FAQs

The vast amount of literature available on the subject ensures that there exist innumerable definitions of corporate governance. To get a fair view on the subject it would be prudent to give a narrow as well as a broad definition of corporate governance.

In a narrow sense, corporate governance involves a set of relationship amongst the company’s management, its board of directors, shareholders and other stakeholders. These relationships, which involve various rules and incentives, provide the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Thus, the key aspects of good corporate governance include transparency of corporate structures and operations; the accountability of managers and the boards to shareholders; and corporate responsibility towards employees, creditors, suppliers and local communities where the corporation operates.

In a broader sense, however, good corporate governance- the extent to which companies are run in an open and honest manner- is important for overall market confidence, the efficiency of international capital allocation, the renewal of countries’ industrial bases, and ultimately the nations’ overall wealth and welfare.

It is important to note that in both the narrow as well as in the broad definitions, the concepts of disclosure and transparency occupy centre-stage. In the first instance, these concepts create trust at the firm level among the suppliers of finance. In the second instance, they create overall confidence at the aggregate economy level. In both cases, they result in efficient allocation of capital.

Corporate governance is important for the following reasons:

  • It lays down the framework for creating long-term trust between companies and the external providers of capital
  • It improves strategic thinking at the top by inducting independent directors who bring a wealth of experience, and a host of new ideas
  • It rationalizes the management and monitoring of risk that a firm faces globally
  • It limits the liability of top management and directors, by carefully articulating the decision making process
  • It has long term reputational effects among key stakeholders, both internally (employees) and externally (clients, communities, political/regulatory agents)

Independent directors are the trustees of good corporate governance. An active and involved board consisting of professional and truly independent directors plays an important role in creating trust between a company and its investors, and is the best guarantor of good corporate governance. Increasingly, institutional investors, both in India and internationally, are closely scrutinising the corporate governance practices and the quality of boards before taking investment decisions. As Indian companies look towards accessing funds from foreign institutional investors and tapping global financial markets, the credentials of their independent directors will become important.

Finally, competent and qualified independent directors play an important role in the stewardship and strategy formulation of companies. Indian corporates that have appointed such directors to their Board have benefited immensely from their guidance and inputs.

In 2003, Ministry of Corporate Affairs (MCA) led a unique PPP model to set up the National Foundation for Corporate Governance in partnership with Confederation of Indian Industry, Institute of Company Secretaries of India and Institute of Chartered Accountants of India. Subsequently, Institute of Cost Accountants of India, National Stock Exchange and Indian Institute of Corporate Affairs also joined with an objective to promote good Corporate Governance practices both at the level of individual corporates and Industry as a whole.

NFCG endeavors to create a business environment that promotes voluntary adoption of good corporate governance practices.

The NFCG will focus on the following areas:

  • Corporate Governance
  • Corporate Social Responsibility (CSR)
  • Ethical Business Practice
  • Sustainability, Environmental, Social and Governance (ESG)
  • Risk Management
  • Data Governance and Cyber security