A corporate governance system is a set of legal, regulatory, and best practice elements. It was not only popular in India but around the world. The global community (investors and lenders) is less likely to add governance risks to the country and industry risks that are already inherent in their investment portfolio. The revised Clause 49 and the Listing Agreement are needed to be viewed in the backdrop of a significant increase in capital flows across the globe.
Corporate Governance
Good corporate governance can increase the value of shareholders. This has motivated legislators and regulators to tone up standard practices and laws. Stock exchanges observed that a separate index of companies with high governance ratings significantly outperformed the market index.
International credit agencies have also incorporated corporate governance variables into their credit rating methodology. However, the most interesting development is the weightage of corporate governance in the investment selection process by fund managers as opposed to the ownership management processes that have been the most relevant so far.
As the calibration gets fine-tune, the global banking systems could follow portfolio capital adequacy norms with risk weights for corporate governance. Therefore, governance might be an explicit consideration for companies issuing debt and influence the corporate cost of capital.
Business performance measures, such as well-hones internal systems, processes, and governance standards, are essential for companies to be competitive. Indeed, corporate governance is rapidly transforming into a business consideration.
More independent boards have become the order of the day. A significant number of independent or non-executive board of directors are required by almost all internal and international governance codes to address this issue. Independence is also gaining momentum in all parts of the world.
One cannot find fault with the need for independent professionals to make qualitative contributions to the board as it takes some time to create a reservoir of such independent directors. The independent directors can ask critical questions, bring in new perspectives to risk management and strategy, and evolve board meetings into brain-storming sessions that add value.
Increasing business complexity has made it impractical for the board to look at the company’s financial statement in detail. Thus, the role of the audit committee must be expanded, and they must be given tasks to understand such financial statements, discuss with internal and external auditors, and review the financial and accounting policies of the company periodically.
Committees can perform efficiently if their members are competent professionals having an understanding of finance. Proactive companies had already appointed audit committees (that are effective) even before the advent of Clause 49.
Clause 49
Clause 49 of the Listing Agreement is the only comprehensive set of requirements for corporate governance for listed companies in India. There are several pitfalls in Indian corporate governance. For instance, In India, the requirement of Clause 49 is completely inappropriate due to control over directors’ remuneration. In countries other than India, directors, and management receives sky-high remuneration and perks, irrespective of the company’s performance.
Remuneration of directors is hardly an issue in typical promoter-driven companies in India, so with Companies Act archaic limits on managerial remuneration and sitting fees are retained.
CEO/CFO Certification
Corporate governance requires vigilance that introduces the requirement for CEO/CFO certification. It can be viewed as a culmination of immaculate systems and business practices.
GrayCell Technologies has created an innovative web-based solution (i.e., CEO/CFO certification application) for helping Indian companies to implement Clause 49 compliance requirements. This application utilizes the .NET technology framework that helps to simplify the implementation process of CEO/CFO certification. It has already established processes to bring changes in the controls environment of several Indian companies such as Tata Chemicals Ltd. and Nestle India Ltd.
GrayCell Technologies is an award-winning digital solution provider company having more than 16 years of experience in delivering result-driven design, development & analytics solutions. It has proven experience in a broad range of business applications that use both open source and proprietary software technologies. GrayCell’s development team ensures to offer top-notch quality solutions at a competitive price within the specified timeline.
Conclusion
Issues in Clause 49 occurs in the method and techniques and not in the concept. Rather than copying methods that are not suitable for Indian corporations, a fresh approach is needed to bring a willing and enthusiastic application of corporate governance that will benefit all stakeholders in the long run.