What is Corporate Governance?

Corporate Governance is a continuous process of applying the best management practices, ensuring the law is followed the way intended, and adhering to ethical standards by a firm for effective management, meeting stakeholder responsibilities, and complying with corporate social responsibilities.

It contains policies and rules to maintain a strong relationship between the owners of the company (shareholders), the Board of Directors, management, and various stakeholders like employees, customers, Government, suppliers, and the general public. It applies to all kinds of organizations-profit or not-for-profit.

In this article, we shall discuss the definition, significance and objectives of corporate governance. This is an important topic from the UPSC exam and competitive exam perspective.

Principles of Corporate Governance

The principles of Corporate Governance are:

Accountability

Accountability means to be answerable and be obligated to take responsibility for one’s actions. By doing so, two things can be ensured-

  1. That the management is accountable to the Board of Directors.
  2. That the Board of Directors is accountable to the shareholders of the company.

This principle gives confidence to shareholders in the business of the company that in case of any unfavourable situation, the persons responsible will be held in charge.

Fairness

Fairness gives shareholders an opportunity to voice their grievances and address any issues relating to the violation of shareholder’s rights. This principle deals with the protection of shareholders’ rights, treating all shareholders equally without any personal favouritism, and granting redressal for any violations of rights.

Transparency

Providing clear information about a company’s policies and practices and the decisions that affect the rights of the shareholders represents transparency. This helps to build trust and a sense of togetherness between the top management and the stakeholders. It ensures accurate and full disclosure timely on material matters like financial condition, performance, ownership.

Independence

Independence means the ability to make decisions freely without being unduly influenced. Decisions should be made freely without having any personal interest in the company. It ensures the reduction in conflict of interest. Corporate governance suggests the appointment of independent directors and advisors so that decisions are taken responsibly without influence.

Social Responsibility

Apart from the 4 main principles, there is an additional principle of corporate governance. Company social responsibility obligates the company to be aware of social issues and take action to address them. In this way, the company creates a positive image in the industry. The first step towards Corporate Social Responsibility is to practice good Corporate Governance.

Corporate Governance in India

Candidates should have thorough knowledge about Corporate Governance in India as it is covered under the UPSC Syllabus.

Candidates shall go through the topic and make their UPSC notes accordingly.

  1. The Ministry of Corporate Affairs (MCA) and Securities and Exchange Board of India (SEBI) is responsible for corporate governance initiatives in India. The corporate sector of India faced major changes in the 1990s after liberalization.
  2. In the 1900s, SEBI regulated corporate governance in India through various laws like the Security Contracts (Regulation) Act, 1956; Securities and Exchange Board of India Act, 1992; and the Depositories Act of 1996.
  3. In February 2000, SEBI established the first formal regulatory framework for corporate governance in India owing to the recommendations of the Kumar Mangalam Birla Committee. It was undertaken to improve the standards of corporate governance in India. This came to be known as clause 49 of the Listing Agreement.
  4. A major corporate governance initiative was undertaken in 2002 when the Naresh Chandra Committee on Corporate Audit and Governance furthered their recommendations addressing multiple governance issues.
  5. MCA and the Government of India have set up multiple organisations and charters like the Confederation of Indian Industry (CII), National Foundation for Corporate Governance (NFCG), Institute of Chartered Accountants of India (ICAI).

Corporate Governance in India is required for the current affairs section of all civil service examinations.

Aspirants can visit the linked article and get details about the upcoming government exams that comprise current affairs and general awareness as an important topic in the syllabus.

For the best preparation strategy for competitive exams candidates can visit the linked article and get detailed study material and preparation tips to excel in the examination.

Frequently Asked Questions on Corporate Governance

Why is corporate governance important?

Corporate governance is important to improve the integrity and performance of a company. It gives it a sustainable approach to the affairs of the organisation. This provides an upper ground to the company and increases its competitive advantage.

What are the elements of Corporate Governance?

The elements of corporate governance are:

  1. Transparent disclosure
  2. Well-defined rights of shareholders
  3. Internal control environment
  4. Structured Board practices
  5. Board commitment

What are the four ‘P’s (Philosophies) of corporate governance?

The four Ps are People, Purpose, Process, and Performance.

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