corporate governance thesis india

Corporate Governance in India

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• Pradip K. Bhaumik  

Not long ago the phrase corporate governance did not mean much to anyone beyond a handful of academic scholars and perhaps some shareholders. However, corporate governance has now become a mainstream concern of corporate leaders, global investors, regulators, policymakers and legislators, practically all over the world. Interest in corporate governance was heightened by two unrelated events that occurred in quick succession around the end of the 20th century.

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Bhaumik, P.K. (2015). Corporate Governance in India. In: Banik, A., Das Gupta, A., Bhaumik, P.K. (eds) Corporate Governance, Responsibility and Sustainability. Palgrave Macmillan, London. https://doi.org/10.1057/9781137361851_3

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Implications of corporate governance on financial performance: an analytical review of governance and social reporting reforms in India

• Puneeta Goel   ORCID: orcid.org/0000-0002-0563-7671 1  

Asian Journal of Sustainability and Social Responsibility volume  3 , Article number:  4 ( 2018 ) Cite this article

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Currently the corporate governance reforms in India are at cross roads where though the intention behind the reforms is good yet there is a need to look for a complete solution addressing country specific challenges in Indian context. Keeping pace with developments at international level, India also introduced reforms for improving corporate, social and environment disclosures. This paper explores the effectiveness of these corporate governance reforms by analyzing the corporate governance practices followed by Indian companies in two reform periods (FY 2012–13 as Period 1) and (FY 2015–16 as Period 2). Considering mandatory regulations as per clause 49 of Listing agreement with Securities exchange board of India and the governance norms in the new Company Act, 2013, a corporate governance performance (CGP) index is developed to measure corporate governance score of Indian companies. Though there is a significant improvement in corporate governance structures implied by Indian companies but the number of independent directors inducted in the board decreases after the reforms in period 2. All the sectors under study show a significant improvement in following corporate governance practices after the reforms. The study reported a significant relationship between integrated framework of total corporate social performance and financial performance only in period 1. Corporate governance reforms do not impact financial linkages in Indian market in period 2.

Introduction

The economic success of an organization is not only dependent on efficiency, innovation and quality management but also on compliance of corporate governance principles. Implementation of corporate governance standards improves financial performance of the company as well as positively impacts internal efficiency of the firms (Tadesse, 2004 ) in developed economies. However, lack of transparency and poor disclosure practices reduce effectiveness of corporate governance mechanism. Though, global financial crisis and major corporate scandals have reinforced the merit of good corporate governance structures in enhancing firms’ performance and sustainability in the long run (Ehikioya, 2009 ).

Corporate governance aims at facilitating effective monitoring and efficient control of business. Its essence lies in fairness and transparency in operations and enhanced disclosures for protecting interest of different stakeholders (Arora and Bodhanwala, 2018 ). Corporate governance structures are expected to help the firm perform better through quality decision making (Shivani et al. 2017 ). A wider definition given by Maier ( 2005 ) states that “Corporate governance defines a set of relationships between a company’s management, its board, its shareholders and its stakeholders.” Good corporate governance “ensures that corporations take into account the interests of a wide range of constituencies, as well as of the communities within which they operate, and that their boards are accountable to the company and the shareholders” (Organization for Economic Cooperation and Developement, 1999). Corporate governance was originally developed to protect shareholder’s interest but gradually it has gained importance for other stakeholders and society (Jizi, Salama, Dixon, Startling, 2014 ).

Corporate governance identifies the role of directors and auditors towards shareholders and other stakeholders. Corporate governance is significant for shareholders as it increases confidence in the company for better return on investment. For other stakeholders like employees, customers, suppliers, community and environment, corporate governance assures that company behave in a responsible manner towards society and environment (Kolk and Pinkse, 2010 ). Thus, corporate governance is not only about board accountability but also include aspects of social and environment responsibility.

Earlier good governance was not a mandated legal requirement and adherence was voluntary, but owing to corporate failures on account of unethical practices at top level management, most of the countries have initiated mandatory norms and guidelines to strengthen corporate governance framework. The Cadbury Committee report in United Kingdom (UK) in 1992 and Sarbanes Oxley (SOX) Act in United States (US) in 2002 are considered a seminal development in corporate governance regulations followed by similar codes of good governance in rest of the countries. The governance codes become a source of normative institutional pressure for convergence within a country (Yoshikawa and Rasheed, 2009 ).

Corporate governance reforms are more significant for developing economies as they make the corporate structures more effective, help in competing with multi-national corporations and increase investors confidence (Reed, 2002 ). Keeping pace with the global developments, India has witnessed a series of such reforms in corporate governance. One such reform is introduction of clause 49 of listing agreement by Security Exchange Board of India (SEBI), apex regulatory authority of stock market in India. This clause outlines corporate governance structures for listed companies in India. It has led to significant implications on independent directors on board, enhanced disclosure requirements, making audit committees more powerful etc. Further, corporate governance initiatives are strengthened with the introduction of revised Company Act, 2013.

Though, corporate governance norms and other disclosure guidelines have been introduced in India but owing to weak implementation, the extent of compliance by the Indian companies is still questionable. Countries with weak legal norms have suffered higher depletion in exchange rates and stock market decline (Johnson, Boone, Breach and Friedman, 2000 ). Dharmapala and Khanna ( 2013 ) emphasize on the importance of enforcement of legal reforms in developing economies which are marred by weak systems, corruption and bureaucratic influence on policy implementation. Most of the previous studies highlight the impact of corporate governance on financial performance but surprisingly there is dearth of literature on impact of corporate governance reforms on corporate disclosures and reporting. This backdrop gives an interesting case to study the impact of reforms and amendments on improvement corporate governance disclosures in Indian companies.

Moreover, previous literature has focused on corporate governance in a particular sector like Information and Technology (IT) sector (Rajharia and Sharma, 2014a ; Rajharia and Sharma, 2014b ), Manufacturing sector (Saravanan, 2012 ), Textile sector (Ashraf, Bashir and Asghar, 2017), Banking and Financial Services (Arif and Syed, 2015 ) but the comparison of different sectors (Palanippan and Rao, 2015 ) is very limited. This study investigates the nature and type of corporate governance activities followed by top Indian companies in different sectors.

Extant research in this domain establish association between corporate governance and stock market performance (Klapper and Love, 2004 ; Cheung, Stouraitis and Tan, 2010 ; Abatecola, Caputo, Mari and Poggesi, 2012 ; Beiner, Drobetz, Schmid and Zimmermann, 2006 ; Brammer, Brooks and Pavelin, 2009 ; Brown and Caylor, 2006 ; Bauer, Guenster and Otten, 2004 ). However, very few studies have focused on the impact of corporate governance reforms and its linkage with financial performance. This paper investigates the plausible connection between corporate governance after reforms and firm valuations for India during two different periods of reforms on select sectors.

The paper has been organized in six sections. Background of the study is discussed in section one. Section two outlines recent developments in corporate governance norms in India. Section three reviews existing literature across economies, while section four discusses the methodology adopted. Statistical analysis of the impact of India’s corporate governance reforms on firm performance is reported in section five followed by discussion, conclusion and policy implications in the last section.

Recent developments in corporate governance norms in India

Corporate governance reforms have significant importance for India which is moving towards a more transparent and accountable system of economic governance (Sanan and Yadav, 2011 ). The fiscal crisis in 1991 led to liberalization and privatization of Indian economy. The Indian companies required finance for growth and expansion. The need of foreign investment gave rise to the need of corporate governance reforms in India. Since then, good governance in capital market has always been on high priority for SEBI. This is evident from frequent updation of guidelines, rules and regulations by SEBI for ensuring transparency and accountability (Sehgal and Mulraj, 2008 ). Clause 49 was adopted by SEBI in 1999 from the code of governance developed by Confederation of Indian Industry (CII), an independent organization working with government on policy issues. It has been revised time to time to ensure better compliance.

India introduced reforms for improving corporate, social and environment disclosures. Ministry of Corporate Affairs, Government of India published ‘National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business’ in 2011 (Ministry of Corporate Afairs, 2011 ). The guidelines make it mandatory for the listed companies to file Business Responsibility Report (BRR) to enhance the quality of disclosures (SEBI Circular, 2012 ). The enactment of the companies Act 2013 replaces the Companies Act, 1956 and aims to improve corporate governance standards to simplify regulations and enhance the interests of minority shareholders (Prasanna, 2013 ). India is among the first country to implement mandatory Corporate Social Responsibility (CSR) spending and this Indian model will set precedence for other countries in the world, for strategic implementation of corporate governance policies.

As per the latest revision in 2014, clause 49 includes protection of shareholders rights, proper and timely disclosures, Chief Financial Officer (CFO) certification of financial statements, equitable treatment of shareholders, enhance responsibility of board and norms for preventing insider trading. To sum up, corporate governance in India is mainly concerned with improving accountability and transparency, disciplining dominant shareholders, protecting the interest of minority shareholders. This is in contrast to US and UK which concentrates on making management more accountable to dispersed shareholders (Pande and Kaushik, 2012 ).

Review of literature and hypothesis development

Impact of corporate governance reforms on disclosures.

In general, almost all countries have issued general guidelines for governance, social and environmental reporting, but it would result only as a tick-in-the-box activity unless it is checked to what extent the corporate world is responding and reporting as per the new reforms. Many researchers have studied the impact of the recent reforms for improving governance, social and environment disclosures in different economies. In Portugal, Monteiro and Guzman ( 2010 ) explore that the extent of disclosures have improved as compared to the pre reform period but the amount of disclosures is still low even after the introduction of new reforms. Ioannou and Serafeim ( 2017 ) study the implications of disclosure reforms in China, Denmark, Malaysia and South Africa and suggest that improvement in sustainability disclosures due to introduction of reforms is associated with increase in firm value. Kolk ( 2008 ) asserts that after the reforms in disclosure regulations, many countries in Europe and in Japan have started paying attention to board supervision, ethics compliance and external verifications. Chen, Hung and Wang ( 2018 ) affirm decrease in industrial waste and Sulfur Dioxide (SO2) emissions after the declaration of disclosure mandate in China but the firms adopting CSR reporting experience decrease in profitability.

India initiated reforms concerning corporate governance, corporate social responsibility and environment to improve disclosures by Indian companies. Implementing corporate reforms, however, is significantly difficult than framing those reforms. There are many challenges in successful implementation and effective enforcement of reforms such as local inhibitions and comprehensive rules (Afsharipour, 2009 ), lack of availability of qualified independent directors (Malik and Nehra, 2014 ), underdeveloped external monitoring systems and weak and multiple regulatory norms (Rajharia and Sharma, 2014a ; Rajharia and Sharma, 2014b ). This gives the need to explore the actual impact of reforms on corporate governance and disclosures by Indian companies.

There is an interesting observation about these disclosure regulations that it contains a clause of “comply or explain”. It means that either the companies should comply by the norms or explain the reasons for not following the mandatory requirements. Moreover, there is no penalty for non-compliance as well. It gives an option to the companies either to follow the regulations or safely escape by giving some explanation. There may be some companies which were following the best practices in corporate governance even before these reforms were introduced. But, there may be others, which have started doing the same after these reforms. This argument justifies that there is no obvious reason to believe that reforms would result into better compliance and reporting. Therefore, it becomes important to explore the practical implications of these reforms for Indian companies and for policy makers.

Corporate governance reforms draw increased strategic attention in India. These structural changes and disclosure reforms make an interesting case to investigate their implications on Indian companies. Accordingly, this research studies the corporate governance by Indian companies after the introduction of the above stated recent reforms. No previous research has investigated the impact of these reforms considering two different periods of reforms.

Thus, the first hypothesis of the study is:

HO1: There is no significant improvement in corporate governance performance of Indian companies after the introduction of reforms.

Impact of corporate governance reforms on different sectors

Many researchers have studied the impact of corporate governance in different sectors of the economy. There is a significant impact of corporate governance on firm performance in textile sector (Ashraf et al. 2017 ) and in Banking and Financial services sector (Arif and Syed, 2015 ) in Pakistan. While comparing different sectors, Banking, Insurance and Service sector companies listed in Amman stock exchange perform better after the introduction of corporate governance reforms in Jordan (Mansur and Tangl, 2018 ). Jizi et al. ( 2014 ) find board independence and board size significantly related to improved CSR disclosures for banking sector in US. Okoye, Evbuomwan, Achugamonu and Araghan ( 2016 ) report a significant impact of corporate governance on banking sector in Nigeria. Palaniappan and Rao ( 2015 ) report significant impact of corporate governance disclosures on firm performance for manufacturing companies taking only one company from ten different sectors in India.

Many studies have been conducted testing the impact of corporate governance on firm performance taking a set of listed companies in varied stock exchanges across different economies. Gompers, Ishi and Metrick ( 2003 ) report better governed firms listed in New York Stock Exchange (NYSE) show higher market valuation and low expenditure. Bauer et al. ( 2004 ) reveal the same results for companies in Financial Times Stock Exchange (FTSE), Eurotop 300 index giving higher stock returns and enhanced firm valuation for the better governed companies. Studies on US listed firms also highlight positive relationship between corporate governance rankings and Tobin Q (Klapper and Love, 2004 ; Durnev and Kim, 2005 ). Similar findings are also reported in studies conducted on Italian (Abatecola et al., 2012 ) and Swiss (Beiner et al., 2006 ) firms which confirm that corporate governance has a significant statistical relationship with corporate performance variables like Return on Capital (ROC), Return on Assets (ROA).

An interesting observation from these studies is that most of the research has been done on a whole set of listed companies in a stock exchange or a set of listed companies in a particular sector but very few studies have done comparison of corporate governance in different sectors. Corporate governance reforms along with liberalization and privatization has led to substantial development and strategic changes in different sectors of the economy (Reed, 2002 ). This study investigates the nature and type of corporate governance activities, followed by top 100 listed Indian companies of different sectors, after the introduction of recent corporate governance reforms in India and tests the sector differences for two periods of reforms.

The second hypothesis of the study is:

HO2: There is no significant difference in corporate governance in different sectors in India.

Corporate governance reforms and firm performance

In general, corporate governance is considered to be a significant variable influencing growth prospects of an economy because best governance practices reduce risk for investors, improves financial performance and helps in attracting investors (Spanos, 2005 ). Monda and Giorgino ( 2013 ) document better corporate governance results in higher market valuation and ROA for companies listed in France, Italy, Japan, UK and US. Cheung et al. ( 2010 ) confirm that firms which have adopted corporate governance reforms appear to have better risk return trade off for investors in Hong-Kong stock market. Bae and Goyal ( 2010 ) find that good corporate governance practice adopted by Korean firms have resulted in improved equity market performance and increased foreign ownership in companies. Yang, Yan & Yang ( 2012 ) state that improved corporate governance disclosures by US firms help in reducing cost of equity. Botosan ( 2006 ) also substantiated in an extensive literature review that proper disclosure of financial reporting and corporate governance practices help in reducing the cost of equity capital. There have been a few studies which contradict the above mentioned findings. For instance, Bhagat & Bolton ( 2008 ) find corporate governance measures not correlated to future stock market performance for NYSE listed firms while Roodposhti and Chashmi ( 2010 ) report a negative correlation between ownership and independent board and earnings of the companies in Iran.

Similarly Indian companies are publicizing their efforts through corporate governance disclosures to attract the investors which have also led to enhancement in market valuation (Dua and Dua, 2015 ). Improvement in corporate governance has lead to significant increase in investment by foreign investors and profitability of Indian companies (Patibandla, 2006 ). Firms adopting corporate governance reforms appear to have better risk return trade off for investors (Prasanna, 2013 ; Mohanty, 2003 ). Examining the relationship between corporate governance and firm performance for firms listed in National Stock Exchange of India (Nifty 500), Shivani, Jain and Yadav ( 2017 ) find that while larger boards, committees of the board are negatively related to ROA and Return on Equity (ROE), presence of non-executive directors and whistle blower policy have positive impact.

In contrast to the above findings, Sarpal & Singh ( 2013 ) reports no significant relationship between board and corporate performance. Kumar ( 2004 ) specifies no significant relation between foreign shareholding and financial performance of Indian companies. Tata and Sharma ( 2012 ) find that corporate Governance practices such as board structure, ownership and other such disclosure have no significant relationship with corporate performance. Misra and Vishnani ( 2012 ) are of the view that reforms and change in corporate governance have no significant impact on the market risk of the companies listed in Group – A of Bombay Stock Exchange (BSE). The review of literature gives mixed results for Indian companies. Hence, this needs to be further scrutinized to draw any concrete conclusions.

Indian investors responded positively to clause 49 reforms initiated in 1999 and the large firms gained 4.5% on an average for three days from the date of announcement of the reforms in contract to negative reaction by investors towards SOX in developed countries (Black and Khanna, 2007 ). Other recent studies extend immediate positive effect into tangible long-term outcomes. Kohli and Saha ( 2008 ) report positive and significant relationship between corporate governance reforms and firms’ performance. The increase in scope of clause 49 improves debt- equity structures of Indian companies (Goel and McIver, 2015 ). Dharmapala and Khanna ( 2013 ) put a strong case for causal effect of changes in clause 49 on firm value and underscore the significance of enforcement of regulatory norms. Clause 49 has improved stock market sentiments which result in more reliance on equity capital and less dependability on bank loans (Saher, Pal and Pinheiro, 2015 ).

Since a very limited literature is available to study the impact of reforms on corporate governance and firm performance, it will be interesting to evaluate the impact of changes in governance, social and environment disclosure norms on financial performance after the introduction of the recent reforms. Thus, this study explores the linkage between corporate governance and financial performance of the companies in two different periods of reforms in India.

HO3: There is no significant impact of corporate governance reforms on financial performance of Indian companies in both the periods under study.

Methodology

For this study, the researcher constructs a firm specific corporate governance performance index for Indian companies based on recent reforms introduced in the country. This paper takes into consideration two periods P1 (2012–13) and P2 (2015–16) representing two different stages of corporate governance reforms in India. The study develops an integrated empirical framework to measure the valuation effects of corporate governance mechanism.

Sample and data collection

The sample for the study is drawn from the top 100 companies ranked on the basis of revenue in the list of The Economic Times 500 (ET500), 2016. From the selected companies, 28 companies of Banking and financial services sector have been excluded from the purview of this paper as disclosure and profitability norms are different for this sector in India. Further, 4 companies are also excluded from the study as data for the period under study was not available. The finally selected companies have been categorized under six major sectors. Table  1 shows the sector-wise composition of the companies under study.

Published Annual Reports, Business Responsibility Reports and Sustainability Reports of the selected companies are taken as the primary source of data. These reports are collected/ downloaded from the website of the respective companies. The reports have been reviewed thoroughly to do the content analysis for the selected dimensions under study (Quick, 2008 ; Sandhu and Kapoor, 2010 ; Gautam and Singh, 2010 ). All the information available in the reports on a particular dimension has been collated to give the final score for each aspect. All the reports were reviewed at least twice so that no item is missed while collecting the requisite information to ensure accuracy and trustworthiness of the data. Instead of using binary score of 0 and 1, this study gives credit to the type of reporting, the amount of information disclosed, number of good governance practices adopted by any company (Cheung et al., 2010 ). Scoring for different dimensions is in a range of zero to three. Financial data used in this study is mainly acquired from published data available in the Centre for Monitoring Indian Economy (CMIE) Prowess database.

Measuring corporate governance

Most of the previous studies have used only a specific aspect of corporate governance to study its implications of financial performance such as board size (Black, 2002 ), independent directors (Kaur and Mishra, 2010 ; Annalisa, P. & Yosef, 2011 ), board meetings (Misra and Vishnani, 2012 ; Subramanian and Reddy, 2012 ) and code of ethics (Liao, 2010 ; Mittal, Sinha and Singh, 2008 . This study uses a comprehensive corporate governance performance index for measuring corporate governance of Indian companies based on recent developments in corporate governance norms in India. This index is based on changes in clause 49, Company Act, 2013 and other mandatory guidelines issued by Ministry of Corporate Affairs of India. Some of the dimensions of mandatory disclosures are excluded from the study such as appointing audit committee, CFO certification of financial statements, certificate of compliance by board of directors The exclusion has been done as the pilot study done on one sector revealed that the score is same in both the periods for all the companies. Since corporate governance is based on stakeholder approach (Freeman and Evan, 1990 ), different stakeholders are taken as individual responsibility centers for measuring cumulative corporate governance performance to meet corporate business objectives (Barter, 2011 ; Clarkson, 1995 ). The responsibility towards different stakeholders included in the study are shareholders (SHR), employees (EMR), suppliers and consumers (SCR), community (CMR) and environment (ENR). Table  2 elaborates the final instrument used to measure Corporate Governance Performance (CGP) index. Cronbach’s alpha test of reliability of data revealed a score of 0.840.

Using paired sample t-test corporate governance performance of each parameter in Period 1 is paired with the same in Period 2 to check the significant difference for each dimension for the two periods under study. Further, sector comparison has been done by calculating the percentage score of each sector for every stakeholder using the formula:

One way Analysis of Variance (ANOVA) is applied to study the significant difference in performance of different sectors under study.

Measuring financial performance

Most of the scholars have used any one of the three approaches of measuring corporate financial performance i.e. Accounting Ratios (Griffin and Mahon, 1997 ; Bayoud, Kavanagh and Slaughter, 2012 ) or Market Valuation Ratios (Kiel and Nicholson, 2003 ; Arnold, Bassen and Frank, 2012 ) or Accounting and Market based mixed ratios (Mulyadi and Anwar, 2012 ). To correlate corporate governance performance with financial performance, we consider the third approach and take Tobin Q (Klapper and Love, 2004 ), Market Capitalization (Suttipun, 2012 ) and Price Earning (PE) (Siew, Balatbat and Carmichael, 2013 ; Tyagi, 2014 ) as market valuation ratios and ROS (Venanzi, 2012 ), ROE (Griffin and Mahon, 1997 ; Aggarwal, 2013 ) and ROA (Aupperle, Carroll and Hatfield, 1985 ; Tyagi, 2014 ) as accounting ratios.

Regression model

Regression model has been developed to examine the relationship of overall CGP score of company (independent variable – CGP taken as summation of corporate responsibility towards five different stakeholders- Shareholders, Employees, Suppliers and Customers, Community and Environment) with the financial performance of the company (dependent variables –ROS, ROA, ROE, Tobin Q, Market Cap and PE).

Control variables

Size of the company is an important control variable as Burke, Logsdon, Mitchell, Reiner and Vogel ( 1986 ) suggest that larger firms more often adopt social and governance principles and thus attract attention from stakeholders. Previous researchers have also considered risk as a factor that effects corporate social and financial performance. Thus, this relationship is studied by using size of the company as control variable calculated by natural log of total assets (Abatecola et al., 2012 ) and natural log of sales (Tsoutsoura, 2004 ) as its proxy. Additionally, beta is considered as another control variable for market risk element affecting corporate financial performance.

Six regression equations that shall be tested in this model are:

ROS =  β 0 + \( {\sum}_{k=1}^5\boldsymbol{\beta} \) k C GP + β 6 LnAssets + β 7 LnSales + β 8 beta + Ɛ

ROA =  β 0 + \( {\sum}_{k=1}^5\boldsymbol{\beta} \) k C GP + β 6 LnAssets + β 7 LnSales + β 8 beta + Ɛ

ROE =  β 0 + \( {\sum}_{k=1}^5\boldsymbol{\beta} \) k C GP + β 6 LnAssets + β 7 LnSales + β 8 beta + Ɛ

Tobin Q =  β 0 + \( {\sum}_{k=1}^5\boldsymbol{\beta} \) k CGP + β 6 LnAssets + β 7 LnSales + β 8 beta + Ɛ

Market Cap =  β 0 + \( {\sum}_{k=1}^5\boldsymbol{\beta} \) k CGP + β 6 LnAssets + β 7 LnSales + β 8 beta + Ɛ

PE =  β 0 + \( {\sum}_{k=1}^5\boldsymbol{\beta} \) k C GP + β 6 LnAssets + β 7 LnSales + β 8 beta + Ɛ

Data analysis

Impact of recent reforms on corporate governance in indian companies.

Table  3 clearly depicts the improvement in mean score of each stakeholder. The introduction of governance reforms in India results in substantial increase in mean score of total corporate governance performance in P2. Further, to test the significant difference in CGP for two periods paired t-test is applied.

Table  4 depicts a significant difference in performance of each parameter in two periods as the significant p value in all cases is less than 0.05 except for SHR2 i.e. having independent directors on board (p value: 0.254) and for ENR 3 i.e. achieving awards and achievements (p value: 0.321). Pair 17 represents cumulative CGP score and the p value of 0.000 shows a significant difference in overall corporate governance score of Indian companies during P1 and P2. Thus HO1 is rejected.

Sector differences in corporate governance performance

Analysis of Table  5 shows total percentage score of each sector towards each stakeholder. Over all there is improvement in CGP towards different stakeholders in each sector under study but it needs further statistical testing.

Table  6 shows the results of ANOVA to study the difference in corporate governance performance of different sectors. It gives an interesting observation that during P1, there is a significant difference between the sectors as the p value (0.006) is less than 0.05 but during P2, as the p value increases to 0.605, there is no significant difference between different sectors for their performance towards different stakeholders. Thus, HO2 is accepted for post reform period. It signifies when all sectors are making efforts to contribute towards different stakeholders, the sector differences reduce in post reform period. This is a positive impact of new corporate governance reforms on Indian companies.

Impact of corporate governance performance on financial performance

Table  7 presents the relationship between cumulative CGP score and six financial ratios using regression analysis. It is observed that CGP has positively and significantly influence on ROA, ROE and Tobin Q in P1 and only on PE in P2. Since the value of r 2 is low, only marginal variation in financial performance is explained by the model of corporate governance performance of Indian companies. The significant value of f stat helps to conclude that there is a significant relationship between corporate governance performance and different parameters of financial performance of Indian companies in P1. There is no significant impact of corporate governance on financial performance in P2. Thus, HO3 is rejected for P1 but accepted for P2.

Discussion, conclusion and policy implications

The study attempts to answer the following questions raised in the hypothesis:

Do reforms improve corporate governance in Indian companies?

All the companies under study have implemented good governance initiatives and recognized their responsibility towards different stakeholders. The introduction of corporate governance standards through clause 49 of listing agreement has helped in improving governance standards and internal efficiency of listed companies (Sharma and Singh, 2009 ; Goel & Mclver, 2015 ). Out of sixteen dimensions in corporate governance index, two dimensions did not show significant improvement. Indian companies need to pay attention on these dimensions namely, number of independent directors on board and achieving awards and recognitions during the year. The study finds that the number of independent directors as percentage of total directors has decreased over the period of time (Kaur and Misra, 2010 ). The reason may be attributed to shortage of qualified independent directors in India (Malik and Nehra, 2014 ; Rajharia and Sharma, 2014a , b ). Further, two positive changes identified in good governance practices, which are appointing women directors on board as required by new norms and instituting diverse board committees for protecting shareholders rights. These reforms aim at making the boards more powerful and focus on monitoring the management (Dharmapala and Khanna, 2013 ; Dua and Dua, 2015 ). Accordingly, it is observed that the number of meetings of board of directors has increased. Many companies have started conducted separate meetings of independent directors. This has increased the involvement of independent directors in different committees, which have made boards more responsible and accountable to stakeholders (Shivani et al. 2017 ; Khan, Muttakin and Siddiqui, 2013 ). It is observed that most of the companies are taking care of grievances of the employees and the customers. Yet, it is quite surprising that even some of the high revenue generating companies are not reporting the grievances as per the stipulated guidelines (Chatterjee, 2011 ).

As per the results of the study, though the spending on CSR initiatives has increased, yet Indian Companies are still trying to match the mandatory requirement of spending 2% of their profit on CSR initiatives (Sharma, 2013 ). Another interesting finding is that the score for social and environment initiatives is fairly high for all the companies, which suggests that Indian companies stress more on community welfare and environment protection in their social initiatives. This result is aligned with the previous studies done by Shanmugam & Mohamed ( 2011 ) and Kansal and Singh ( 2012 ). Kansal, Joshi, Babu and Sharma ( 2018 ) suggest that regulators should highlight specific disclosure norms for corporate social responsibility rather than giving only general mandatory guidelines. Many companies are working under public private partnership and with Non Government Organization (NGOs) to take up social and environment issues. However, reporting on pollution and carbon emission is very low for Indian companies (Kansal et al. 2018 ). It has been observed that frequency of publishing sustainability reports has improved over the period (Cyriac, 2013 ). Further, very few Indian companies are applying for internal quality, sustainability and environment protection awards as the procedure is cumbersome.

How do different sectors perform after governance reforms?

Oil, Power and Refinery sector showed consistent responsibility towards all stakeholders during P1. This sector is dominated by public sector enterprises, which warrants them to be more adherent to the mandatory norms. IT and Communication sector, with mostly private players, also performed reasonably well in P1. Most of the Indian companies in IT sector have multinational operations with business processes outsourcing model. Hence, it becomes imperative for them to follow international norms of corporate governance, sustainability and social responsibility (Narayanaswamy, Raghunandan and Rama, 2012 ). Thus this comprehensive reporting helps the companies in winning the international contracts and increase revenues. However, Palaniappan and Rao ( 2015 ) suggest IT companies have a long way to go to improve their corporate governance performance.

During P2, all the sectors showed significant improvement in corporate governance score. Specifically, Pharmaceutical and Chemical sector registered a substantial increase and are at the top of the table in the cumulative score. Transport and Auto sector is at the bottom of the list in both the time periods. Though, this sector shows a significant improvement in responsibility towards shareholders and employees yet it needs to take care of environment requirements and initiate more steps for welfare of the society. Further, Metal, Engineering and Infrastructure sector has the highest score for responsibility towards suppliers and consumers in both the periods under study but they need to stress on CSR reporting (Shamim, Kumar, Soni, 2014 ). For diversified sector, marginal improvement in the cumulative corporate governance score is recorded.

Another significant finding of the study is that in every sector the score of top four to five companies is relatively higher than the rest of the companies. This anomaly sometimes neutralizes the high score of top companies in a particular sector. To sum up, after the introduction of mandatory and non-mandatory norms for improving corporate governance, all the sectors have initiated different programs for stakeholders. This has reduced the difference in corporate governance score between the sectors in the post reform period. Similar findings were also reported by Bhasin ( 2012 ) and Bhardwaj and Rao ( 2014 ).

Do governance reforms impact financial linkage?

Total corporate governance score is a significant predictor of company’s market valuation and accounting performance. Positive direct association with Tobin q, ROA and ROE is captured in the period P1. Hence, the study concludes that better corporate governance performance leads to better financial performance in term of revenue and growth. Similar findings have been reported by earlier studies (Cortez and Cudia, 2011 ; Love and Klapper, 2002 ). In Japan, Bauer, Frijns, Otten, Rad ( 2008 ) find disclosures related to shareholders rights, remuneration and internal control, impact firm performance but disclosures related to board accountability do not affect stock prices. Studies conducted in Indian context also find a positive impact of corporate governance reforms on firm performance (Mohanty, 2003 ; Rajput et al., 2012 , Arora and Bodhanwala, 2018 ). Even in other developing economies like Pakistan, Ashraf et al. ( 2017 ); Arif and Syed ( 2015 ) find significant relationship between corporate governance and financial performance. However in Nigeria after the introduction or corporate governance norms, Sanda, Mikailu and Garba, ( 2005 ) report that presence of outside directors does not influence firm performance but the existence of expatriate Chief executive officers does. The regulatory authorities in Nigeria need to ensure strict compliance to improve the impact of reforms (Okoye et al., 2016 ). Mansur and Tangl ( 2018 ) find that after the introduction of governance code in Jordan, the presence of institutional investors in ownership structures help in improving firm performance in stock market.

However, an interesting finding for Indian companies is that after the introduction of the new governance reforms, the corporate governance performance improves but its impact on financial performance decreases. The study did not find any significant impact on market valuation ratios and accounting ratios in post reform period (Tripathi & Seth, 2014 ; Aggarwal, 2013 ). Hence, governance reforms actually do not impact financial linkages in Indian market during post reform period.

Conclusion and policy implications

This research concludes that Indian companies have made significant development in corporate governance after the introduction of recent reforms. Over all, it is observed that the main objective of the reforms has been achieved by making the board more responsible towards all stakeholders. The introduction of having at least one women director on board is a significant development for Indian companies. Regulators may further enhance women representation on board to improve gender parity at top management. Indian companies should appoint more number of independent directors as the role of independent directors becomes very significant for the successful implementation of these reforms. The target set for mandatory 2 % spending of net profits on CSR is still not achieved to full extent. Hopefully, in near future when the companies are able to identify the core areas of social responsibility, this Indian model can bring miracles for the development of the society. As a result, these philanthropic initiatives may yield better return on social investment. The mandatory publishing of business responsibility reports has improved disclosures for economic and social responsibility. Regulators should make disclosure of carbon foot prints mandatory to bring more awareness and responsibility towards environment. Initiating appropriate corporate governance rewards in different sectors would also encourage companies to follow the regulations and showcase their contribution towards society and environment.

All the sectors have endeavored to improve corporate governance performance as the investors have started recognizing good governance companies and this can also be used as a tool for attracting foreign investors. Government should try to address sector specific issues to raise the standards of performance. Although in light of these reforms, corporate governance has gained substantial ground in India, but this study does not find any significant impact of reforms on financial performance of the companies. As and when the corporate governance reforms are implemented in true spirit, the market sentiments would change and improve the relationship between corporate governance and firm performance in India similar to developed economies.

To cater to the problem of compliance and implementation of governance reforms in view of strong interference of bureaucracy and corruption in India, market regulators should be made more powerful and given a free hand to prosecute the companies involved in frauds. Also, high penalties should be imposed for non-adherence of mandatory requirements. Thus, the full implementation of governance reforms in India requires reforms to take place in larger context including political and legal systems. Moreover, the Indian companies need to understand the benefits of implementing good governance strategies and corresponding initiatives that help in improving financial performance as well.

This study has certain limitations. The annual reports have been reviewed multiple times to validate the reported aspects and achieve higher consistency while giving the rating score, still the subjectivity inherent in the rating scale remains a limitation. Additionally, financial data and corporate governance performance has been considered for two years and for top hundred companies only. Future study can extend this data for multiple years and investigate the relationship as a trend analysis for all ET500 companies. As the global investors are ready to pay premium to the companies who are investing in sustainable practices for stakeholders, even the domestic investors may also follow the same trend and attach more value to the well governed companies embracing corporate responsibility.

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Goel, P. Implications of corporate governance on financial performance: an analytical review of governance and social reporting reforms in India. AJSSR 3 , 4 (2018). https://doi.org/10.1186/s41180-018-0020-4

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Principles of Corporate Governance: The Indian Perspective

• Author(s): Journal of Legal Studies and Research
• Publication Date: September 26, 2019
• Tags: 2013 , business integrity , Clause 49 of the Listing Agreement , Corporate Governance , Kumar Mangalam Birla Committee , Naresh Chandra Committee , Section 118 of Companies Act , Securities and Exchange Board of India , South African King Report (1994) , United Kingdom Cadbury Report (1992)

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Written by Dr. Jayendra Kasture

Assistant Professor (Sr), Symbiosis Law School, Hyderabad

Corporate governance is a very complex and controversial area of the law. Corporate governance has increased in prominence over the decades. It has been an area of speedy development especially after big corporate collapses, comprehensive measures were required to ensure adherence to good practice in corporate governance. Corporate or Corporation is derived from Latin term “corpus” which implies a “body”. Governance implies directing the procedures and frameworks put for fulfilling partner desire.

The Principles are intended to help policymakers evaluate and improve the legal, regulatory, and institutional framework for corporate governance, with a view to support economic efficiency, sustainable growth and financial stability. A primary worry in the corporate governance deliberations is to balance the profit-making objective of corporations against broader social responsibilities owed to the wider community. Good governance is essentially about effective leadership. Such leadership is characterized by the ethical values of responsibility, accountability, fairness and transparency and based on moral duties. The present paper goes for scrutiny on the various principles of corporate governance as embodied in the Indian legal system.

Corporate governance is beyond the realm of law.  It stems from the culture and mindset of management, and cannot be regulated by legislation alone. Corporate governance is about ethical conduct in business. Ethics is concerned with the code of values and principles that enables a person to choose between right and wrong. Much more needs to be done to ensure the entrenchment of good governance standards, such as improving leadership.

INTRODUCTION

Corporate governance concerns the manner in which corporations are regulated and managed. Corporate governance has increased in prominence over the decades. It has been an area of speedy development especially after big corporate collapses, sweeping measures were required to ensure adherence to good practice in corporate governance. Corporate or Corporation is derived from Latin term ‘corpus’ which implies a ‘body’. Governance implies directing the procedures and frameworks put for fulfilling partner desire.

The purpose of corporate governance is to help build an environment of trust, transparency and accountability necessary for fostering long-term investment, financial stability and business integrity, thereby supporting stronger growth and more inclusive societies. The Principles are intended to help policymakers evaluate and improve the legal, regulatory, and institutional framework for corporate governance, with a view to support economic efficiency, sustainable growth and financial stability. [i]

A primary worry in the corporate governance deliberations is to balance the profit-making objective of corporations against broader social responsibilities owed to the wider community. The principles increase and constantly reinforce the trust placed in the company by present and future shareholders, creditors, customers & clients, employees, the public at large, the society, the community, the regulators and the suppliers. Through consistent implementation of these principles at all levels the Company’s place in the capital markets will also be strengthened. Corporate governance has increased in prominence over the decades. It has been an area of speedy development especially after big corporate collapses, sweeping measures were required to ensure adherence to good practice in corporate governance. Corporate, performance and conduct impacts on every individual – often in very profound and significant ways. Corporate governance is a very complex and controversial area of the law.

In an age where capital flows worldwide, just as quickly as information, a company that does not promote a culture of strong, independent oversight, risks its very stability and future health. As a result, the link between a company’s management, directors and its financial reporting system has never been more crucial. As the boards provide stewardship of companies, they play a significant role in their efficient functioning. [ii]

UNDERSTANDING CORPORATE GOVERNANCE

Corporate governance is as old as the corporate form itself. [iii] Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those goals, objectives and monitoring performance are determined.

Early attempts to define the concept of corporate governance appear in the United Kingdom Cadbury Report (1992) and the South African King Report (1994), defining corporate governance as ‘the system by which companies are directed and controlled’. [iv]

Good corporate governance is a key factor in underpinning the integrity, competence and efficiency of a company. Poor corporate governance can weaken a company’s potential, can lead to financial difficulties and in some cases can cause long-term damage to a company’s name and reputation.

Corporate governance is ‘the framework of rules, relationships, affairs, systems and processes within and by which authority is exercised, prescribed and controlled in corporations. It includes and encompasses the mechanisms by which companies, and those in control, are held to account.

Corporate governance refers generally to the legal and organizational framework within which, and the principles and processes by which, corporations are governed. It refers in particular to the powers, accountability and relationships of those who participate in the direction and control of a company. Chief among these participants are the board of directors, and management. There are aspects of the corporate governance regime that have an impact on the relationship between shareholders and the company. [v]

Effective corporate governance structures encourage companies to create value, through entrepreneurialism, innovation, development and exploration, and provide accountability and control systems commensurate with the risks involved. [vi]

Thus, the concept of ‘corporate governance’ began to adopt this new articulation of ‘managing the corporation’, with a central focus on the interrelationship between internal groups and individuals such as the board of directors, the shareholders in general meeting, employees, managing directors, executive directors, non-executive directors, managers, audit committees and other committees of the board. However, outside interests are also at stake; for example, those of creditors, potential investors, and consumers and the public or community at large. [vii]

If one takes into consideration recent developments, corporate governance could be defined as follows:

‘The system of regulating and overseeing corporate conduct and of balancing the interests of all internal stakeholders and other parties – external stakeholders, governments and local communities – who can be affected by the corporation’s conduct, in order to ensure responsible behaviour by corporations and to achieve the maximum level of efficiency and profitability for a corporation. [viii]

Moreover, good governance is essentially about effective leadership. Leaders should rise to the challenges of modern governance. Such leadership is characterised by the ethical values of responsibility, accountability, fairness and transparency and based on moral duties. Responsible leaders direct company strategies and operation with a view to achieving sustainable economic, social and environmental performance.

Principles of Corporate Governance

The Principles are intended to be concise, understandable and accessible to the international community.  On the basis of the Principles, it is the role of government, semi-government or private sector initiatives to assess the quality of the corporate governance framework and develop more detailed mandatory or voluntary provisions that can take into account country-specific economic, legal, and cultural differences.  The Principles recognize the interests of employees and other stakeholders and their important role in contributing to the long-term success and performance of the company. [ix]

The Principles are developed with an understanding that corporate governance policies have an important role to play in achieving broader economic objectives with respect to investor confidence, capital formation and allocation.

Together, the body of corporate governance rules and practices therefore provides a framework that helps to bridge the gap between household savings and investment in the real economy. As a consequence, good corporate governance will encourage and reassure shareholders and other stakeholders that their rights are protected and make it feasible and possible for corporations to decrease the cost of capital and to facilitate their access to the capital market. [x]

Corporations pool capital from a large investor base both in the domestic and in the international capital markets. In this context, investment is ultimately an act of trust and faith in the ability of a corporation’s management. When an investor invests money in a corporation, he looks forward to the board and the management to act as trustees and ensure and guarantee the safety of the capital and also earn a rate of return that is higher than the cost of capital. In this regard, investors expect management to act in their best interests at all times and adopt good corporate governance practices. [xi]

The Principles themselves are evolutionary in nature and are assessed and reviewed in light of significant changes in circumstances in order to maintain their role as a leading instrument for policy making in the area of corporate governance and the same can be discussed succinctly.

Effective Corporate Governance Framework

Effective corporate governance requires a sound legal, regulatory and institutional framework that market participants can rely on when they establish their private contractual relations. This corporate governance framework typically comprises elements of legislation, regulation, self-regulatory arrangements, voluntary commitments and business practices that are the result of a country’s specific circumstances, conditions, history and tradition. The desirable mix between legislation, regulation, self-regulation, voluntary standards, etc., will therefore vary from country to country. [xii]

Division of responsibilities among different Authorities

Corporate governance requirements and practices are typically influenced by an array of legal domains, such as company law, securities regulation, accounting and auditing standards, insolvency law, contract law, labour law, tax law etc. Corporate governance practices of individual companies are also often influenced by human rights and environmental laws. Under these circumstances, there is a risk that the variety of legal influences may cause unintentional overlaps and even conflicts, which may frustrate the ability to practice and pursue key corporate governance objectives. It is important that policy-makers are aware of this risk and take measures to limit it. [xiii]

Stock Market Regulation should support Effective Corporate Governance

Stock markets can play a meaningful role in enhancing corporate governance by establishing and enforcing requirements that promote effective corporate governance by their listed issuers e.g.

Clause 49 of the listing agreement mandates the listed companies to adhere to corporate governance standards.

Responsibilities – Supervisory, Regulatory and Enforcement Authorities

Supervisory, regulatory and enforcement responsibilities should be vested with bodies that are operationally independent and accountable in the exercise of their functions and powers.

Many countries have addressed the issue of political independence of the securities supervisor, regulator through the creation of a formal governing body.

The Securities and Exchange Board of India is a regulatory body having the basic function ‘to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto’ and therefore can enforce corporate governance norms to be complied with by all the companies who have listed their securities on the stock exchange.

Ensuring Shareholders’ Rights

The corporate governance framework should protect and facilitate the exercise of shareholders’ rights and ensure the fair and equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.

Disclosure and Transparency

The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.

The Responsibilities of The Board

The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders. According to the existing law in India every company has to have independent directors accounting for at least a third of its board strength. Their main duty is to act as overseers outside the influence of the firm safeguarding the interest of the company.

INDIAN PERSPECTIVE 

Corporate governance and indian legal framework.

The concept of corporate governance has been attracting public attention for quite some time in India. Progressive firms in India have voluntarily put in place systems of good corporate governance. The financial crisis in emerging markets has led to renewed discussions and inevitably focused them on the lack of corporate as well as governmental oversight.

The Committee [xiv] however felt that under Indian conditions a statutory rather than a voluntary code would be far more purposive and meaningful, at least in respect of essential features of corporate governance. In fact, Kumar Mangalam Birla Committee’s recommendation culminated in the introduction of Clause 49 of the Listing Agreement to be complied with by all listed companies. Practically most of the recommendations were accepted and included by SEBI in its new Clause 49 of the Listing Agreement in 2000, covering issues such as protection of investor interest, promotion of transparency, building international standards in terms of disclosure of information.

The Committee further observed that corporate governance has several claimants –shareholders and other stakeholders – which include suppliers, customers, creditors, the bankers, the employees of the company, the government and the society at large. The imperative for corporate governance lies not merely in drafting a code of corporate governance, but in practicing it.

The Committee recommended that the board of a company should have an optimum combination of executive and non­executive directors with not less than 50% of the board comprising the non-executive directors. In case, a company has a non-executive chairman, at least one-third of board should be comprised of independent directors and in case, a company has an executive chairman, at least half of the board should be independent. The committee for the first time introduced the Independent Directors who are non-executive directors who apart from receiving director’s remuneration do not have any other material pecuniary relationship or transaction with the company, its promoters, management or subsidiaries, which in the judgment of the board may affect their independence of judgment as they opined that “material pecuniary relationship which affects independence of a director” should be the litmus test of independence.

These and other mandatory recommendations culminated in the introduction of Clause 49 of the Listing Agreement to be complied with by all listed companies. Subsequently Clause 49 was amended in 2012 to introduce new corporate governance code to improve transparency and disclosure standards of listed companies in India.

In 2002 Government of India appointed Naresh Chandra Committee to examine and recommended drastic amendments to the law pertaining to auditor-client relationships and the role of independent directors. The committee extensively covered the statuary auditor-company relationship, rotation of statutory audit firms/partners, procedure for appointment of auditors and determination of audit fees, true and fair statement of financial affairs of companies.

In 2002 SEBI constituted a Committee under the chairmanship of N.R. Narayana Murthy, chairman and mentor of Infosys, and mandated the Committee to review the performance of corporate governance in India and make appropriate recommendations. The Committee submitted its report in February 2003. The Committee focused on responsibilities of audit committee, quality of financial disclosure, requiring boards to assess and disclose business risks in the company’s annual reports. The key mandatory recommendations focus on strengthening the responsibilities of audit committees; improving the quality of financial disclosures, including those related to related party transactions and proceeds from initial public offerings; requiring corporate executive boards to assess and disclose business risks in the annual reports of companies; introducing responsibilities on boards to adopt formal codes of conduct; the position of nominee directors; and stock holder approval and improved disclosures relating to compensation paid to non-executive directors.

Such and other committees were constituted by the Government of India and also by SEBI, to evaluate the adequacy of existing corporate governance practices and further improve these practices. They have outlined a series of voluntary recommendations to integrate best-in-class practices of corporate governance in listed companies which touches the four cornerstones of fairness, transparency, accountability and responsibility in managing the affairs of the company.

The final assent to Corporate Governance practices in the effective management of the company can be seen as introduction to new significant provisions introduced in the Companies Act, 2013 which seeks to achieve the objectives to encourage transparency, accountability and high standards of corporate governance; in form of Board composition and requirements for board members, Obligations and responsibilities of the Board, Role and responsibilities of independent Directors, women directors on the board, Ensuring shareholders’ rights and participation at shareholders’ meetings, Disclosure of Information, Transparency of the Issuer’s business, Principles of the Issuer’s internal and external control, Audit Committee, General principles, types and criteria for setting remuneration, corporate social responsibility and mandatory compliance of Secretarial Standards issued by Institute of Company Secretaries of India as per Section 118 of Companies Act, 2013.

Corporate governance is beyond the realm of law. It stems from the culture and mindset of management, and cannot be regulated by legislation alone. Structures and rules are important because they provide a framework, which will encourage and enforce good governance; but alone, these cannot raise the standards of corporate governance. What counts is the way in which these are put to use.

It follows that the real onus of achieving the desired level of corporate governance, lies in the proactive initiatives taken by the companies themselves and not in the external measures like breadth and depth of a code or stringency of enforcement of norms. The extent of discipline, transparency and fairness, and the willingness shown by the companies themselves in implementing the Code, will be the crucial factor in achieving the desired confidence of shareholders and other stakeholders and fulfilling the goals of the company.

A corporation is a congregation of various stakeholders, namely, customers, employees, investors, vendor partners, government and society. A corporation should be fair and transparent to its stakeholders in all its transactions. This has become imperative in today’s globalized business world where corporations need to access global pools of capital, need to attract and retain the best human capital from various parts of the world, need to partner with vendors on mega collaborations and need to live in harmony with the community. Unless a corporation embraces and demonstrates ethical conduct, it will not be able to succeed. Corporate governance is about ethical conduct in business. Ethics is concerned with the code of values and principles that enables a person to choose between right and wrong, and therefore, select from alternative courses of action. [xv]

Much more needs to be done to ensure the entrenchment of good governance standards, such as improving leadership. Indeed, there is a need for advocacy and awareness.

[i] OECD (2015), G20/OECD Principles of Corporate Governance , OECD Publishing, Paris.

[ii] Report of the Kumar Mangalam Birla Committee Appointed by the SEBI on Corporate Governance, 2000

[iii] J J du Plessis, ‘Corporate law and corporate governance lessons from the past: Ebbs and flows, but far from “The end of History: Part 1” ’ (2009) 30 Company Lawyer 43 at 44.

[iv] Jean Jacques du Plessis, Anil Hargovan and Mirko Bagaric, Principles of Contemporary Corporate Governance , 2 nd Edn. Cambridge University press

[v] Background Paper 11 (HIH Royal Commission) Directors’ Duties and Other Obligations under the Corporations Act (November 2001) 27 para 76.

[vi] ASX, Principles of Good Corporate Governance and Best Practice (2nd edn, August 2007) 3

[vii] Jean Jacques du Plessis, Anil Hargovan and Mirko Bagaric, Principles of Contemporary Corporate Governance , 2 nd Edn. Cambridge University press, 7

[viii] For other useful definitions of corporate governance, see Ken Rushton, ‘Introduction’ in The Business Case for Corporate Governance (Ken Rushton, ed.), Cambridge, Cambridge University Press (2008) 2–3;

Morten Huse, Boards, Governance and Value Creation: The Human Side of Corporate Governance , Cambridge, Cambridge University Press (2007) 15 and 18-24

[ix] OECD (2015), G20/OECD Principles of Corporate Governance , OECD Publishing, Paris.

[x] OECD (2015), G20/OECD Principles of Corporate Governance , OECD Publishing, Paris

[xi] Report of the Committee on Corporate Governance, SEBI, 2003 (N. R Narayana Murthy, Chairman)

[xii] OECD (2015), G20/OECD Principles of Corporate Governance , OECD Publishing, Paris, 13

[xiii] OECD (2015), G20/OECD Principles of Corporate Governance , OECD Publishing, Paris, 15

[xiv] Kumar Mangalam Birla Committee Appointed by the SEBI on Corporate Governance, 2000

[xv] Report of the Committee on Corporate Governance, SEBI, 2003 (N. R Narayana Murthy, Chairman)

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Corporate Governance in India – Concepts and Frameworks

Introduction.

Corporate Governance is a standard of principles, rules, customs, policies and regulations adopted to regulate and administer a corporation. The hype and demand of good corporate governance and the awareness elevated more with a plethora of corporate scandals and scams, notable of which is the landmark case of Satyam Computer Services Limited. The case apparently pointed out the lacunae in India’s corporate governance. Therefore, albeit having multiple regulatory bodies, India holds a very infirm monitoring system.

Features of A Good Corporate Governance

There are eight significant features of good corporate governance which include:

• Accountability,
• Transparency,
• Effective principles and policies,
• Responsiveness,
• Participatory decision-making process,
• Efficiency,
• Consensus oriented operations,
• Equitable Administration and in accordance with the rule of law.

Good Corporate Governance aims to minimize corruption by considering the views of the minorities and holding up their voice in the decision-making procedure. Good governance must be dynamic and responsive to the needs of society. [1]

Corporate Governance

Corporate Governance is defined as a standard of conduct prevalent among the shareholders, the Company Board, Management of the company, and other stakeholders. Corporate Governance aims to set up the objectives of the company and demarcate the means of accomplishing those objectives as well as monitoring and coordinating them. The features of good corporate governance shall reflect in the implementation of such features wherein production of proper incentives shall assist the management and the board of a company in achieving the objectives that shall help yield the best interest of the company and its shareholders. Moreover, good corporate governance shall facilitate the firms in guiding through effective use of the resources, thereby encouraging the firms to formulate effective monitoring means to regulate the company’s conduct. [2]

In short, good corporate governance refers to such practices that an organization shall abide by in order to get directed, governed and controlled. It is a means to make sure that the management, board and directors of a company shall function for the best interest of the company and its stakeholders, as also to hold the managers accountable to the capital providers for utilizing the company’s assets. Therefore, to accomplish the objectives of fair corporate governance and to minimize corporate scams, the Government of India has set up a statutory framework that regulates the activities of the corporations and aims to foster the system of good corporate governance.

Legal Framework of Corporate Governance

In India, the corporate governance regulatory framework functions in accordance with the statutory laws as follows, which has been simplified for clear interpretation and to cater to speedy economic growth:

The Companies Act, 2013

The Act dictates the provisions in terms of the board meetings, audit committees, disclosure requirements in financial statements, the constitution of the board, related party transactions. The Companies Act, 2013 is the key legal framework in terms of Corporate Governance in India. Several landmark changes have begun in the arena of corporate governance with the commencement of this Act. Prominent changes could be noted in the provisions relating to the composition of the board of directors that mandated the appointment of at least one resident director, and the nominee directors have been ceased to be treated as independent directors. [3] The Act mandated the listed and specified classes of public companies to appoint independent directors and women directors in their Board of Directors. The Act, for the first time, codified the duties of the directors . Moreover, the Act mandated the constitution of the following committees to effectuate better administration and operability of the companies towards retaining the framework of good governance. The committees are as follows:

• Audit Committee
• Nomination and Remuneration Committee
• Corporate Social Responsibility Committee
• Stakeholders Relationship Committee.

Securities and Exchange Board of India (SEBI)

SEBI is a regulatory authority responsible for monitoring and regulating the corporate governance of listed companies by virtue of Clause 49 , which has been incorporated in the listing agreement of stock exchanges with companies. SEBI works to ensure the protection of the investors, and it is compulsory for the listed companies to abide by the provisions of Clause 49. [4]

Standard Listing Agreement of Stock Exchanges

Companies have their shares listed in stock exchanges and are popularly known as the ‘listed companies’. Clause 49 is a firm step towards strengthening the corporate governance in India among the listed companies. Clause 49 mandated the constitution of the following procedures that aimed for fair and good governance among the listed companies.

i) The Composition of Board of Directors:

Clause 49 stated that the Board of Directors should comprise a definite number of independent directors. At least one-third of the Board shall be comprised of independent directors wherein the Chairman of the Board is a non-executive director. However, an independent director shall not be an executive director or any relative of a promoter. [5]

ii) The Audit Committee:

The constitution of the Audit Committee shall be comprised of at least 3 directors as members, and two-third of such shall be the independent directors. [6]

iii) Mandatory Disclosure of Financial Information:

The system of periodical disclosure of the financial and commercial information relating to the specified transactions and the details of the remuneration of the directors is to facilitate and ensure transparency in regulating the administration of the corporations. [7]

iv) The CEO/ CFO Certification:

The certification is mandatory to ensure that the financial statements have been duly reviewed and the same are in compliance with the laws and regulations and therefore are responsible for accepting the internal control system of the company.

v) The Report and Compliance:

It is a separate section in the annual report which states that the company rules and standards are in compliance with Corporate Governance. The compliance officer or the CEO signs the quarterly compliance report to the stock exchange. Moreover, the company shall disclose in the annual reports the compliance with the non-mandatory requirements.

Institute of Chartered Accountants of India (ICAI)

ICAI of India is India’s second-largest accounting body, which is responsible for issuing guidelines and standards, thereby directing the pathway of disclosing the financial data. It is to be stated in such reference that Section 129 of The Companies Act, 2013 states that the financial statement of a company shall reflect the true state of its affairs and shall comply with the standards of accounting as has been set up under Section 133 of The Companies Act, 2013. Further, the components stated in the financial statement shall comply with the standard of accounting.

Institute of Company Secretaries of India (ICSI)

ICSI is a premier national secretarial body responsible for issuing the secretarial standards primarily in terms of “Board of Directors Meetings” and “General meetings.” In such a reference, Section 118(10) of The Companies Act, 2013 states that other than one person company, every company shall abide by the secretarial standards issued by the ICSI in regard to the general meetings and board meetings.

Necessity of Corporate Governance In India

1) Shareholders in a corporation possess different opinions and attitudes towards corporate affairs. However, a sound and effective corporate governance stressing the shareholder’s interest could bind the shareholders in a single tune.

2) Effective corporate governance could guide a company in a situation where the large corporate investors influence the internal decision-making of the company, thereby posing the biggest challenge for the company.

3) A plethora of corporate scams in contemporary times has immensely affected the confidence of a large number of investors. Therefore, effective corporate governance could help in reverting the public trust over the corporate sector.

4) Good corporate governance could do away with the takeovers of the corporate entities, which affects the right of the stakeholders in a company, thereby helping the company in meeting several social expectations.

5) In the era of globalization, several Indian companies are listed with the international stock exchange, which mandates the requirement of effective corporate governance.

6) An effective code of corporate conduct is much needed to regulate the management of Indian Corporates, which gets primarily affected consequent to an abundant flow discharge of international capital in the Indian Companies.

The primary regulatory authority, The Ministry of Corporate Affairs (MCA), is responsible for promoting a transparent, accountable and efficient form of corporate governance. The MCA, in collaboration with National Foundation for Corporate Governance (NFCG), ICAI and ICSI, has set up a platform where stress is laid on issues relating to good governance, therefore to spread the awareness of good governance among the corporate leaders, policymakers, law enforcing authorities and other non-governmental organizations and to foster the sense of voluntary compliance and effective participation of the stakeholder. Therefore, it is to create a practical regulatory framework comprised of ethics and best practices which is immensely indispensable to strike a remarkable difference in the Indian corporate sector by uplifting the standard of corporate governance and progress towards the steps of growth and stability. Therefore, the actions of the regulatory bodies must take into account the dynamicity of the corporate sector, which shall be in tune with the economic trends that encourage the protection of investors and the interests of the stakeholders. [8]

A close nexus lies between risk mitigation, governance and compliance. Therefore, if the components of good governance as discussed in the earlier paragraphs prevails in a company having sound and effective principles, and the functionality of such company ensures due compliance with the statutory laws and regulations, the company shall be ever ready to face the uncertainties and other political, economic and technological turmoils with its effective risk mitigation mechanisms. Therefore, such practices, in turn, will gain better shareholders satisfaction and reliance. Henceforth, good corporate governance enhances the valuation of a company and helps in maximizing the shareholders’ interests.

A single corporate scam holds enough capability to wipe out the goodwill and the long earned value of a company. Therefore, effective internal control is necessary to cater for the sense of good corporate governance. [9] Inherent good governance is necessary to gain the trust of the shareholders. Moreover, industrial competitiveness, utilization of company resources, service and product innovation primarily gets affected by corporate governance. Enhanced corporate performances come with good governance that yields better financial results. Restructuring events such as mergers and acquisitions largely get impacted due to corporate governance. Mergers and Acquisitions, besides being a determinant of good and bad deals, also affects the interest of the stakeholders. The stakeholder better accepts a merger and acquisition by a company possessing good corporate governance in the market.

However, it is pertinent to mention that mergers and acquisitions hold immense power to bring about an effective positive change in good corporate governance in an organization. However, the leading companies nowadays choose monetary gain over corporate governance, thereby negating the latter. Corporate governance’s value gets elevated when the commercial market gets into tough times rather than in smooth durations. Albeit, corporate governance in India shall consistently hold a specific value. Thereafter, the approach of formulating rules and policies for good governance shall be construed with the intention of striking a balance between extreme rigidity and excessive flexibility with consideration to the interest of the stakeholders.

In India, corporate governance mandates the companies to audit their operations and provide the shareholders with a more trustable outlook as their actions have moral and legal implications. The much effective rules and regulations subsequent to the Companies Act 2013 are well balanced and equally innovative. These norms have catered for the economic growth of Indian Companies in accordance with international standards. Participatory actions of the shareholders in the decision-making process of the companies and adoption of a plethora of safeguards considering the interest of the shareholders and the society reflects a transparent and much compelling picture of good governance. Corporate Governance caters for a culture of much required transparency in the corporates. Therefore, embracing effective corporate governance could drastically elevate the economic standard of a country’s corporate sector. [10]

[1] Aggarwal P (2013) Impact of sustainability performance of company on its financial performance: a study of listed Indian companies.

[2] Arora A, Bodhanwala S (2018) Relationship between corporate governance index and firm performance: Indian evidence. Glob Bus Rev 19(3):675–689.

[3] Aggarwal, R., & Ghosh, A. (2015). Director’s remuneration and correlation on firm’s performance. International Journal of Law and Management, 57(5), 373–399.

[4] Akbar, M., & Khan, A. (2008). Corporate governance and the role of institutional investors in India corporate governance and the role of institutional investors in India. Journal of Asia-Pacific Business, 7(2), 37–41.

[5] Almaskati, N., Bird, R., & Lu, Y. (2020). Corporate governance, institutions, markets, and social factors. Research in International Business and Finance, 51(2020101089), 1–20.

[6] Ashfaq, K., & Rui, Z. (2019). The effect of board & audit committee effectiveness on internal control disclosure under different regulatory environments in South Asia. Journal of Financial Reporting and Accounting, 17(2), 170–200.

[7] Al‐Mudhaki, J., & Joshi, P. L. (2004). The role and functions of audit committees in the Indian corporate governance: Empirical findings. International Journal of Auditing, 8(1), 33–47.

[8] Arora, A., & Sharma, C. (2016). Corporate governance and firm performance in developing countries : Evidence from India. Corporate Governance, 16(2), 420–436.

[9] Bachmann, S., & Pereira, V. (2014). Corporate human rights responsibility and multinationality in emerging markets – A legal perspective for corporate governance and responsibility. International Journal of Business Governance and Ethics, 9(1), 52–67.

[10] Black, B. S., & Khanna, V. S. (2007). Can corporate governance reforms increase firm market values? Event study evidence from India. Journal of Empirical Legal Studies, 4(4), 749–796.

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Amrapali Mukherjee

I have completed my Masters in Commercial and Corporate Law from the Queen Mary University of London with upper merit and a distinction in the dissertation, currently, I am working as a Legal Advisor for a partnership firm at Kolkata.

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LL.M CORPORATE GOVERNANCE AND LAW DISSERTATION

This dissertation examined the question ‘Has section 172 (“s172”) of the UK’s Companies Act (“CA”) 2006 created an effective set of directors’ duties’? Prior to the advent of s172 CA 2006, there was no statutory form of direction concerning directors’ duties and obligations. However, with the intervention of s172, the pressure to take other stakeholders into consideration in the management of corporate affairs is now recognized . Therefore, the essence of this research was to examine whether the law has adequately reflected a shift from the previous common law position, which favored shareholder primacy to a more inclusive approach .

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Professor Kato Gogo Kingston, PhD.

Angus Young

Directors of listed entities in the United Kingdom are about to face greater demands from recent discussions on corporate governance reforms, in particular compliance with the obligations in section 172 of the Companies Act 2006. This article argues that leadership in a multistakeholder regime has become more important than ever.

Academia Letters

Ravi Ranjan Singh

Corporate Board: role, duties and composition

It is suggested in the paper that section 176 is too compendious in its drafting. A consequence of this is that the declared objectives of the CLR to make the law comprehensible and, therefore, accessible is undermined. It fails to capture the essence of the principles that have emerged from the case law on the no-conflicts rule and the corporate opportunity. Further, the differing approaches towards the determination of liability by the Court of Appeal in Bhullar, on the one hand, and the more open textured approach towards the issue in Pyke, illustrates the dichotomy of the case law surrounding the corporate opportunity doctrine which the language of section 176 fails to resolve.

Osgoode Hall Law Journal

Sean Vanderpol

Gary Tarafder

System of corporate governance in the economic environment is considered as a modern structure that covers various Science and involves multidisciplinary. Corporate Governance is concerned with the scope of various groups including majority and minority of shareholders, board of director and etc. The board of directors of a company is responsible for monitoring progress. Each director has a duty to act, in the best interests of the company. But there may be conflict between personal interests of director and interests of the manager who is responsible for managing it or does not comply with the company's interests. In this article we will examine the civil and criminal sanction of director's authority.

SSRN Electronic Journal

Shann Turnbull

Kris Panijpan

Business Law Review

On the 10th September last year, the Law Commission published its eagerly awaited consultation paper entitled Company Directors: Regulating Conflicts of Interests and Formulating a Statement of Duties (Law Com Consultation Paper No. 153). The paper addressed two burning issues in the area of corporate governance, namely the future of Part X of the Companies Act 1985 and the desirability and content of a statutory statement of directors’ duties. This article concentrates on the latter issue, specifically the issue of whether the duty should be subjective, objective or a combination of the two.

Social Science Research Network

Howard Gospel

Since the early 1990s, the UK has been very active in undertaking policy reforms that includes a number of corporate governance codes, expert reports, a high level review of company law, and new regulations and legislation. These policy initiatives need to be monitored and evaluated in terms oftheir success in influencing the key drivers of 'good' corporate governance. This Report undertaken for the DTI has several aims: to identify key drivers of good corporate governance based on a review of social science literature; to describe the content of UK regulatory initiatives with regard to those drivers; and to evaluate gaps in the content and implementation of UK policy regarding corporate governance, using those drivers as benchmarks. In addition, some further implications of this study are discussed for future policy and research on UK corporate governance. The Report defines 'good' corporate governance with regard to the rights and responsibilities of company stakeh...

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