This article has been written by Richa A., pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho and edited by Shashwat Kaushik.
It has been published by Rachit Garg.
Table of Contents
Introduction
Corporations play a vital role in a country’s economy. If corporate frauds happen due to weak corporate governance, it can pose a threat to foreign investors, which can hurt the Indian economy. Such companies rely on complex corporate structures, face business challenges and go down because it reflects on their earnings and stock prices.
Corporate governance is integral to many issues ranging from business to accounting standards,from corporate social responsibility to managing the supply chain. It helps in averting potential financial crises and greatly contributes to an economy. Ever Since LPG (liberalisation, privatisation and globalisation) reforms were incorporated in 1991 into India’s economic policy, corporate governance has played a vital role in the economic growth of the country. The global recession is predicted as of now since the US, China and Europe show signs of weaker growth due to the invasion of Ukraine by Russia, COVID, high inflation and tight monetary policies, which can have an indirect impact on India. Thus, there is a need for good corporate governance. Furthermore, if we consider the global recession of 2008, India was able to survive the crisis and factors that helped were an increase in foreign direct investment, a non-effect on IT and BPO exports and the continuation of ongoing projects by long term companies and plants. Corporate social responsibility also played a vital role when socio-economic activities were disrupted due to the COVID-19 pandemic.
This article examines corporate governance, including its advantages, problems, and how it can help during a financial crisis and CSR.
What is corporate governance
Corporate governance is the manner in which the company is governed or controlled by the rules, bylaws, regulations and policies that amount to effective management of the company. It acknowledges the power and accountability of the person making decisions. It is an effective business model that helps companies tackle issues when challenges arise. It strives to create a balance between the interests of the stakeholders. Stakeholders include shareholders, employees, suppliers, customers, the board of directors, the government, the community, etc. Good corporate governance is when stakeholders can confide in and trust the company they’re invested in.
Good corporate governance in companies can help reduce systematic risks caused by financial scandals, improve a country’s ability to allot and monitor investments, provide employment opportunities, foster economic growth and facilitate the development of the capital market. Strict adherence to rules and regulations can constitute good corporate governance
Its aim is to achieve company objectives and provide a good framework to make quality decisions for the better working of a company. Corporate governance is the mode of operation or guidelines for a business to work.
The goals of corporate governance are to bring about fairness, transparency, accountability, and the ability to manage risks that are incurred. Well-governed companies have higher returns, low financial risks and the capability to reduce risk during corporate crises. Corporate inefficiencies are detected by better supervision and are essential to minimising the losses incurred during financial emergencies. Reliable financial reporting, timely disclosures, maintenance of accounts, an efficient board of directors, etc. are crucial for companies to facilitate strong capital markets and better administration.
Benefits of corporate governance
Corporate governance enables the business to create a module and maintain decorum. Good governance assures the stakeholders that the company has the potential and the ability to fulfil the requirements.
Other benefits are mentioned below as follows:
- It helps in the progress of corporate performance and forms better strategies.
- Highlights accountability of the board of directors towards their shareholders.
- It provides for compliance with the relevant laws and regulations and complying to third parties enhances credibility and henceforth attracts investments
- Enables effective decision-making free from external control.
- Improves access to information required for clear communication between stakeholders and shareholders. Thus, it helps reduce internal conflict within the organisation.
- Transparency also attracts investments from foreign investors and enables the smooth running of operations.
- Opens doors for external funding from institutions and provides for the development of businesses
- It helps in identifying and eradicating risks.
- Improves the capital flow and helps boost corporate reputation.
- Good corporate governance ensures the long-term survival of companies.
- It helps in eradicating corruption and malpractices leading to bankruptcy or closure of the company and it also helps to tackle legal issues.
Difficulties faced due to bad corporate governance
Corporate governance has the ability to save or destroy an economy during a crisis. Domination by individuals, lack of board involvement, lack of supervision, illegal insider trading, concealing information, giving misleading information, no clear communication with shareholders, lack of accountability, mismanagement of funds, money laundering, lack of independence to independent directors, focusing on the short term, etc. leads to fraud, forgery, corruption, loss of trust, decreased profits, tarnished brand reputation, difficulty in attaining investments and poor risk management.
Failure to adhere to the set rules by the board of directors leads to poor decision-making and thereby adversely affects the stakeholders and economy at large.
Corporate fraud became unavoidable as the Indian economy developed and led to the loss of potential investors. Laws are amended to increase the penalties for such crimes, and authorities are set up to safeguard investor’s interests.
Examples of bad corporate governance:
- Committing massive fraud, inflating the company’s profits, and falsifying company accounts, leading to the collapse of the company (Satyam scandal 2009).
- Unauthorised Letters of Undertaking (LoUs) were given by corrupt PNB (Punjab National Bank) officials to Nirav Modi and his firm, thereby constituting fraud (Nirav Modi Scam 2018).
An increase in corporate governance failures leads to a decline in investor confidence, loss of employment, decreased availability of credit, loss of public investment and foreign investment that not only adversely affect the companies but also hinder the country’s economic growth.
Corporate governance and prevention of economic crisis
Effective corporate governance can do wonders for a country’s economy and also plays a vital role in helping a country during a global recession. Good governance leads to economic growth and such companies are stable, profit-generating, provide employment, and increase investments by strengthening the confidence of investors in the capital market.
Effective checks and balances in corporate governance are a requirement to tackle the economic crisis. The business provides locally produced goods and services, and the tax money from those companies can also contribute to the social welfare of the people. A country relies on powerful companies with good corporate governance across different sectors. Economies are constructed basically by these companies and they depend on their productivity and supply. In this era of globalisation, corporate sectors have an immense hold on a country’s economy. Small business with good corporate governance provides stability and nurtures local economic growth. Hence, corporate governance is essential and companies must operate ethically.
Corporate social responsibility
As per Section 135 of Schedule VII of the Companies Act, 2013 and the Companies (CSR) Rules 2014, it is mandatory for the companies covered under Section 135 to comply with the CSR provisions in India. Companies are required to spend a minimum of 2% of their net profit over the preceding three years as CSR. It is a company’s social responsibility towards the community and environment.
During the COVID-19 pandemic, CSR played a vital role. CSR made the companies provide public health systems, supply hygiene kits and support the establishment of quarantine facilities. According to the Ministry of Corporate Affairs on March 23, 2020, all expenditures incurred on activities related to COVID-19 would be added as permissible avenues for CSR expenditure. Funds were spent for various activities related to COVID-19 under the items of Schedule VII.
Thus, CSR played a vital role during pandemics and economic crises. It also provided for its employees to work from home when they were stuck in their homes during the contagious spread and for business operations in this era of digitisation. Thus, CSR contributes to the social and economic welfare of the people during a crisis.
Conclusion
Corporate governance is crucial for the workings of a company. It strives to protect the interests of the stakeholders. It refers to the rules that are to be followed by the board of directors when managing the company. Corporate governance in India requires improvement and still has a long way to go. Laws are amended to increase punishment related to economic crimes involving corporate scams and to uphold the stakeholders’ interests. Scams are byproducts of inefficient, poor management, which leads a business to collapse. The four P’s of corporate governance are people, purpose, process and performance, which control company operations. Corporate governance acts like armour to tackle difficulties during a crisis.
Bad corporate governance can lead a company to ruin. Corporate frauds result from forgery, fraud and misleading statements, leading to losses of investment, credit and jobs that can negatively impact the economy.
Good corporate governance assures quality,long running of the business, generates profits, benefits the stakeholders and also contributes to the country’s economy.
CSR highlights the responsibility of the company towards society and the environment. Lack of transparency, accountability and initiatives are current challenges, and the companies must take appropriate measures. CSR played a vital role during the COVID epidemic.
References
- https://currentaffairs.adda247.com/what-is-global-recession-2023-and-its-impact-on-india/
- https://government.economictimes.indiatimes.com/news/economy/corporate-social-responsibility-in-times-of-covid-19-pandemic/75771467
- https://www.investopedia.com/terms/c/corporategovernance.asp
- https://www.worldbank.org/en/topic/financialsector/brief/corporate-governance
- https://m.economictimes.com/markets/stocks/news/the-risks-of-poor-governance-to-investors-in-india/articleshow/96190185.cms?utm_source=whatsapp_pwa&utm_medium=social&utm_campaign=socialsharebutton
- https://www.cgi.org.uk/about-us/policy/what-is-corporate-governance#:~:text=Corporate%20Governance%20refers%20to%20the,challenges%20of%20running%20a%20company
- https://www.legalserviceindia.com/legal/article-7435-corporate-governance-in-india.html https://www.indiafilings.com/learn/corporate-governance-2/#:~:text=It%20enhances%20organisational%20performance%2C%20investor,risk%20management%20and%20inculcates%20accountability
- https://uk.indeed.com/career-advice/career-development/benefits-of-corporate-governance
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