Corporate governance

1. Meaning

The Cadbury Committee (United Kingdom, 1992) defined corporate governance as “the system by which companies are directed and controlled.” The OECD Principles of Corporate Governance describe it as a set of relationships between a company’s management, its board, its shareholders and other stakeholders, which provides the structure through which objectives are set and performance is monitored. The SEBI committee chaired by N.R. Narayana Murthy (2003) called it the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders.

The need arises from the separation of ownership and control in a company (Berle and Means, The Modern Corporation and Private Property, 1932): managers may pursue their own interests instead of the shareholders’, a conflict called the agency problem. In India the problem is also between controlling promoters and minority shareholders.

2. Principles

1. Transparency: timely and accurate disclosure of financial and non-financial information.
2. Accountability: of management to the board and of the board to shareholders.
3. Fairness: equal treatment of all shareholders, including minority and foreign shareholders.
4. Responsibility: to stakeholders and society.
5. Independence: of directors and auditors from management.
6. Integrity and ethical conduct.

3. Functions (elements) of corporate governance

• Board composition: a balance of executive, non-executive and independent directors; separation of the roles of chairman and managing director where possible.
• Setting strategy and supervising management.
• Protection of shareholder rights: voting, information, dividends.
• Financial reporting and audit: true and fair accounts, an independent statutory auditor, and an audit committee.
• Risk management and internal control.
• Executive remuneration fixed by an independent committee and disclosed.
• Related party transactions approved and disclosed.
• Stakeholder relations and grievance redressal.
• Whistle-blower mechanism.

4. Factors influencing corporate governance

1. Legal and regulatory framework: the Companies Act, SEBI regulations, listing rules, accounting standards (Ind AS).
2. Ownership structure: promoter-dominated, widely held, or government-owned.
3. Board structure and independence.
4. Role of auditors and their independence.
5. Capital market and institutional investors, who demand good governance.
6. Ethics and values of top management.
7. Market for corporate control: the threat of takeover disciplines poor management.
8. Media, credit rating agencies and public opinion.
9. Global practices, for firms raising capital abroad.

5. Arguments for corporate governance

• Protects investors, especially minority shareholders, and builds their confidence.
• Makes it easier and cheaper to raise capital, including foreign capital.
• Prevents frauds and scandals (Satyam, 2009; the IL&FS default, 2018).
• Improves performance and decision-making through independent oversight.
• Enhances reputation and long-term value.
• Protects stakeholders and the economy from corporate failure.

6. Arguments against (limitations)

• High cost of compliance, especially for smaller listed companies.
• Box-ticking: firms comply in form, not in spirit.
• Independent directors are often chosen by promoters and may not be independent in fact.
• Slows decision-making with more committees and approvals.
• Rules cannot replace honest management; frauds still occur.
• One model does not suit all companies.

7. Development in India

8. Key legal provisions

• Independent directors: at least one-third of the board of a listed company (section 149(4)); their duties are in Schedule IV (Code for Independent Directors). Under LODR, half the board must be independent where the chairman is an executive or promoter.
• Woman director on the board of listed and prescribed public companies (section 149(1), second proviso).
• Audit committee (section 177) with a majority of independent directors; nomination and remuneration committee (section 178); stakeholders relationship committee (section 178(5)).
• Vigil mechanism (section 177(9)).
• Auditor rotation for listed companies (section 139(2)) and prohibition of certain non-audit services (section 144).
• Related party transactions (section 188) require board or shareholder approval.
• Directors’ responsibility statement in the board’s report (section 134(5)).

How this is examined

January 2026 set “Corporate Governance” as a 6-mark note; June 2025 set “Discuss the concept and functions of corporate governance in detail” (10 marks) and “Define corporate governance. Explain in detail the arguments for and against” (16 marks); February 2025 set “Factors influencing corporate governance” (10 marks). Cadbury definition, agency problem, principles, then the part the question asks for, and end with the Indian provisions.