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This article is written by Ayushi Sinha who is pursuing a Diploma in Companies Act, Corporate Governance & SEBI Regulations from Lawsikho.

Introduction

Corporate governance is essentially about driving the business processes in an ethical and effective manner and committing to wealth creation for the stakeholders in fair, transparent and justifiable manner thereby retaining the trust of the stakeholders. The Board which enjoys the necessary authority to take management decisions should exercise the same in the genuine interest of the stakeholders independent of the influence of the owner or management and in keeping with the law of the land. Corporate governance has three major players, i.e., Board of Directors, the Management and the shareholders who together should uphold transparency, accountability, and equality of dealing for all investors.

The stakeholders of a Company and also the print and electronic media and the public at large, realised the need and significance of a structured and sustainable corporate governance practices like in the United States after quite a few mega Companies in the early years of this century suffered huge revenue and goodwill loses on account of financial irregularities and unethical management practices.

The above objectives are ensured through the corporate governance report which contains among others a declaration of disclosure of the company’s governance procedures , the codes and principles that guide the company’s procedures, details of the working of the committees and sub-committees and the powers and duties delegated to such committees to make sound decisions in corporate affairs.

Fundamentally, corporate governance is an assortment of procedures, rules, structures and associations that are realized with the resolve to control and guide corporations and hold them accountable. It includes the rules and procedures that corporations rely on.

The stakeholders involved with the company affairs have their rights and responsibilities well laid down and involve besides others the  Boards of Directors, Shareholders, Creditors, Managers, Stakeholders, Auditors, Regulators etc. who together need to ensure through goal setting by BOD to meet regulatory, social, market concerns and conditions.

Law regulating the corporate governance report

Operation of Corporate Governance has dual aspects:

  1. The primary one is controlled by statute issued by the Registrar of Companies, Ministry of Corporate Affairs, SEBI listing regulations, which are obligatory in nature and require compliance in accordance with the notifications, regulations issued under the Companies Act. Every quarter there is a requirement to file Corporate governance reports. All listed companies are compulsorily required to submit the corporate governance report within fifteen days from the quarter-end in line with the SEBI listing regulations, 2015(LODR) regulation 27(2). Every listed entity is mandated to file corporate governance from March 28, 2016. Securities and Exchange Board of India (SEBI) amended the agreement clause of the equity listing for several disclosures and guarding of stockholder rights, including unbiased conduct for minority and overseas shareholders. If there is a lapse in submitting the corporate governance report inside fifteen days from quarter end, as is required in the regulation 27(2), it is punishable with fine of Rs 2,000 per day. The other penalties can be a holdup in securities trading and even freezing of promoter holdings. From October 1, 2014, several alterations have been introduced. The shareholders’ approval is now required for finalising on related party transactions, whistle blower policies, much more detailed disclosures on pay packages than ever before. In addition, the provisions are stricter on the requirement to have least one-woman director on Board.
  2. The other aspect is the guiding principles and philosophies which are structured by in-house Management. The guidelines and principles are developed within the company including the shareholders, directors, officers for enhancing corporate image, brand and goodwill. These would revolve around efficiency and effectiveness, fairness, accountability, responsibility, independence and transparency. This would typically encompass elements like-
  • A mind-set that BOD are not owners and merely the trustees of the shareholder’s capital and need to safeguard the same.
  • Maintain integrity and transparency of highest level. Disclose whenever there is an element of doubt. Transparency is ensured by observing highest level of openness. Leaders are honest, authentic, hardworking and just at all times, and ever watchful of the importance of exhibiting principled and righteous behaviour. Management must never fail to report information about the company precisely and in an appropriate way.
  • BOD needs to continually monitor the overall activities and operations to ensure that they’re efficient and effective, and that these support the corporation’s vision and mission. Management capability, responsibility, and awareness are the fundamental commitments and responsibilities.  
  • Abide by law not only in letter but also in spirit. 
  • Maintain best of relationship with the stakeholders i.e. investors, clients, shareholders, stock markets
  • Earn trust of stakeholders by being objective and ethical. Let the outside world be kept informed truthfully about the internal running of the company. They should remain independently and jointly responsible for their decisions and actions. 
  • Espouse simple and transparent processes guided by business needs of all stakeholders. Corporate resources are to be kept distinctly separate from personal usage, comforts and conveniences.
  • The law of the land, whether indigenous or foreign, should be followed scrupulously.
  • Lead by example by safeguarding independence of the Board and effectiveness of the management. It is important that the Board remains independent which shall ensure that decision-making is fair and objective and in company interest.
  • corporate structure should be simple and crystal clear driven exclusively by business requirements

Contents of the Annual Report

Having dwelled on the complete perspective of the concept of Corporate governance, it will be worthwhile to embark upon the must haves under the banner in an Annual Report. A corporate governance report is also called the annual corporate report. As elaborated in the aforesaid paras on its statutory requirements and the value-added management guidelines which are incorporated by progressive companies. 

The salient five top picks as subjects to be covered under Corporate Governance Report as part of the Annual Report should include a statement of corporate governance procedures and compliance, information on board structure, declarations on the company’s performance, evidence about compliance and to what extent it confirms with the best practices for corporate governance to be considered good.

 The breakup of the same with description would be as under:

  1. Include a statement in the corporate report disclosing the company’s governance procedures and compliance. The principles and codes that guide the company’s procedures should be disclosed. The distribution of powers between the Chairman, CEO and Directors need to be detailed in the Disclosure statements. 
  2. Maintain an ideal mix of BOD keeping into consideration capabilities, age, gender, occupation, independence and miscellany. The corporate boards should be slim and trim with effective strength between seven to 11 members. The preponderance of Independent Directors over functional Directors as regards the numbers should be ensured for dispassionate, independent, holistic and out of box perspective on company’s affairs. The frequency and regularity of board meetings should be made known and religiously adhered to.
  3. The controls, functions, roles and responsibilities of board directors should be clearly depicted and listed in the assigned section. The information about committees and sub-committees and powers and duties delegated to such committees and/or subcommittees should find clear mention in the report dealing separately with their conformance and transformative functions. Adopt the superlative practices in contemporary marketplace like discouraging the same individual to serve as CEO and chairman on repeat tenures etc.
  4. The company’s procedures for engaging directors, board expansion, succession planning and compensation by shareholding members may particularly interest the shareholders.
  5. The board’s performance and mechanisms should evaluate and control the same and form an essential part of the disclosure report with additional mention of each member of the Board in terms of their performance, output and contribution in wealth creation for the shareholders. The related party transactions and information regarding the same is essential to perceive the conflicts of interest and the way it was handled by the BOD.
  6. An exclusive section should be assigned to the general organizational plan, and how it gels with the business plans and financial plan; a separate section should give particulars of the operational and performance measures in the annual report along with account of risk management and internal control measures. These reports should offer indication and support of the answerability and transparency of the generally accepted standards for accounting and auditing. Association and affiliation with internal and external auditors should be specifically denoted and disclosed in the accounting section of the report. 
  7. Statutory compliance, and codes of conduct for BOD, CEO, management and staff are also to be communicated in the Disclosure statements to the shareholders and stakeholders, 
  8. The report should detail in a section about the nature of the business and its avenues and threats, roadmap for growth, future market leanings for strategic forecasting, business sustainability specially keeping environment friendliness factor in business plan, modernization index and plans, futuristic market place interventions, and  comprehensive delineation of factors affecting  strategic planning.

Conclusion

The Corporate Governance pivots around guiding philosophies denoted by four ‘Ps’, i.e., PeoplePurposeProcess, and Performance.

People – Business has People all around and comes first into consideration. Be it the founders, the BOD, the shareholder and customer and neutral observer in pillars of the economy.The sense of purpose and the line of sight of the company is core to the lead players in the company and they need to ensure a reliable process to attain it, assess their performance consequences, and use those consequences to create wealth for their own selves and all others effected.

Purpose – The governance philosophy should exist for a purpose and to attain a purpose. The policies, processes, projects, should all be in tandem with the vision and mission statement of the company 

Process – The developed processes should clearly analyse performance and it should be reviewed and polished over time in order to steadily attain their resolve. 

Performance – Analysis of Performance is critical to any industry. The ability to determine the success of the results of various interventions and application of those results to the rest of company, is one of the prime purposes of the governance process. Using these outcomes to mature personal competencies, is how the Four Ps cycle rotates limitlessly.


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