UP PCS Mains-2024

Approach Briefly define Corporate Governance and Capitalist Economy. Discuss the role of Corporate Governance. Highlight the ethical issues with Corporate Governance. Discuss the measures to improve Corporate Governance: Conclude with a way forward.

Introduction

Corporate governance is defined as the system of rules, practices, and processes by which a company is directed and controlled and plays a crucial role in ensuring that businesses are run ethically and in the best interests of their stakeholders such as shareholders, senior management executives, customers, suppliers, financiers, government, and the community.

Body

The main objective of corporate governance is to prevent corporate greed and ensure that businesses are operated in a responsible and transparent manner.

In the capitalist economy, private actors own and control property in accord with their interests, and demand and supply freely set prices in markets in a way that can serve the best interests of society.

The essential feature of capitalist economy is to make profit. The chase of profit has led to the emergence of many problems like environmental degradation, concentration of wealth, and corrupt corporate practices.

Role of Corporate Governance:

• Fairness: The board of directors must treat shareholders, employees, vendors, and communities fairly and with equal consideration.
• Transparency: The board should provide timely, accurate, and clear information about financial performance, conflict of interest, and risks to shareholders and other stakeholders.
• Risk Management: The board and management must determine the risk involved, and measures to control them. The board must act on the recommendations given by its members to manage the crisis. They must inform all relevant parties about the existence and status of risks.
• Responsibility: The board is responsible for the oversight of corporate matters and management activities.
• It must be aware of and support the successful, ongoing performance of the company. Part of its responsibility is to recruit and hire a CEO. It must act in the best interests of a company and its investors.
• Accountability: The board must explain the purpose of a company’s activities and the results of its conduct. It is accountable for the assessment of the company’s capacity, potential, and performance. It must communicate issues of importance to shareholders.

Ethical Issues with Corporate Governance:

• Conflict of Interest: The challenge of managers potentially enriching themselves at the cost of shareholders. For example, the recent case of former ICICI bank head Chanda Kochar approved a loan to Videocon for a quid pro quo deal for her husband.
• Weak Board: Lack of diversity of experience and background represents a major area of weakness of the board. Often the board faces allegations whether it is performing in the interest of its shareholder or not.
• Separation of Ownership and Management: In the case of family-run companies, the separation of ownership and management remains a key challenge.
• Independent Directors: They behave in partisan manner and are not able to check unethical practices.
• Measures to improve Corporate Governance:
  • Diverse Boards are better Boards: In this context, ‘diverse’ is all-encompassing, including gender, ethnicity, skills, and experience.
  • Robust Risk Management Policies: Adoption of effective and robust risk management policies for better decision-making as it develops a deeper insight into the risk-reward trade-offs that all corporations face.

Effective Governance Infrastructure:

Since the board is ultimately responsible for all the actions and decisions of an organization, it will need to have in place specific policies to guide organizational behaviour.

To ensure that the line of responsibility between the board and management is clearly delineated, it is particularly important for the board to develop policies in relation to delegations.

Boards should improve their governance processes by addressing weaknesses highlighted in Board evaluations.

Committees to improve corporate governance:

• Naresh Chandra Committee (2002): If covered the corporate audits and the auditor company relationship.
• Uday Kotak Committee (2017): If stated that lifted company should have six directors on its board and atleast one independent director should be a women.

Conclusion

Thus, in a capitalist economy, as competition increases, the environment in which companies operate also changes and in such a dynamic environment the systems of corporate governance also need to evolve. Good corporate governance may not be the engine of economic growth, but it is essential for the proper functioning of the economic engine.

A corporate lawyer Annamarie van der Merwe said that “Corporate governance needs a mindset change. It’s about outcomes. It’s about ethics, value-creation, effective control, and legitimacy”.