SIGNIFICANCE OF CORPORATE GOVERNANCE TO ATTRACT INVESTOR: MEHAK MEHRA
INTRODUCTION
The committee on Financial Aspects
of Corporate Governance headed by Sir Adrian Cadbury, defines corporate
governance as a concept that is concerned with holding the balance between economic and
social goals and between individual and communal goals. The corporate
governance framework is there to encourage the efficient use of resources and
equally to require accountability for the stewardship of those resources.[1] Simply
put, corporate governance is about how companies are controlled and directed.
It clearly defines the duties and obligations of the regulators, directors,
owners, and executives for the efficient performance of the company, in this
article, the author analyses how an efficient policy of corporate governance
impacts the investors in the market.
DEVELOPMENT
OF LITERATURE ON CORPORATE GOVERNANCE IN INDIA
Confederation of India Industry is credited for the
genesis of the literature about corporate governance in India. In 1998, CII
came up with a voluntary code on ‘Corporate Governance’ which was welcomed by
some big companies with open arms. The Kumar Mangalam Birla Committee report
1999 brought the first-ever formal regulatory code for the listed companies
under Clause 49 of the Listing Agreement of Stock Exchange. This committee
advocated for annual disclosure of the financial performance of the listed
companies. Another committee, formed in 2002, known as the Naresh Chandra
Committee, brought changes to the audit system and suggested changes to the
statutory audit. In
2004, SEBI formed a committee under the chairmanship of Naresh Chandra for
reviewing the implementation of the corporate governance code and issues of the
revised clause 49 of the listing agreement. This committee suggested changes
primarily relating to audit reports, independent directors, related party
transactions, risk management, director compensation, etc. Despite such
regulations, the Indian Corporate Landscape saw the most contentious scams like
Satyam Inc. scam that exposed the incompetency of the existing regulations in this
regard. Later, the Companies Act, 2013 was incorporated with stringent measures
like providing three-layered protection under Section 188 of Companies Act
against related-party transactions; Section 241-246 provides for the protection
of shareholders against oppression and mismanagement, etc.
PRINCIPLES OF CORPORATE GOVERNANCE THAT HELP TO ATTRACT
INVESTORS
In a competitive world where
business dynamics change every second, corporate houses must formulate, adopt,
and implement a policy that thrives to achieve transparency, accountability,
independence of leadership, ethics, and fairness in its working. These
principles act as the guiding force for a company and define its working
culture. Work culture affects the performance of the employees, which in turn
affects the financial performance of an organization. A good financial
performance, work culture, and growth of a company has a substantial role in
attracting investors for a company. Thus, attracting more investors will be in
favor of the company as they are ones who bring capital and business to the
company, which are necessary for the running of the business. A company must
incorporate the following principles in its internal management system to have
a positive impact on the investors-
a. TRANSPARENCY
Transparency
means the willingness on the part of the company to disclose all relevant
information about the working of the company to the people who matter, i.e.,
the stakeholders. Employees, debtors, creditors, shareholders, customers, etc.
all form part of the stakeholder community. Transparency is one of the
essential principles of corporate governance that helps the stakeholders to
know about the financial performance, growth, business stability of a
corporation. The SEBI has made it compulsory for companies to timely disclose
annual reports with details regarding the financial and social standing of a
corporation. Higher is the transparency in the working of the organization
higher will be the loyalty of the investors towards a company.
Another
example is Section 188 of the Companies Act, 2013 that deals with the passing
of the resolution for related-party transactions. It provides that no
related-party transaction shall be entered into by a company without its notice
to the shareholders. Secondly, it excludes people from voting that form part of
the transaction. Lastly, the reports mentioning the total number of such
transactions made by the company have to be disclosed. Hence, it provides for
three-layer protection for the shareholders.
b. FAIRNESS
Fairness
refers to subjecting all stakeholders to equal treatment without any bias. For
instance, all shareholders must be treated fairly irrespective of the size of
their holding. In many corporations, for example, the TATA group, the
ex-chairman accused the TATA group of giving more preference to the majority
shareholders as compared to the minority shareholders. It leads to a divide
between the majority and minority shareholders. Thus, shaking the confidence of
the investors in the company. Hence, equal treatment should be given to all
shareholders, and their interests should be adequately represented. Similarly,
equal treatment must be given to employees, directors, etc. to establish a
system free from any prejudice.
c. ACCOUNTABILITY The principle of
accountability makes the authorities accountable for their actions to the
investors. Accountability and responsibility go hand in hand. Accountability
can be ensured only when transparency and fairness are there in the working of
the company. The Board of Directors is responsible for overseeing the
management of the business, affairs of the company, appointing the chief
executive, and monitoring the performance of the company. In doing so, it is
required to act in the best interests of the company.[2]
Hence, the Board of Directors should be made accountable to the shareholders
for how the company has carried out its responsibilities.
CONCLUSION
Investors are the most important
people who help the company to do business by bringing adequate capital for its
functioning. An investor who invests his funds in a company expects good
returns as an incentive to invest. Choosing a company for investment is a
crucial decision for any investor that is influenced by various factors like
corporate governance policy, ethics, and transparency in working, fairness, and
degree of accountability in the working of a company. Therefore, to be able to
attract a huge number of investors, the company needs to overhaul its corporate
governance policy from time to time to curb the chances of any fraud or scam
inside the company. Thus, a sound corporate governance policy will lay the
foundation for strong principles that are imperative for earning the trust of
the investors.
[1] Ann K.
Buchholtz, Jill A. Brown, and Kareem M. Shabana, Corporate
Governance and Corporate Social Responisbility, OXFORD HANDBOOKS ONLINE
(Aug.27, 2020, 6 PM) https://www.oxfordhandbooks.com/view/10.1093/oxfordhb/9780199211593.001.0001/oxfordhb-9780199211593-e-014
[2] Anonymous, The Core Principles of Good Corporate
Governance, PEARSE TRUST (Aug. 27, 2020, 4 PM) https://www.pearse-trust.ie/blog/bid/108866/The-Core-Principles-Of-Good-Corporate-Governance
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