Thursday, 18 October 2018

Essay on Corporate governance: Promises and prospects for UPSC

Essay on Corporate governance: Promises and prospects for UPSC

Essay on Corporate governance
The complexity of businesses is increasing manifolds due to separation of ownership and control with the emergence of joint stock companies which allow millions of people from across the globe to own the business jointly. Multiple ownerships result in chaos in the business. The financial reports published for the companies provide information about the separation of power and control of private, public companies, shareholders and investors and the company's performance. These reports are easy to modulate and manipulate as it's in the hands of the managers. They may falsify these reports and provide misleading information about the liabilities, assets and risks. This information may cause loss of investments and breaking of trust of shareholders. This is where corporate governance comes into play. 

Corporate governance is defined by rules, laws and processes by which one monitors, manages and controls the business. Corporate governance encompasses the internal factors viz. the officers, stockholders and constitution of the business and the external factors viz. consumer groups, clients and government regulations. Both are equally important to ensure responsible leadership, transparency in the system and stewardship of organizational resources. If the shareholders, managers and board of directors work hand in hand, then the business can reach heights of efficiency. 

Transparency is the key to growth, stability and profitability of any business. There is a dire need of good corporate governance citing to the growing competitions amongst businesses in economic sector at national and international level. Good corporate governance has many prospects. It promises a harmonious, relationship among the stakeholders and the management.

Corporate governance has many facets to it. On one side, it ensures that the company is directed and controlled such as to achieve the set goals and thereby adding value to the company. And on the other hand, it takes into stride the stakeholders so as to benefit them in the long run. However, bad corporate governance can ruin the company. The high profile scams like stock market scam, Satyam scam, Ketan Parikh Scam, UTI scam have exemplified poor corporate governance. They have also set a benchmark for bringing corporate governance in India so as to avoid hampering its growth and development. 

But what is good corporate governance? When a management of a company works with its heart and soul in the interests of the owners and stakeholders instead of filling their own pockets, it is referred to as good corporate governance. For Indian listed companies, governance norms are set up in the Companies Act. Shareholders are the ones who invest in the public limited companies for building and running a business. But in day to day life, they play no active role in decision making. All the governance is delegated to the management team who takes crucial financial and business decisions. In good governance, the shareholder flourish, while in bad governance they are the ones who are prone to losing big time. Bad governance affects the stakeholders directly- the banks and lenders who provide financial assistance, employees who invest their careers in the company, the suppliers and the customers who support the company with their faith and loyalty. 

In today's scenario, corporate governance should be treated seriously. The leading titans of the business industry Infosys and TCS have also tasted the essence of corporate governance lately. Both these iconic organizations have faced a time of turmoil. Some call it boardroom tussle while some refer to it as owners versus management fight. But corporate governance of both these business giants has been in news for all the wrong reasons. In the case of TCS, the chairman - Cyrus Mistry was pitched against the owner of Tata Sons - Rattan Tata. Here, Mr. Mistry was removed from his position after the leading shareholder; Tata Trust lost faith in him. It was one on one battle which saw friction between Tata Sons and Mistry also fighting it in the court. The transition, however, was smooth with N. Chandrasekaran taking over as the Chairman of the group. On the other hand, in the case of Infosys, the shareholders lost faith in the whole management. N.R. Narayana Murthy, founder of Infosys with a 13 percent stake, expressed his dissent over certain decisions taken by the management. He raised issues involving higher compensation to executives, appointment of independent directors and acquisition strategies. The ugly fracas between the founder and the whole management at Infosys subsequently led to fall of stock prices by 15 percent and also has led to uncertainty for clients and employees. The board claimed that it continues to adhere to 'highest international standards' of corporate governance. With the naming of Nandan Nilekani as Infosys non-executive chairman, the message was sent to all stakeholders that there were no "discordant" voices at the country's second-largest IT firm. The company has been in a crisis over the last few months amid a stand-off between the founders and the management over allegations of corporate governance lapses. 

Howsoever, the transition in both the cases has been smooth and substantial. It is to the credit of good governance in these organizations. While at TCS, the leader had to be replaced because of lack of confidence whereas at Infosys, the board was quick to address issues raised by the owners. 

As a matter of fact, it should be noted that the shareholders are directly deprived of profits because of overhead expenses bore by the company like creative accounting, managerial remuneration, related party deals, free goodies to friends and family and risky mergers and acquisitions.

For any business today, corporate governance holds well defined guidelines. When streamlined into good governance, these can be beneficial to both the shareholders and the management. In a developing and sovereign country like India, corporate governance requires companies to have independent directors constituting one-third of the board, disclose all their related party deals, disclose about comparative metrics on managerial pays, appoint nomination and audit committees and the CEO and CFO to sign off on the governance guidelines being met in financial statements. It also empowers minority shareholders to drag the companies to courtroom for mismanagement and oppression. 

One may not have any say in the politics with regard to the appointment of ministers and bad governance, but with companies, one doesn't need to wait for five years span to be vocal about bad governance. Good governance is all about black and white without any grey area. It is transparent and empowers the owners or founders along with the management of the company. Good governance has many prospects and promises to grow a company in terms of its manpower, shareholders and stakeholders. Thus as a business owner, one should be weary of bad governance to avoid any hassles and tussles. 

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