Read this article to understand the history, significance, code, and importance of corporate governance…
Importance / Significance of Corporate Governance
Why good corporate governance is important?
Corporate governance is significant for the following reasons:
1. It frames the future and growth of capital markets of the economy.
2. Good corporate governance strengthens the structures through which objectives of the corporations are fixed, means of achieving such objectives are performance is monitored.
3. It develops the international image of the business sector and enables local companies to raise global capital.
4. It helps to raise funds from the capital markets. Good governance practices contribute to investors morals in business corporations to attract long-term capital.
5. It links the organization’s management with its financial reporting system.
6. It supports shareholders by making corporate accounting practices transparent. Business corporations disclose financial reporting formats.
7. It provides accurate and timely disclosure reporting requirements, information, code of conduct, etc.
8. It develops efficiency and effectiveness of the business organization and adds to the wealth of the economy. It is an instrumental type of economic growth.
9. It suggests the management take innovative decisions for productive functioning of the company within the legal framework of accountability.
Code of Corporate Governance
The code of corporate governance can be divided into two categories:
- SEBI Code on Corporate Governance
- CII Code on Corporate Governance
1. SEBI Code on Corporate Governance:
SEBI had formed a committee on corporate governance under the guidance of Shri Kumar Mangalam Birla, Member, and SEBI board to raise and promote the standard of corporate governance of listed companies.
This official meeting was held on January 25, 2000, considered the recommendation of the official committee and decided to make the adaptations to the listing agreement in the execution of the decision of the board.
2. CII Code on Corporate Governance:
In 1996, CII took a great initiative in corporate governance-the first or primary institutional initiative in Indian industry. The purpose was to promote and develop a code for corporate governance to be followed and adopted by Indian companies, be those in the public sectors, private sectors, financial institutions, all of which are business entities.
This initiative by CII proceeds from public concerns regarding the protection of investors (especially the small investors).
History of Corporate Governance
Weakness in the accounting standards led to the failure of many business companies in the U.K. This brought to need some codes or norms, to remedy the improper accounting system. Important concerns were raised regarding business governance and the committee on corporate governance was set up in 1991 by the London Stock Exchange to look into financial facts of corporate governance.
The 1st official attempt to evolve a code of corporate governance for Indian companies was put forward by the Kumar Mangalam Report or (Birla Committee Report). The purpose of this committee was “improvement of the long-term shareholders’ value while at the same time protecting the interests of other stakeholders like shareholders, employees, employers, and other staff also.
The main recommendations of the report are as follows:
1. Financial Reporting and Accounting Standards:
The official committee recommended issuing of Accounting Standards by the Institute of Chartered Accountants of India (ICAI) regarding modifying of financial reporting and accounting standards system in India. Business companies are required to present,
(i) consolidated accounts for their subsidiaries, (ii) financial reporting for each of their product segments so that investors have a proper financial picture of the company in one or single statement.
2. Board of Directors:
The directors of the company control and guide the company’s operations and provide objective judgment, independent of the management, to the company. The board members always remain accountable for its actions to its shareholders.
The basic purpose of the board includes: develop the relations, strategic development of the company, manage its assets and fulfill legal requirements.
3. Remuneration Committee:
The report suggested setting up of a remuneration committee that will govern and account for the policy on remuneration of directors. Remuneration also contains pension rights and compensation paid to them.
4. Audit Committee:
Companies must have a separate committee for audit to make financial reporting. This committee shall have access to all finance related information and power to investigate any business activity within its terms of reference.
The objective of appointing an audit committee is to present and disclose sufficient credible, and correct financial information of the company to stakeholders.
Shareholders categorized into two parts like equity shareholders and preference shareholders. Equity shareholders are the real owners of the company and the Preference shareholders are part owners of the company. They have the right to receive timely information from the company, participate and vote into shareholders’ meeting, right to transfer, right to register their shares, and so on.
Generally, shareholders participate in official body meetings to confirm that it functions for their interests. In this condition, the committee suggested that companies’ quarterly results and various financial presentations may be put up on their official website for access by shareholders.
While the board of members confirms that corporate policies and strategies are laid according to the code of corporate governance, management of the organization ensures that strategies and policies are executed successfully for the achievement of corporate objectives.
The role or purpose of management should be clearly explained by the board of members of directors.
So, these are the history, significance, code, and importance of corporate governance. I think your concept would have been cleared…