Corporate Governance Framework

What is Corporate Governance:

Governance is defined as the set of rules and regulations, policies and strategies that are
useful to regulate the behaviour of a system, an authority or a large number of people. When
this governance is applied to a company or corporate field, it is called Corporate Governance.
Corporate governance is the set of rules and regulations that regulate the conduct of members
in the corporate sector or any company. Usually, the responsibility for regulating the conduct
of the members is given to the board of directors of a particular company, but even their roles
and conduct are regulated by legislation. Shareholders have to fulfil the duty of appointing a
board of directors, and in this way, they contribute to corporate governance. This governance
also defines how a member must continue his term in the company, how external and internal
affairs are to be conducted, and what the procedure is for different meetings of the board, like
general meetings, annual meetings, etc.
Corporate governance is therefore about what the board of a company does and how it sets
the values of the company, and it is to be distinguished from the day to day operational
management of the company by full-time executives.

Core values of Corporate Governance

● Fairness :

Effective corporate governance strives for good business ethics. All shareholders and
stakeholders should be considered and treated equally, regardless of their respective
shareholdings or position on the corporate ladder. Businesses that exercise favouritism risk
losing investors, suppliers, consumers and public support.
A board that strives to build an engaged and diverse organisation, actively conducts
succession planning, develops a reflective and incentivised compensation policy and
considers the interests of all of the company’s constituencies are exercising a good
understanding of fairness.
Red flags of bad corporate fairness include nepotistic promotions, internal corruption and
incompetent or a ‘closed-door’ approach to leadership.

● Responsibility

As the authoritative voice, steering control of so many elements of business, it’s important for
the board to wield their power responsibly. Directors must act ethically at all times and
maintain the best interests of all those impacted by the business.
Examples of good corporate responsibility in practice include taking a top-down approach to
ethical conduct and engaging with long-term shareholders on issues and concerns that affect
the company’s long-term value creation. Warning signs of bad corporate responsibility
include a board that disregards expert advice or is monopolised and controlled by an
individual member voice.

● Transparency

Transparency builds upon this trust. A corporation must exercise openness and willingness to
disclose truthful, accurate and timely information regarding the company’s financial, social
and political position to shareholders, stakeholders, consumers and the wider community.
A board with a comprehensive audit committee, routine external audits and informed,
unbiased annual reports are practising good corporate transparency.

● Accountability

Accountability surpasses right and wrongdoing or placing blame. Businesses must be able to
account for and explain every action and decision taken and are obligated to take ownership
of the risks involved. This builds trust between business and stakeholders and shareholders,
essential for maintaining confidence and procuring investment.
Establishing formal corporate reporting, sound risk management and internal control systems
and approving sustainable corporate strategies are examples of good corporate accountability
in practice.

Why we need Corporate Governance:

● Good corporate governance helps to build an environment of trust, transparency and

accountability necessary for fostering long-term investment, financial stability and
business integrity, thereby supporting stronger growth and more inclusive societies.
● From this perspective, corporate governance would focus on internal structure and
rules of the Board of Directors, the creation of independent audit committees, rules
for disclosure of information to shareholders and creditors, and control of the
management.

Corporate Governance Framework in india :

The Indian framework on Corporate Governance has been vastly in sync with the
international standards. Broadly, it can be described in the following:
● The basic framework for regulation of all companies in India is contained in the
Companies Act, 1956, which provides for checks and balances over the powers of
the Board of Directors.The Companies Acts 2013 has provisions concerning
 Independent Directors, Board Constitution, General meetings, Board meetings, Board
processes, Related Party Transactions, Audit Committees, etc.

● SEBI (Securities and Exchange Board of India) Guidelines ensure the protection of
investors and have mandated the companies to adhere to the best practices mentioned
in the guidelines.

● Accounting Standards issued by the ICAI (Institute of Chartered Accountants of

India) wherein the ICAI is an autonomous body and issues accounting standards. The
disclosure of financial statements is also made mandatory by the ICAI backed by the
Companies Act 2013, Sec. 129.

● Standard Listing Agreement of Stock Exchanges applies to the companies whose

shares are listed on various stock exchanges.

● Secretarial Standards Issued by the ICSI (Institute of Company Secretaries of

India) on ‘Meetings of the board of Directors’, General Meetings’, etc. The
Companies Act 2013 empowers this autonomous body to provide standards which
each and every company is required to adhere to so that they are not punished under
the Companies Act itself.

Key legal framework for Corporate Governance :

The Companies Act, 2013

The Government of India has recently notified Companies Act, 2013 which replaces the
erstwhile Companies Act, 1956. The New Act has greater emphasis on corporate governance
through the board and board processes. The New Act covers corporate governance through its
following provisions:

The New Companies Act introduces significant changes to the composition of the boards of
directors.
● Every company is required to appoint 1 (one) resident director on its board.
● Nominee directors shall no longer be treated as independent directors.
● Listed companies and specified classes of public companies are required to appoint
independent directors and women directors on their boards.
● New Companies Act for the first time codifies the duties of directors.
● Listed companies and certain other public companies shall be required to appoint at
least 1 (one) woman director on its board.
● New Companies Act mandates following committees to be constituted by the board
for prescribed class of companies:
○ Audit committee
○ Nomination and remuneration committee
○ Stakeholders relationship committee
 ○ Corporate social responsibility committee

Listing agreement – Applicable to the listed companies

SEBI has amended the Listing Agreement with effect from October 1, 2014 to align it with
New Companies Act.
Clause 49 of the Listing Agreement can be said to be a bold initiative towards strengthening
corporate governance amongst the listed companies. This Clause intends to put a check over
the activities of companies in order to save the interest of the shareholders. Broadly, cl 49
provides for the following:

1. Board of Directors

The Board of Directors shall comprise of such number of minimum independent directors, as
prescribed. In cases where the Chairman of the Board is a non-executive director, at least
one-third of the Board shall comprise of independent directors and where the Chairman of the
Board is an executive director, at least half of the Board shall comprise of independent
directors. A relative of a promoter or an executive director shall not be regarded as an
independent director.

2. Audit Committee
The Audit Committee to be set up shall comprise of minimum three directors as members,
two-thirds of which shall be independent .

3. Disclosure Requirements

Periodical disclosures relating to the financial and commercial transactions, remuneration of

directors, etc, to ensure transparency.

4. CEO/ CFO Certification

To certify to the Board that they have reviewed the financial statements and the same are fair
and in compliance with the laws/ regulations and accept responsibility for internal control
systems.

5. Report and Compliance

A separate section in the annual report on compliance with Corporate Governance, quarterly
compliance report to stock exchange signed by the compliance officer or CEO, company to
disclose compliance with non-mandatory requirements in annual reports.