The great Indian master of Political Science Kautilya mentioned four functions of a king in his well-known book Arthashastra -1.Raksha or protection, 2.Vriddhi or enhancement, 3.Palana or maintenance, and 4.Yogakshema or wellbeing or safeguard. It is the sacred duty of the state to protect the person and property of its subject to enhance their wealth, to maintain them and to safeguard their interest in general. This noble concept can be applied with equal force to company management for corporate governance. The Board of Directors and the CEO or MD are the rulers and the shareholders and other stakeholders associated with the company are the subject. The company should be managed in a way that would protect the interest of shareholders, would increase the value of their wealth and their prosperity, would lead to the welfare of the society and would increase their accountability to them. The corporate world has become so powerful in recent years that corporate governance has caught the imagination and attention of one and all.
India has globalised its economy and has widened the doors for the entry of multinationals. With the onset of globalization, the competition that the corporate sector has been facing has been increased. Technology up-gradation, warranted because of intense competition, has necessitated the Indian corporate sector to seek funds not only from India but also from abroad by floating Global Depository Receipts (GDRs). Large number of foreign institutional investors is now actively participating in the Indian Capital Market. This has also necessitated the need for good governance since capital easily flows towards companies which are effectively governed and which have the motive of increasing the value of shareholders as well as the society.
In broad sense, Corporate Governance examines how the company is being governed for the benefit of its various stakeholders like equity shareholders, preference shareholders, bond-holders, employees, customers, dealers, suppliers, society, government etc. Thus, corporate governance may be understood as the system by which corporates are directed and controlled by their managements in the best interest of their stakeholders and the general public. In its endeavour to ensure a higher standard of transparency and timely financial reporting, corporate governance system involves the full disclosure of all relevant information for the stakeholders to arrive at informed decisions.
Corporate governance comprises the systems and processes which ensure the efficient functioning of the firm in a transparent manner for the benefit of all the stakeholders and those accountable to them. The focus is on the relationship between the owners and the Board in directing and controlling companies as legal entities perpetually. A company’s ability to create wealth for its owners, however, depends on the role and freedom given to it by the society.
The corporate governance broadly identifies two sectors namely shareholders and stakeholders to whom the corporate sector has to be responsible. Any corporation that satisfies only one sector at the cost of the other is not likely to be favoured by any and it has to have a balanced approach in meeting the needs of these two sectors.
The focus on corporate governance arises out of the large dependence of companies on financial markets as the pre-eminent source of capital. The quality of corporate governance shapes the future and the growth of the Capital Market. Strong corporate governance is indispensable to resilient and vibrant capital market. But capital markets in general can function properly if individuals have access to accurate basic information about the companies they invest. The link between a company’s Management, Board and its Financial Reporting System is crucial. In the context of globalization, capital is likely to flow to...