A ‘Standard’ is a repeatable, agreed upon and documented way of doing something. It contains certain specifications or criteria, which are to be used as a rule or guideline to increase reliability.
India essentially follows a rules-based approach to Corporate Governance. These rules come in the form of law (the Companies Act, 2013) and regulations (SEBI LODR Regulations, 2015). In addition to this, there are Secretarial Standards, which prescribe the standards to be followed for convening and conducting Board meetings, Committee meetings and General meetings. There are also Accounting Standards, which are standards to be followed while preparing the financial statements of a company. In addition, SEBI Prohibition of Insider Trading Regulations, 2015 help promote the safeguarding of the interests of stakeholders, who are not insiders of a company.
While there are no specific standards for Corporate Governance in India, there have been voluntary practices and guidelines that companies, especially listed companies, were encouraged to follow since 1998, with the first code on Corporate Governance being published by the Confederation of Indian Industry (CII). Over the years, as response to evolving Corporate Governance practices internationally, the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI) have set up a number of committees on the subject, to help identify, prescribe and enforce best in class practices through law and regulations. To implement some of the recommendations of these committees, the erstwhile Companies Act, 1956 and the erstwhile Clause 49 of the Listing Regulations, paved way for the Companies Act, 2013 and SEBI LODR Regulations, 2015.
In India, Corporate Governance is implemented through compliance with law and regulations, and the setting up of processes to ensure that checks and balances are in place. These are done to address the problems that could arise from conflict of interest, whether monetary or based on relationships, and asymmetry of information, which cannot be wished away, and its misuse should be reduced, if not eliminated altogether.
Corporate Governance is not an end in itself. It is a means to an end. The end is preserving and protecting the interest of all stakeholders. This is achieved with the help of some building blocks. The major ones are –
- Board of Directors – The shareholders of a company have the power to appoint Directors, who are to hold the management accountable on their behalf.
- Composition of Board – The Board should comprise an optimum mix of Executive and Non-Executive Directors, including Independent Directors. While shortlisting Directors, care should be taken to ensure that the skillsets of Directors are what the Board and the company requires. There should be adequate diversity, in terms of experience, expertise, geography, age and gender.
- Separation of positions of Chairperson and Managing Director (MD) – The Chairperson is the chair of the Board, and the MD is the head of the management. The Board, through the Chair, holds the MD accountable for management action. Separating the posts of these two persons is important for ensuring accountability of management.
- Committees, and their composition – Increasingly, a lot of work of the Boards is being done in the committees of the Board. There are 5 mandated committees of the Board. For these committees to function effectively, it is important for them to be composed appropriately, and for them to have adequate number of meetings, based on the requirements of the company.
- General meetings – Such meetings are for the shareholders to meet the Board members and the management, and for the shareholders to ask any questions that they may have of the latter. For these meetings to be fruitful, Board members should attend such meetings without fail, and meaningfully participate in discussions.
- Auditors – The statutory auditors, internal auditors and secretarial auditors are to help the Board ensure that the management is performing honestly, and there are no problems in the financials, compliance standards, and processes of the company. Their independence and proper functioning is to be ensured by the Board.
- Policies – Law and regulations mandate a number of policies, which have to be approved by the Board of Directors. While a company may have all the mandatory policies uploaded on its website, it is for the Board to ensure that the policies are updated and properly implemented throughout the company.
- Disclosures, including on website – India follows a disclosure-based regime. While a number of disclosures have to be mandatorily made to the Stock Exchanges or on the website of the company, the quality of disclosures too should be given a lot of importance.
- Board processes – Agenda for meetings, minutes of the meeting and action taken report arising out of the pending actions from each meeting are very important to ensure that the meetings of the Board and the committees are productive.
The purpose of all these building blocks is to promote fairness, transparency, accountability and stakeholder democracy. If each building block functions effectively and efficiently, Corporate Governance practices in India will definitely improve. While there may not be set standards for Corporate Governance, law and regulations, along with best practices, can help set standards which are among the best in the world.