It has been written by Sanskriti Koul, a third-year law student of Asian Law College, Noida

Introduction:

Corporate governance refers to the processes, systems, and principles by which all the companies are controlled and directed. Corporate governance has been a very famous concept throughout the decades, as famous companies are likely to attract better investment opportunities which will help them to expand, innovate, and generate profit and job opportunities. Corporate governance is a kind of framework of guidelines and norms with guide a company’s management, resolution, and practices. It is based on the relationship between company stakeholders, the board, management, etc. Effective corporate governance is very important to establish accountability, ethical behavior, and transparency in an organization. Corporate governance covers both the social and institutional aspects of a business. Simply put, it is the system by which organizations are directed and managed. Corporate governance influences how the objectives of a business are set and achieved, how risks are monitored and assessed, and how internal performance is optimized.[1] This article talks about the importance, benefits, and implementation of corporate governance along with regulatory framework.

Importance of corporate governance:

· Enhancing accountability and transparency- One of the main objectives of corporate governance is to establish transparency and accountability. Good governance regulation ensures that the management is responsible for their decisions and actions. Accountability is very necessary to build trust between stakeholders, employees, shareholders, and customers. Transparency introduces stakeholders to accurate and clear data about the company’s financial performance, strategic direction, and operations. By establishing an open environment, companies can decrease the risk of misconduct and fraud.

· Protecting stakeholder's interests- Corporate governance plays a vital role in protecting the interest of stakeholders. Shareholders are mainly concerned with their profit returns on investment, whereas employees prioritize career development and security. Customers expect quality services and products. A well-structured governance framework helps to balance all the diverse interests by ensuring that decisions are established in a way that considers the impact on stakeholders.

· Risk management- Effective corporate governance is very important for the identification of risks. Risk management is important in corporate governance because it protects the organization from losses. When good corporate governance is in place, corporations can proactively identify and mitigate risk, reducing their risk exposure and ultimately limiting reputational and financial damage. Reducing risk should be at the heart of all governance practices.[2]

· Improving financial performance- Financial performance is an important part of organizations because it helps to assess success and achieve goals. Good financial performance allows the company to compete effectively with other companies and to evaluate its operational activities. Financial performance appraisal provides valuable information for making management decisions regarding the efficiency of company activities and the effective use of equity. It also helps in understanding the overall financial position of the company and predicting its future performance. Good financial performance supports the company’s objectives and enhances its ability to attract investments and obtain loans.[3]

Benefits of corporate governance:

· Mitigation of risk- Corporate governance helps to mitigate risk by the implementation of procedures and policies. Corporate governance also assures that the organization is protecting the interests of shareholders and other parties by minimizing risk. There are various types of risks which is possible to mitigate through corporate governance like operational efficiency, financial performance, and financial health.

· Boosts corporate reputation- Corporate reputation is also affected by corporate governance. Improving an organization’s corporate governance also improves transparency in the company’s internal politics and demonstrates that the company has sufficient control mechanisms to manage quality, risk, and performance successfully, even in difficult market conditions. This improves the organization’s reputation within the industry and increases brand value.[4]

· Improves decision-making- Strong corporate governance impacts decision-making by defining accurate roles and responsibilities. Companies with good corporate governance permit managers and executives to ensure that decision-making is responsive and efficient. Good corporate governance develops access to information and introduces clear communication among stakeholders at every level of the company.

· Greater ability to attract and retain talent- A significant focus has been placed on culture being a key contributing factor to the success of a company. Maintaining transparency surrounding fairness, accountability, and operations, gives employees a greater sense of responsibility and awareness as to where they are positioned to create value within an organization.[5]

· Boosts compliance- Corporate governance requires organizations to comply with regulations and laws, which affects the risk management profile of the company positively. A suitable framework of corporate governance has a control mechanism that permits organizations to operate efficiently and meet their objectives.

Implementation of corporate governance:

1. Clear governance framework- The organization should establish a clear and proper framework of governance that outlines the roles and responsibilities of stakeholders, board members, and other management. A clear corporate governance framework should include:

ü Clear definition of the organization’s values and mission.

ü Outline of the organizational structure.

ü A proper description of the roles and responsibilities of management, stakeholders, and other members.

ü A clear description of decision-making processes.

2. Establish a code of conduct- The company should establish a code of conduct that highlights the expected behavior of employees, directors, officers, and other members. The code of conduct should include a description of values and principles, consequences of non-compliance with the code, etc.

3. Formation of an audit committee- Companies should form an audit committee to keep an eye on auditing processes and financial reporting. This committee should:

ü Review the financial audit reports and statements of the company.

ü Composed of directors with financial expertise.

4. Implementation of internal controls and risk management- Companies should implement a proper framework for risk management and for effective internet control to oversee the reliability and accuracy of financial reporting.

5. Engage with shareholders- Organizations should engage with shareholders and give them regular updates on the performance of the company. Encourage the participation and feedback of shareholders along with regular meetings.

6. Development and training- The organization should provide proper development and training facilities to the directors and other members to make sure that they have all the important knowledge and skills to do their roles. The company should provide training on financial reporting, auditing, risk management, and corporate governance and should also focus on professional development.

7. Evaluate and monitor- Companies should evaluate and monitor the governance practices to identify areas of improvement and to make sure that they are effective. Companies should focus on regular reviews of governance practices. They should also monitor the areas of improvement.

By the above-mentioned points, organizations can implement productive corporate governance practices that encourage accountability, better decision-making, and transparency, and lead towards better financial performance.

Regulatory framework of corporate governance in India:

The regulatory framework of corporate governance is a set of guidelines and rules that ensures that companies are operating in a transparent and fuel manner. The regulatory framework is designed to safeguard the interests of employees, investors, customers, stakeholders, etc. The main governing bodies which help to save the regulatory framework are:-

1. The Companies Act of 2013

2. Securities and Exchange Board of India (SEBI) Guideline

3. Accounting Standards by the Institute of Chartered Accountants of India (ICAI)

4. Standard Listing Agreement of Stock Exchanges

5. Companies (Indian Accounting Standards) Rules of 2015

6. Companies (Indian Accounting Standards) (Amendment) Rules of 2016

7. Companies (Indian Accounting Standards) Rules of 2018

The Satyam Scam Case:

The Satyam scam is one of the biggest accounting scams in India which was done by the company named Satyam Computers. Satyam scam was a huge corporate fraud committed in 2009 by Ramalinga Raju, the founder and chairman of Satyam Computer Services. He admitted to exaggerating sales, earnings, cash balances, and personnel numbers in the company’s books. He also acknowledged siphoning off money from the firm for his personal use. The Satyam fraud was considered worth Rs. 7800 crores and was formerly regarded as India’s largest business scandal.[6] This scam highlighted the lack of corporate governance, ethical behavior, auditing standards, and regulatory monitoring. After this scandal, various changes were introduced to enhance the accountability and transparency of corporate governance like the introduction of the Companies Act 2013 and making SEBI the regulator of listed companies.

Conclusion:

Corporate governance isn’t just a structure, it contains various obligations, rights, and duties which direct and control a company. Corporate governance maintains and develops accountability, and financial performance, ensures compliance with laws, and builds a positive corporate culture. The implementation of a sturdy governance framework which includes clear roles, open communication channels, commitment towards improvement, a strong board, etc. can position a company toward success. Good governance is not only about following regulations, it's about adopting a culture that drives sustainable growth along with the creation of value. Organizations must stay updated with the best practices and adapt to changing stakeholder expectations and regulatory requirements. Good corporate governance is very important for the long-term success of a company.

REFERENCES:

[1] SpriggHR, The Importance of Corporate Governance, (2020) SpriggHR < https://sprigghr.com/blog/board-management/the-importance-of-corporate-governance > accessed 10 August 2024

[2] The Diligent Team, The relationship between risk management and corporate governance (2023) Diligent < https://www.diligent.com/resources/blog/relationship-between-risk-management-and-corporate-governance > accessed 10 August 2024

[3] Scispace, Why financial performance is important? (2022) < https://typeset.io/questions/why-financial-performance-is-important-4wouptdrej > accessed 10 August 2024

[4] Indeed, 12 benefits of corporate governance and their impacts (2024) Indeed < https://uk.indeed.com/career-advice/career-development/benefits-of-corporate-governance > accessed 10 August 2024

[5] Cura, The Benefits of Good Corporate Governance (2020) CURA < https://curasoftware.com/the-benefits-2/ > accessed 10 August 2024

[6] Tanushree Jaiswal, Satyam Scam (2023) 5paisa < https://www.5paisa.com/blog/satyam-scam > accessed 10 August 2024