[Answered]What is Corporate Governance? What are the weaknesses in corporate governance in India? Also, discuss the importance of ethically-based corporate governance.

Demand of the question

Introduction. What is Corporate Governance?

Body. Weaknesses in corporate governance in India. Importance of ethically-based corporate governance.

Conclusion. Way forward.

 Corporate Governance refers to the way a corporation is governed and managed. The Organization for Economic Co-operation and Development (OECD) defines corporate governance as ‘procedures and processes according to which an organization is directed and controlled’. Negligence of business ethics in corporate governance is a responsible factor for the failure of corporate. There have been many instances of failure and scams in the corporate sector in India due to the absence of good corporate governance e.g. Satyam scam.

Weaknesses in corporate governance in India:

  1. Concentration of powers: Ownership of corporations in India, is still held in a few hands. A single shareholder or family controls a large group of companies. This leads to several governance related challenges and has often led to poor decision making that harms company’s profits.
  2. Board directors: Independent directorswere supposed to be the biggest corporate governance reform. However, they have hardly been able to make the desired impact due to the passive role played by them on board. The frequent removal of directors by promoters of the company is an issue. This has not been addressed effectively yet, despite the strengthening of the regulations regarding independent directors.
  3. No Proper Structure: Corporate Governance has no proper structure or design and is largely ambiguous. There is still a lack of awareness about various issues like compliance with rules and regulations, roles and responsibilities of Board of Directories, shareholder’s rights, etc. This leads to poor governance and impacts the working of companies.
  4. Insider Trading: Corporate insiders like officers, directors and employees by the virtue of their position have access to confidential information. Many misappropriate that information to reap profits. SEBI lacks the thorough investigative mechanism and a vigilant approach due to which the culprits are able to escape. In most of the cases, SEBI failed to produce evidence and corroborate its stance before the court.
  5. Noncompliance with disclosure norms: Noncompliance with disclosure norms is common in Indian businesses with hardly any punitive action. While the Companies Act provides clear instructions for maintaining and updating registers, in reality minority shareholders have often suffered from irregularities in share transfers.
  6. Family-owned business: Many Indian businesses are old family establishments. With the growth of family and its business, there is an increase in inefficiencies and internal conflicts that threaten the continuity of the business. Family control also brings governance problems like a lack of checks and balances over executive decision making and a lack of transparent reporting.

Importance of ethically-based corporate governance:

  1. Profits: Ethical Corporate Governance helps in growing the reputation of a company and thus, increase the profits. It leads to better relationships among stakeholders that enhances performance of organisations.
  2. Investment: Robust governance practices are imperative for companies to create positive sentiment in the minds of investors and the public at large. An ethically-based corporate governance leads to more trust in the organisation and its work culture leading to more investors’ interest.
  3. Employees’ motivation: Good corporate ethics improves the situations of the employee. It leads to higher retention and better morale. It also leads to a more effective recruitment process, loyalty, motivation, and productivity in the company.
  4. Customer relationships: Customer relationships are also improved. Ethical governance increases customer loyalty, enhances brand image, and cater to customers service and satisfaction. With ethical business practices, complaints and issues of customers are solved transparently leading to trust in the corporation.
  5. Business performance: Good corporate ethics also enhances overall business performance, particularly leading to improved competitive advantage through good governance, higher financial returns, and better reputation.

 Way forward:

  1. Responsibilities of the Board: The corporate governance framework should ensure the effective monitoring by the board and the board’s accountability to the company and the shareholders.
  2. Objective performance evaluation:Privileges and compensation of executive directors should be based on an objective performance evaluation process conducted by the board.
  3. Enhancing objectivity: Acode of conduct and code of corporate governance should be put in place in order to dictate desired behaviour.
  4. Relations with Shareholders: The board should be responsible for ensuring that an appropriate dialogue takes place among the organisation and its shareholders. The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders.
  5. Effective internal audit function: An effective audit mechanism should be in place to prevent insider trading. Both the board and the management should establish formal and transparent arrangements to appoint and maintain an appropriate relationship with the organisation’s auditors.
  6. 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.

Corporate governance is very essential for overall growth of the companies. Ethical culture can be regarded as the insurance for successful business. So for good corporate governance ethics is essential. It is every company’s moral duty to implement the ethical codes in their business.

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