A sound Corporate Governance structure is essential for a company to function effectively. It promotes transparency, accountability, fairness and independence.
Regulation in India
Indian companies are regulated by the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI). MCA monitors all Indian companies, whether public or private, through the Companies Act, 2013 and the Rules thereunder, and SEBI monitors all listed companies through SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. Banks in India are regulated by the Reserve Bank of India (RBI) through the Banking Regulation Act 1949. The Insurance Regulatory and Development Authority of India (IRDAI) is the Regulator for all insurance companies in India.
Basic Structure of Corporate Governance in India
Corporate governance ensures that a company has a set of policies and procedures by which it is directed and controlled. A Corporate Governance structure clearly specifies the reporting relationships and distribution of rights and responsibilities among different levels in the structure.
Shareholders are the owners of a company since they have invested in the shares of the company. They could be promoters, institutional investors or retail investors. They appoint Directors, who function as their representatives, to hold management accountable for their actions. This is to ensure that the money that they have invested is properly utilised.
Board of Directors
The Directors on the Boards of companies are appointed by the shareholders to ensure that the Board can hold the management accountable on their behalf. The Board’s role is superintendence, direction and control. It has to exercise strategic oversight over the company and its affairs. It has to also ensure compliance with the legal framework, integrity of financial accounting and reporting systems, and proper and timely disclosures.
Board committees are sub sets of the Board, and comprise Board members. Since the Board does not have adequate time to deep dive into all the important issues, Board committees are expected to do so on the Board’s behalf. They generally look into those aspects of the company where special focus and expertise are required, such as, internal audit, risk management, etc. They derive authority from the powers vested in them by law or regulation or delegated to them by the Board. They strengthen the Board’s governance role as they do the groundwork for the Board to make informed decisions. In India, there are 5 mandatory Board level committees – Audit Committee, Nomination and Remuneration Committee, Stakeholders Relationship Committee, Risk Management Committee and Corporate Social Responsibility Committee.
Management is involved in the day-to-day functioning of a company. Management co-creates strategy with the Board, and implements it. It is responsible for operating the company’s business under the oversight of the Board. Effective Corporate Governance practices require that the management focuses on creating sustainable long-term value for the stakeholders.
The shareholders of the company also appoint statutory auditors, who are responsible for auditing the financials of the company. They check inter alia whether the financial statements of the company reflect a true and fair picture, and whether the company is following all the relevant accounting standards that are applicable to it.
The Regulators, including the Stock Exchanges, regulate a company to check that it is complying with all applicable laws, rules and regulations. In case a company is found to be non-compliant, Regulators take corrective action against the company.
Stakeholders are persons who have some stake, whether direct or indirect, in the company. These include employees, creditors, customers, government, regulatory authorities, shareholders and society at large. The fundamental objective of any company is to act in the best interest of all its stakeholders.