What is corporate governance?

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.

Why is corporate governance important?

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)

Why are independent directors important for good corporate governance?

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.

What is the National Foundation of Corporate Governance?

The National Foundation for Corporate Governance (NFCG) has been set up the Department of Company Affairs, Government of India, in partnership with Confederation of Indian Industry (CII), Institute of Company Secretaries of India (ICSI) and Institute of Chartered Accountants of India (ICAI) with the goal of promoting good corporate governance practices in India.

What are the objectives of the National Foundation of Corporate Governance?

The NFCG will focus on the following areas:

  • Creating awareness on the importance of implementing good corporate governance practices both at the level of individual corporations and for the economy as a whole. The foundation would provide a platform for quality discussions and debates amongst academicians, policy makers, professionals and corporate leaders through workshops, conferences, meetings and seminars.
  • Encouraging research capability in the area of corporate governance in the country and providing key inputs for developing laws and regulations which meet the twin objectives of maximizing wealth creation and fair distribution of this wealth.
  • Working with the regulatory authorities at multiple levels to improve implementation and enforcement of various laws related to corporate governance
  • In close coordination with the private sector, work to instil a commitment to corporate governance reforms and facilitate the development of a corporate governance culture
  • Cultivating international linkages and maintaining the evolution towards convergence with international standards and practices for accounting, audit and non-financial disclosure.
  • Setting up of “National Centres for Corporate Governance’ across the country, which would provide quality training to Directors and aim to have global recognition and acceptance