Code of Corporate Governance
For practising corporate governance in organisations, code of corporate governance is required. Code of corporate governance is just like any other professional code and prescribes the practices that the organisations should follow to achieve their objectives. In Indian context, code of corporate governance is required because the company laws which prescribe how a company can be managed, only prescribe procedural matters and the penal provisions if any offence is committed in the form of non-conformity to these procedures. These do not prescribe good corporate management practices. Code of corporate governance prescribes such practices.
Contents of a code of corporate governance may differ from country to country but, in general, a code of corporate governance contents the composition of board of directors, disclosure of information, and management practices.
Composition of Board of Directors
Board of directors of a company involves in both strategic and legal functions. Therefore, the composition of board of directors should be in accordance with company laws and other prescriptions. In India, he Companies Act has prescribed the composition of board of directors. Board members are classified as full-time directors or executive directors and part-time directors. Full-time directors devote their full time in managing the company. Part-time directors do not devote their full time but only participate in the board meetings or meetings of committees constituted by the board. In order to make board of directors more independent, that is, free from the influence of promoters of a company, SEBI has prescribed that all those companies whose shares are listed on any stock exchange must have at least 50 per cent independent directors. An independent director is a person who does not have any significant direct interest, except the compensation he receives by providing the service, in the company at the time of joining the company as a director. Just like the provisions of the Companies Act, it is a mandatory provision.
Disclosure of Information
Disclosure of information is the supply of information of financial nature or other nature relevant to all types of stakeholders of the company through annual reports, accounts, and other sources. While the Companies Act provides the format for providing such information parodically, SEBI has made provisions that all companies listed on the stock exchange will provide all such information which is likely to affect the share prices. Such information relates to financial performance, mergers and acquisitions, opening of a new unit/plant/office, declaration of dividend, and other relevant information. In this regard, SEBI has made two provisions. First, all companies will prepare, submit, and publicize their quarterly results (ending June, September, December, and March) besides annual results. These results will be communicated to the stock exchange/s concerned on the day or on immediate next working day (in the case of holiday) on which the results are finalised. These results will be published in at least two newspapers, one local newspaper and one national newspaper. Second, If there is any item related to the above is on the agenda of any meeting of the board of directors or any of its committee, this has to be communicated immediately to the stock exchange/s indicating the nature of item and the date on which the board/committee will meet.
Management Practices. Management practices include functions—planning, organising, staffing, directing, and controlling—relevant to business functions—production/operations, marketing, finance, and personnel as well as to stakeholders—shareholders, customers, suppliers, financial institutions, government, and society. Management practices as suggested by corporate governance should have fairness, transparency, and accountability.
Corporate governance has been applied in many countries and international institutions. Many countries have formulated code of corporate governance. In India, though no such code has been formulated as yet, Confederation of Indian Industry (CII), an association of a number of companies and regional chambers of commerce has suggested a code of corporate governance. Besides this, many companies have formulated their own code of corporate governance.
A review of the literature on corporate governance, including the Reports of various Committees, suggests that there are some pre-requisites for good corporate governance. They are:
• A proper system consisting of clearly defined and adequate structure of roles, authority and responsibility.
• Vision, principles and norms which indicate development path, normative considerations and guidelines and norms for performance.
• A proper system for guiding, monitoring, reporting and control.