Corporate Governance is a value-based approach which ensures that there are rules, practice and processes in place through which a company is directed or controlled. This framework essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community.

The purpose of corporate governance is to facilitate effective, entrepreneurial and metrics based management that can deliver the long-term success of the company. The Board of Directors and the concerned committees play an instrumental role in inculcating a cohesive culture thereby ultimately helping in increasing companies’ stakeholders value-added growth.

Governance structures are guided by the principles which look for distribution of rights and responsibilities among participants in the corporation such as regulators, the board of directors, executives, vice presidents, managers, shareholders, promoters and includes the rules and procedures for making decisions in corporate affairs. In this context, Corporate Governance includes the processes through which corporations’ objectives are set and pursued in the context of the social, regulatory and market environment.

Corporate Governance practices are affected by attempts to align the interests of stakeholders. Interest in the corporate governance practices is a modern way of obliging corporations, particularly in relation to policies, strategies and accountability, followed by increasing the high-profile collapses of a number of large corporations during 2001–2002, most of which involved accounting fraud, auditing frauds and ending up destroying Corporate Governance standards.

The ways of mitigating or to prevent these conflicting interests include the processes, customs, policies, laws, and institutions which affect the way a company is run and managed. An important theme of governance is the nature and extent of corporate accountability. A related discussion at the macro level focuses on the effect of a corporate governance system on economic efficiency inside a corporation and thus affected from outside Corporation, with a strong emphasis on shareholders’ welfare.

In contemporary business corporations, the main external stakeholder groups are shareholders, debt holders, trade creditors and suppliers, customers, and communities affected by the corporation’s activities. Internal stakeholders are the board of directors, executives, and other employees. Therefore, it is imperative that corporate governance is concerned with mitigation of the conflicts of interests between stakeholders.

In large firms where there is a separation of ownership and management and no controlling shareholder, the issue of ‘majority-minority’ agency problem surfaces between core management which may have significantly different interests/opinion, and by definition considerably more actionable than shareholders. The danger is that rather than overseeing management on behalf of shareholders, the board of directors may become a second fiddle to the management. It is this aspect that is presently being addressed in contemporary public/media debates followed by the developments in regulatory strategies and policies. In a nutshell, corporate governance framework is essential and unavoidable if a company wants to thrive and be profitable.

Author: Mr. Malay Patel

Mr. Patel is presently serving as an Independent Director on the Board of HDFC Bank. He is also a director on the Board of Eewa Engineering Company Private Limited, a company in the plastics/packaging industry with exports to more than 50 countries. In the past, he has been actively involved in varied roles, inter alia, export/import, procurement, sales and marketing in Eewa Engineering Company Private Limited. Mr. Patel possesses in-depth knowledge and vast experience in matters relating to small-scale industries.

Disclaimer: THE STATEMENTS HEREIN REPRESENT THE CURRENT OPINION AND BELIEFS OF THE AUTHOR ONLY AND NOT THE ASSOCIATION OF INDEPENDENT DIRECTORS OF INDIA (AIDI). UNDER NO CIRCUMSTANCES SHOULD ANYTHING IN THIS POST BE CONSTRUED AS INVESTMENT, LEGAL, TAX, REGULATORY, FINANCIAL, ACCOUNTING OR OTHER ADVICE.