Corporate Governance basically centres around Internal Controls, Policies and Procedures which constitute the wireframe of a company’s operations and how it deals with its various stakeholders viz; Customers, Employees, Shareholders, Government and other Industry Bodies. Good Corporate Governance stresses on the need for organisations to focus on upholding the principles of Transparency, Integrity, and Ethics.
What does it offer?
Good Corporate Governance can play a defining role in leading an organization on the path of unparalleled prosperity. If implemented properly. Some of its vitalities are as follows:
- Risk Mitigation & Compliance
There is a direct relationship between governance, risk mitigation and compliance. If a company is governed on appropriate principles, it will naturally work efficiently and ensure compliance with every statutory law and guidelines. Being on track with the policies and law ensures that the company is braced well for any uncertainty and thus has risk mitigation mechanisms in place. The more disciplined a company is in its operations, the better it is placed to face any risk or disruption arising out of political, technological and economic events.
- Enhances Shareholder Value
While a direct relation hasn’t been established between corporate governance and the market value of a company, it would be fair to state that corporate governance plays a pivotal role in enhancing shareholders’ satisfaction. Corporate Governance helps in protecting the valuations of a company because the ultimate goal of good governance is to maximise the interest of all stakeholders. The value accumulated by the company over the years can vanish into thin air by a single unlawful incident, thus internal controls at the right places are mandatory.
- Better Image during Economic Downturns
Over the last few months, we’ve been hearing many stories of banking frauds and financial malpractices. It is but natural for people to believe that it is common for almost all banks and financial institutions to follow the same path, which of course is not true. It is only when an organisation can ensure people about their inherent governance practises that people will believe them. Trustworthiness that has been established over the years plays a strong role in upholding the company’s image even during economic downturns.
- Improved Organisational Efficiency
Corporate Governance is an important determinant of industrial competitiveness. Nowadays, there are many questions raised on the way a company is governed. Better governance ensures enhanced corporate performance and better economic results. Corporate Governance lays the foundation stone for the overall success of a company, the utilization of resources, product/service innovation and overall corporate strategies.
- Crucial during Mergers & Acquisitions
Corporate Governance in India plays a crucial role in restructuring events such as mergers and acquisitions. Not only does corporate governance of a company helps to differentiate between good deals from bad ones, but M&A activity by a company with good corporate governance is better received by stakeholders in the market. Another aspect to be mentioned is that mergers and acquisitions also have the power to improve the quality of corporate governance of the organisation.
A few Corporate Governance Idols in India
It indeed is a proud moment for the Indian corporate sector. Around 12 Indian giants have featured in the Forbes list of the world’s 2,000 best-regarded firms. Infosys, TCS, TATA Motors secured the 31st, 35th and 70th ranks, respectively.
Other Corporate Giants like Tata Steel, L&T, Grasim, GIC, Mahindra & Mahindra, Asian Paints, SAIL and ITC are some amongst many others to have made it to this highly coveted list. HDFC is the sole company from the banking and financial sector to have attained a position.
Forbes partnered with Statista, which surveyed 15,000 people from 60 countries regarding their opinion on top 2000 organisations across the globe. Companies were evaluated on parameters such as trustworthiness, social conduct, the performance of the company’s product or service and the company as an employer.
When bank scams, financial frauds, and cybercrimes become the order of the day, news like these reinstates our belief in the importance of sound and well implemented Corporate Governance in India.
Ill-Effects of not having a sound Corporate Governance Framework
A few amongst many examples of Weak Corporate Governance range from the most recent ones like the siphoning of funds at Jet Airways and the Chanda Kocchar -Videocon Bank Loan episode to older ones like the Sahara & Kingfisher down-dive.
SAHARA – An Embodiment of Poor Corporate Governance
Raising capital through unlawful means was at the centre of this major scandal which eventually led to the downfall of SAHARA. The OFCD’s were being issued in a manner inconsistent with the SEBI’s guidelines. This paved the way for a stretched period of conflict between SAHARA and SEBI. Later, shreds of evidence pointed towards the possibility of money laundering and the case got even worse for its promoter, Subrata Roy, landing him a jail term towards the end. It would be safe to say that had the operations been well governed and looked after, the situation would have been a lot more different.
Chanda Kochhar – Videocon Case
The saddening turn of events at ICICI marked the downfall of one of the most revered lady CEO in the country. In a bid to, fulfil personal agendas, she allegedly sanctioned loans to Videocon, in a manner inconsistent with the standard procedures followed by the Bank. This further led to her removal from her position and a marked degradation in the bank’s public image. The unfortunate Incident could have been easily avoided if the situation was monitored carefully by the board of directors.
Therefore, it would be fair to state that in the absence of a well-structured Corporate Governance Framework, a Company may receive astounding profits in the short term but may choke on them in the longer scheme of things. This is primarily because the manner in which it will carry out its primary business activities may involve practices that are unethical and misleading in nature.