP (Civil) No.21620/94:–

These Civil Appeals and the Special Leave Petition arise out of judgment of the Madhya Pradesh High Court. The High Court had followed the earlier decision in Mahalaxmis case. The said decision in Mahalaxmi, has been upheld by the Supreme Court in 1995(Supp.) 1 S.C.C.642. Consequently, these appeals and the special leave petition stand dismissed.

• Vodafone International Holdings By v. Union Of India

[5]The landmark judgement was made by the Supreme Court of India in Vodafone International Holding (VIH) v. Union of India (UOI). In the transaction dated 11.2.2007 between VIH and Hutchinson Telecommunication International Limited or HTIL, the Bench consisting of Chief Justice S.H Kapadia, K. S. Radha krishnan and Swatanter Kumar quashed the order of the High Court of claim for Rs 12000 crores as capital gain tax and exempted VIH from responsibility for payment of Rs 12000 crores as capital gain tax(non-resident company for tax purposes).The court held that the Indian revenue authorities do not have authority to tax an offshore transaction between two non-resident companies where the non-resident company is purchased in the transaction in order to control the interest in the (Indian) resident company.

The selling of HTIL’s CGP shares to Vodafone or VIH does not lead to the transfer of capital assets under the scope of Section 2(14) of the Income Tax Act and therefore does not attract capital gains tax on all rights and entitlements resulting from the shareholder agreement, etc., which form an integral part of CGP ‘s shares. The order of High Court of the demand of nearly Rs.12, 000 crores by way of capital gains tax would amount to imposing capital punishment for capital investment and it lacks authority of law and therefore is quashed. In Vodafone International Holding v. Union of India, the Supreme Court released a landmark judgement and explained the ambiguity with regard to the imposition of taxes. Finally, it can be said that this judgment helped to remove complexities with regard to the imposition of taxes and agreed that the concept that the object of the transaction is to escape tax does not necessarily lead to the hypothesis of tax evasion and the Supreme Court embraced the view of legitimate tax.

[1]http://iodglobal.com/Articles/Corporate%20Governance%20and%20Sustainability%20Concepts%20Sreeti%20Raut.pdf

[2] https://www.oecd.org/daf/ca/Improving-Corporate-Governance-India.pdf

[3] https://www.scconline.com/blog/post/2019/11/13/evolution-of-corporate-governance-in-india/

[4] https://www.emerald.com/insight/content/doi/10.1108/CG-07-2018-0255/full/html

[5] https://commercemates.com/the-scope-issues-of-corporate-governance-in-india/

[6] https://www.managementstudyguide.com/corporate-governance.htm

[7] https://www.mondaq.com/india/employee-benefits-compensation/30193/the-relevance-of-corporate-governance-in-the-national-economy–indian-experience

[8] https://www.yourarticlelibrary.com/business/corporate-governance-business/corporate-governance-in-india-concept-needs-and-principles/69978

[9] https://www2.deloitte.com/in/en/pages/risk/articles/governance-101.html

[10] http://www.jesd-online.com/dokumenti/upload/separated/Vol%204%20No%201_Paper8.pdf

[11] https://iclg.com/practice-areas/corporate-governance-laws-and-regulations/india

[12] https://blog.ipleaders.in/corporate-governance-india/

[13] https://rbidocs.rbi.org.in/rdocs/speeches/pdfs/61586.pdf

[14] https://cfo.economictimes.indiatimes.com/news/corporate-governance-practices-in-india-a-work-in-progress/73093142

Author Details: Prishi Kothari [Student, Balasaheb Apte College of Law]