Introduction:

Corporate Governance is essentially all about how corporations are directed, managed, controlled
and held accountable to their shareholders. In India, the question of Corporate Governance has
come up mainly in the wake of economic liberalization and de-regularization of industry and
business. With the rapid pace of globalization many companies have been forced to tap
international financial markets and consequently to face greater competition than before. Both
policymakers and business managers have become increasingly aware of the importance of
improved standards of Corporate Governance. India has one of the best corporate governance laws
but poor implementation together with socialistic policies of the pre reform era has affected
corporate governance. Concentrated ownership of shares, pyramiding and tunneling of funds
among group companies mark the Indian corporate landscape.

Significance:

A corporation is a congregation of various stakeholders, namely customers, employees, investors,

vendor partners, government and society. In this changed scenario an Indian corporation, as also a
corporation elsewhere, should be fair and transparent to its stakeholders in all its transactions. This
has become imperative in today’s globalized business world where corporations need to access
global pools of capital, need to attract and retain the best human capital from various parts of the
world, need to partner with vendors on mega collaborations and need to live in harmony with the
community. Unless a corporation embraces and demonstrates ethical conduct, it will not be able
to succeed. Corporations need to recognize that their growth requires the cooperation of all the
stakeholders; and such cooperation is enhanced by the corporations adhering to the best Corporate
Governance practices

Meaning:

Definition of Corporate Governance varies widely. The concept of "governance" is not new. It is
as old as human civilization. Simply put "governance" means: the process of decision-making and
the process by which decisions are implemented (or not implemented). Governance can be used in
several contexts such as corporate governance, international governance, national governance and
local governance. It is participatory, consensus oriented, accountable, transparent, responsive,
effective and efficient, equitable and inclusive and follows the rule of law. It assures that corruption
is minimized, the views of minorities are taken into account and that the voices of the most
vulnerable in society are heard in decision-making. It is also responsive to the present and future
needs of society.

Scope:

Corporate governance is concerned with the holding balance between economic and social goals
and between individuals and communal goals. The governance framework is there to encourage
the efficient use of resources and equally to require accountability for the stewardship of those
resources. The aim is to align as nearly as possible the interest of individuals, corporations and
society. It has been rightly stated by Sir Adrian Cadbury that the foundation of any structure of
corporate governance is disclosure. Openness is the basis of public confidence in the corporate
system and funds will flow to centers of economic activity that inspire the trust.

Challenges & Imperatives:

The main problem with corporate governance is that it doesn't stand alone; it has to work in
conjunction with a company's mission and values statement to give directors and stakeholders a
clear guide about how they should behave. There are several problems that a business might
struggle with as follows:

1. Conflicts of interest: A conflict of interest occurs when a controlling member of the

company has other financial interests that could influence his decision-making or conflict
with the objectives of the company. For example, a board member of a wind turbine
company who owns a significant amount of stock in an oil company is likely to be
conflicted, because she has a financial interest in not representing the advancement of green
energy. Conflicts of interest erode the trust of stakeholders and the public and potentially
open the business up to litigation.
2. Governance standards: A board can have all the equitable rules and policies it likes but
if it can't propagate those standards throughout the business, what chance does the company
have? Resistant managers can subvert good corporate governance at the operational level,
leaving the business exposed to state or federal law violations and reputational damage
with stakeholders. A policy of corporate governance needs a clear enforcement mechanism,
applied consistently, as a check and balance against the actions of executive staff.
3. Short-termism: Good corporate governance requires that boards should have the right to
manage the company for the long-term, to create sustainable value. This is problematic for
a couple of reasons. First, the rules governing a listed company's performance tend to
prioritize short-term performance for the benefit of shareholders. Managers face an
unrelenting pressure to meet quarterly earnings targets, since dropping the earnings per
share by even a cent or two could hit the company's stock price. Sometimes a company has
to go private to achieve the kind of sustainable innovation that cannot be achieved in the
glare of the public markets.
4. Directors : Directors only sit on boards for a brief period and many face re-election every
three years. While this has some benefits – there's an argument that directors cannot be
considered independent after 10 years of service – short tenures could rob the board of
long-term oversight and critical expertise. The rapid migration of four elements across
national borders. The board of directors and the senior level management ofan enterprise -
walking their talk. It is by walking their talk that the top management can earn credibility.
This also has a direct bearing on the morale of an organisation.
5. Diversity: It's common sense that boards should have an obligation to ensure the proper
mix of skills and perspectives in the boardroom, but few boards take a hard look at their
composition and ask whether it reflects the age, gender, race and stakeholder composition
of the company. For example, should workers be given a place on the board? This is the
norm across most of Europe and evidence suggests that worker participation leads to
companies having lower pay inequalities and a greater regard for their workforce. It's a
balancing act, however, as companies may focus on protecting jobs instead of making
tough decisions.
6. Accountability issues: Under the current model of corporate governance, the board is
positioned squarely between shareholders and management. Authority flows from the
shareholders at the top and accountability flows back the other way. In other words, it's
shareholders – not stakeholders generally – who are most protected by corporate
governance and shareholders – not stakeholders – who get to withhold critical votes unless
certain reforms are implemented. While it's certainly not undesirable to have the actions of
the board checked by shareholders in this way, the future of corporate governance is
perhaps more holistic. Companies can and do have ethical obligations to their communities,
 customers, suppliers, creditors and employees, and must take care to protect the interests
of non-owner stakeholders in the company code of conduct. A corporation should be fair
and transparent to its stakeholders in all its transactions. This has become imperative in
today’s globalized business world where corporations need to access global pools of
capital, need to attract and retain the best human capital from various parts of the world.
Unless a corporation embraces and demonstrates ethical conduct, it will not be able to
succeed. Openness, integrity and accountability are the key elements of Corporate
Governance for any corporate entity. These factors assume greater importance in case of
Public Sector Banks.
7. Non-coverage of unlisted corporates This is one of the major hindrance caused to
effective corporate governance as the applicability of rules and regulations are restricted to
the listed entities only as per the clause 49 of the listing agreement which leads to small
and mid-sized firms to perform activities which are legal in nature but are not ethical.
8. Disclosure of off-balance sheet transactions There are many transactions which cannot
be disclosed in the balance sheet and even if they can be they cannot be displayed in
monetary terms. What transactions are to be disclosed and how to be disclosed is entirely
on the discretion of management. Corporate governance has a basic principle of
transparency but it fails to provide a provision for its compliance.
9. Family owned business In India, the majority of the businesses are family owned which
means there is no provision regarding the dilution of powers. Ranging from directors to
employees all key positions are held by family members. Also, the company’s and family’s
relationship is very ambiguous in reference to that the assets of the company and the family
are not separated legally.
10. Multiplicity of regulations In India there are many regulatory bodies such as Companies
act 2013, Securities and Exchange Board of India (SEBI), Reserve Bank of India, Insurance
Regulatory Development Authority, etc. and they have no coordination with each other
which leads to multiple provisions for a single type of event/transaction. This creates
confusion and leads to chaos. This duplicity provides companies a loophole to escape from
responsibility. These regulatory bodies are reactive but not proactive which means they
only take action when there is a scam.
11. Corporate social responsibility It is mandatory for companies to allocate a minimum of
2% of the profits in the last 3 years for CSR. The small and the mid-sized firms do not have
the resources to allocate separate funds to CSR from its profit.
12. Spirit of corporate governance: Another important aspect is to realise that ultimately the
spirit of corporate governance is more important than the form. Substance is more
important than style. Values are the essence of corporate governance and these will have
to be clearly articulated and systems and procedures devised, so that these values are
practiced.
13. Migration: The rapid migration of four elements across national borders. These are (i)
Physical capital in terms of plant and machinery; (ii) Financial capital; (iii) Technology;
and (iv) Labour.
14. The report of the Consultative Group of Directors of Banks/Financial Institutions – chaired
by A.S. Ganguly has focussed on more fundamental issues like the supervisory role of
boards of banks and financial institutions and functioning of the boards vis-à-vis
compliance, transparency, disclosures, audit committees etc.
15. Banks deal in trust. If trust is in suspicion, damaged or lost, the resulting financial loss
cannot measure the true risk. Trust being the foundation of banking, the discussion over
applicability of good governance has really been a non-issue.
16. Ethics in managing an organisation are vital for long term survival. As far as business ethics
are concerned, a minimum code of ethics has to be practiced in competition, public
relations and social responsibilities. Corporate Governance encourages ethical standards
and sound business practices.
17. When it comes to the hardware aspect of corporate governance, we go into the issue of a
code, which becomes a reference point for behaviour. But the sad fact in our country is that
even though there is a lot of talk about corporate governance, when it comes to reality,
nothing much happens. In the Indian context lack of transparency that leads to corrupt or
illegal behaviour. Perhaps the most important challenge we face towards better corporate
governance is the mindset of the people and the organisational culture. This change will
have to come from within.One can have practices which are legal but which are unethical.
In fact, many a time, tax planning exercises may border on the fine razor’s edge between
the strictly legal and the patently unethical.
 18. Strong corporate governance is indispensable to resilient and vibrant capital markets and
is an important instrument of investor protection. Companies raise capital from market and
investors suffered due to unscrupulous managements that performed much worse than past
reported figures. Many corporates did not pay heed to investors’ grievances
19. Morality : It is quite possible that in the effort at arriving the best possible financial results
or business results there could be attempts at doing things which are verging on the illegal
or even illegal. There is also the possibility of grey areas where an act is not illegal but
considered unethical. These raise moral issues.

Overcoming these challenges

 Investment in Compliance cost In the initial stages, the compliance cost might seem huge
but it will prove to be a huge investment in the long run. Simplifying the unambiguous
regulations might promote the smooth functioning of the company and also encourage
corporate governance as the compliance cost will reduce.
 Changing regulations with time In this time of rapid growth where the technology
changes day by day it is important to upgrade the regulations of corporate governance in
accordance with the changing industrial and economic climate of the country. Adhering to
the old provisions might cause repercussions in the company.
 Regulations for unlisted companies The unlisted companies should also be brought under
the purview of corporate governance for healthy competition and better competition goals.
Standard and incentives are required for the mid-sized new entrants of the capital market.
Right now there are only few provisions for the unlisted companies which lets them walk
out scot free on the subject of corporate governance.
 Competence of independent directors Directors should have integrity and independence
of thought; the courage to express their independent thoughts. They should possess a grasp
of the realities of business operations and an understanding of business and financial
language. The skill set of the independent directors has to match to the company in order
for effective corporate governance.
 Strictness in regulators vigilance The role of regulatory bodies should not just be reactive
but proactive too. They shouldn’t just react after the scam but also supervise and regulate
 the functions of the company to deviate risks which could be avoided. Precautionary
measures have to be taken in order to avoid violation of any guidelines established by the
regulatory bodies.
 Stringent rules for transparency Transparency is a huge part of corporate governance
but there isn’t any clear regulation as to what should be disclosed and what shouldn’t be.
Providing clear rules on transparency will make compliance of corporate governance easier
and effective. Strengthening the disclosure strategy can prove to be the stepping stone to
effective corporate governance in India.
 Value based corporate culture: For any organization to run in effective way, it needs to
have certain ethics, values. Long run business needs to have based corporate culture. It is
a set of beliefs, ethics, principles which are inviolable
 Holistic view: This holistic view is more or less godly, religious attitude which helps in
running organization. It is not easier to adopt it, it needs special efforts and once adopt edit
leads to developing qualities of nobility, tolerance and empathy.
 Compliance with laws: Those companies abide and comply with laws of Securities
Exchange Board of India (SEBI), Foreign Exchange Regulation Act, Competition
Act2002, Cyber Laws, Banking Laws etc.
 Disclosure, transparency, and accountability: Disclosure, transparency and accountability
are important aspect for good governance. Timely and accurate information should be
disclosed on the matters like the financial position, performance etc. Due to tremendous
competition in the market place the customers having choices don't shift to other corporate
bodies.
 Corporate Governance and Human Resource Management: For any corporate body, the
employees and staff are just like family. For a company to be perfect the role of Human
Resource Management becomes very vital, they both are directly linked. Every individual
should be treated with individual respect, his achievements should be recognized. Each
individual staff and employee should be given best opportunities to prove their worth and
these can be done by Human Resource Department.
 Innovation: Every Corporate body needs to take risk of innovation i.e. innovation in
products, in services and it plays a pivotal role in corporate governance.
  Necessity of Judicial Reform: There is necessity of judicial reform for a good economy
and also in today's changing time of globalization and liberalization. It needs to speedily
resolve disputes in cost effective manner.
 Lessons from Corporate Failure: Every story has a moral to learn from, every failure has
success to learn from, in the same way, corporate body have certain policies which if goes
as a failure they need to learn from it. Failure can be both internal as well as external
whatever it may be, in good governance, corporate bodies need to learn from their failures
and need to move to the path of success.
 Independent directors- selection criteria must be transparent, also process of appointment
of BOD must be reconsidered.
 It is important to focus on not just Quantity or profits but on the sustainability of business
models.
 Need for having supervising the functions of management and make them accountable and
transparent to shareholders.
 Codes of conduct and whistle blower policies must be framed in such a way as to be
possible to put in to practise.
 Regulators should enhance penalities as well as to fix liability in imposing substantial
penalties for noncompliance.

Conclusion:

The concept of corporate governance hinges on total transparency, integrity and accountability of
the management and the board of directors. Be it finance, taxation, banking or legal framework
each and every place requires good corporate governance. Corporate Governance is a means not
an end, Corporate Excellence should be the end. Once, the good Corporate Governance is achieved
and the Indian Corporate Body will shine to outshine the whole world. In the Indian context, the
need for corporate governance has been highlighted because of the scams occurring frequently
since the emergence of the concept of liberalisation from 1991. We had the Harshad Mehta Scam,
Ketan Parikh Scam, UTI Scam, Vansishing Company Scam, Bhansali Scam and so on. In the
Indian corporate scene, there is a need to induct global standards so that at least while the scope
for scams may still exist, it can be at least reduced to the minimum. Corporate governance and
ethical behavior have a number of advantages. Firstly, they help to build good brand image for the
company. Once there is a brand image, there is greater loyalty, once there is greater loyalty, there
is greater commitment to the employees, and when there is a commitment to employees, the
employees will become more creative. In the current competitive environment, creativity is vital
to get a competitive edge. Corporate Governance in the Public Sector cannot be avoided and for
this reason it must be embraced. But Corporate Governance should be embraced because it has
much to offer to the Public Sector. Good Corporate Governance, Good Government and Good
Business go hand in hand.