Significance of Corporate Governance
Good corporate governance has assumed greater importance and urgency in India give the following reasons:
- Changing Ownership Structure: The corporate landscape has witnessed a notable shift in ownership structures, particularly in large private-sector corporations. The traditional model of concentrated ownership by a few individuals or families has given way to a more diverse ownership base. This evolution has been driven by factors, such as the threat of hostile takeovers and the emergence of institutional investors. As a result, corporate governance has gained heightened significance in ensuring accountability, transparency, and protection of the rights of all shareholders. It plays a crucial role in preventing undue influence, promoting fair decision-making, and safeguarding the interests of minority shareholders.
- Social Responsibility: Corporate governance serves as a driving force in fostering social responsibility among companies. Integrating ethical practices and considering the interests of various stakeholders, including customers, lenders, suppliers, and the local community, helps organizations contribute positively to society. Effective corporate governance ensures that directors act in the best interests of the company while considering the broader impact of their decisions. It provides a framework for responsible management and distribution of resources, ultimately enhancing value for all stakeholders and facilitating sustainable development.
- Scams: Instances of corporate fraud have eroded public confidence and underscored the need for robust corporate governance practices. Scandals, such as the Harshad Mehta case and CRB Capital fraud have inflicted substantial losses on small investors and highlighted the importance of transparency, accountability, and risk management. By implementing effective governance mechanisms, including independent audits, internal controls, and board oversight, companies can detect and prevent fraudulent activities. Strong corporate governance acts as a safeguard, protecting the interests of shareholders, upholding ethical standards, and maintaining the trust of the investing public.
- Corporate Oligarchy: In India, the promotion of shareholder activism and democracy remains an ongoing challenge. Corporate governance practices need to address the issue of concentrated power and promote transparency, accountability, and shareholder participation. Encouraging diverse representation on boards, allowing proxies to speak at meetings, and fostering shareholder associations are vital steps toward countering corporate oligarchy. Effective corporate governance ensures a level playing field, promotes equitable decision-making, and helps establish a culture of inclusivity and fairness within organizations.
- Globalization: The integration of Indian companies into global markets and the pursuit of international listings have underscored the importance of robust corporate governance practices. Strong governance frameworks are vital for establishing trust among global investors, complying with international regulations, and fostering transparency and accountability. By adhering to global governance standards, companies can enhance their competitiveness, attract capital, and ensure the confidence of international stakeholders. Effective corporate governance facilitates strategic decision-making, risk management, and integrity in financial reporting, enabling companies to thrive in a globalized business environment.