In recent times various issues regarding corporate governance are being prevalent in India.
In this scenario it is important to know about the corporate governance.
What does corporate governance mean?
The West has associated “governance” with a sense of piloting, steering or directing and oversight and ruled the modern day interpretation of “corporate governance”.
The Indian Companies Act 2013 does not define this term, though the accoutrements which help establish the standards of corporate governance in a company, are described in full regalia in the Act.
The Cadbury Committee describes corporate governance as the mechanisms, processes and relations by which corporations are controlled and directed.
Thus reduced to its bare essentials, corporate governance would mean the governance of companies.
What are the various issues in Corporate governance?
Getting the Board Right - Board of directors appointments in India are still by way of "word of mouth" or fellow board member recommendations.
It is common for friends and family of promoters (a uniquely Indian term for founders and controlling shareholders) and management to be appointed as board members.
Performance Evaluation of Directors - Although performance evaluation of directors has been part of the existing legal framework in India, Evaluation is always a sensitive subject and public disclosures may run counter-productive.
True Independence of Directors - Independent directors' appointment is biggest concern in the corporate governance.
The independence of promoter appointed independent directors is questionable as it is unlikely that they will stand-up for minority interests against the promoter.
Removal of Independent Directors - In India there are instances of independent directors not siding with promoter decisions have not been taken well and they were removed from their position by promoters.
Since there is a law that an independent director can be easily removed by promoters or majority shareholders.
Accountability to Stakeholders - Various general duties have been imposed on all directors, directors including independent directors have been complacent due to lack of enforcement action.
Executive Compensation - Executive compensation is a contentious issue especially when subject to shareholder accountability.
Risk Management - Indian companies certainly don’t have a clear idea about the risk management and predictions.
As a key aspect of risk management, privacy and data protection is an important governance issue, but it has been always neglected.
What measures needs to be taken?
Innovative solutions such as rating board diversity and governance practices and publishing such results or using performance evaluation as a minimum benchmark for director appointment are the need of the hour.
In a peer review situation, to avoid public scrutiny, negative feedback may not be shared, to negate this behaviour the role of independent directors in performance evaluation is key.
To protect independent directors from vendetta action and confer upon them greater freedom of action, it is imperative to provide for additional checks in the process of their removal.
Companies have to offer competitive compensation to attract talent, such executive compensation needs to stand the test of stakeholders' scrutiny.
The board must assess the potential risk of handling data and take steps to ensure such data is protected from potential misuse.
