What is Corporate Governance?
Corporate Governance in India is a set on internal controls, policy and procedures which form the framework of a company’s operations and its dealings with various stakeholders such as customers, management, employees, government and industry bodies. The framework of such policies should be such as to uphold the principles of transparency, integrity, ethics and honesty. Corporate Governance is the soul of an organisation and must be adhered to while indulging in any business practises.
It is indeed a proud moment for the Indian corporate sector. Around 12 Indian companies 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 Indian biggies like Tata Steel, L&T, Grasim, GIC, Mahindra & Mahindra, Asian Paints, SAIL and ITC are some of the other companies who have made it to this prestigious list. HDFC is the only company from the banking and financial sector to have attained a position in this list.
Forbes partnered with Statista, which surveyed 15,000 people from 60 countries regarding their opinion on top 2000 companies across the globe. Companies were evaluated on parameters such as trustworthiness, social conduct, 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 reinstate our belief in the importance of sound Corporate Governance in India.
Why is Corporate Governance so important?
- Risk Mitigation and compliance
There is a direct relationship between governance, risk mitigation and compliance. If a company is governed on the basis of sound principles, it will naturally work efficiently and ensure compliance with every statutory law and guideline. 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. 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 there is no established relation between corporate governance and market value of a company, it does enhance shareholder satisfaction. Corporate Governance in India plays a key role in protecting 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 be wiped away by a single unlawful incident, thus internal controls at the right place is mandatory.
- Better image during economic downturns
During the last few months, we have heard many stories of banking frauds and financial malpractices. It is but natural for people to believe that all banks and financial institutions are involved in all these, which 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 ages plays a strong role in upholding the company’s image even during tough situations.
- 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 for behaviour of the company, the utilization of resources, product/service innovation and overall corporate strategies.
- Crucial during mergers & acquisitions
Corporate Governance in India plays a critical role during 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 has the power to improve the quality of corporate governance of the organisation.
Corporate Governance in India: The unseen force behind an organisation
A company is not all about just profits, market valuations, P/E multiples and turnovers, there is a lot that goes into building its position and image. Corporate Governance is one such hidden force. After numerous scandals, maligned reputations and economic downturns, companies are now realising that few concrete steps towards better governance could have saved years of their labour.
Most companies chase only monetary gains and take corporate governance for granted. Due to lack of trust on governance, investor sentiments go awry resulting in mass outflow of FII funds, sale by majority shareholders, reduced market value and so on.
Designing the framework of corporate governance in India is no mean task in itself. The requirement and fundamentals vary across sectors, industries as well as nationalities. Profound corporate governance is a must for banks and healthcare in particular.
Other sectors, such as FMCG, IT and Retail need to prioritize good governance, but this may not help them in enhancing their market value. The influence of governance on value also varies. It gains more importance during tough times rather than smooth sailing periods.
Nevertheless, corporate governance in India will continue to be crucial no matter what. The approach must be a perfect balance between excessive stringency and too much flexibility. Only the framework must be holistic and take the interests of all the stakeholders into account.