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What is corporate
governance?
The
vast amount of literature available on the subject ensures that there
exist innumerable definitions of corporate governance. To get a fair
view on the subject it would be prudent to give a narrow
as well as a broad definition of corporate
governance.
In
a narrow sense, corporate governance involves a set
of relationship amongst the company’s management, its board
of directors, shareholders and other stakeholders. These relationships,
which involve various rules and incentives, provide the structure
through which the objectives of the company are set, and the means of
attaining those objectives and monitoring performance are determined.
Thus, the key aspects of good corporate governance include transparency
of corporate structures and operations; the accountability of managers
and the boards to shareholders; and corporate responsibility towards
employees, creditors, suppliers and local communities where the
corporation operates.
In
a broader sense, however, good corporate
governance- the extent to which companies are run in an open and honest
manner- is important for overall market confidence, the efficiency of
international capital allocation, the renewal of countries’
industrial bases, and ultimately the nations’ overall wealth
and welfare.
It
is important to note that in both the narrow as well as in the broad
definitions, the concepts of disclosure and transparency occupy
centre-stage. In the first instance, these concepts create trust at the
firm level among the suppliers of finance. In the second instance, they
create overall confidence at the aggregate economy level. In both
cases, they result in efficient allocation of capital.
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Why is
corporate governance important?
Corporate
governance is important for the following reasons:
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It
lays down the framework for creating long-term trust between companies
and the external providers of capital
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It
improves strategic thinking at the top by inducting independent
directors who bring a wealth of experience, and a host of new ideas
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It
rationalizes the management and monitoring of risk that a firm faces
globally
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It
limits the liability of top management and directors, by carefully
articulating the decision making process
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It
has long term reputational effects among key stakeholders, both
internally (employees) and externally (clients, communities,
political/regulatory agents)
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Why
are independent directors important for good corporate governance?
Independent
directors are the trustees of good corporate governance. An active and
involved board consisting of professional and truly independent
directors plays an important role in creating trust between a company
and its investors, and is the best guarantor of good corporate
governance. Increasingly, institutional investors, both in India and
internationally, are closely scrutinising the corporate governance
practices and the quality of boards before taking investment decisions.
As Indian companies look towards accessing funds from foreign
institutional investors and tapping global financial markets, the
credentials of their independent directors will become important.
Finally,
competent and qualified independent directors play an important role in
the stewardship and strategy formulation of companies. Indian
corporates that have appointed such directors to their Board have
benefited immensely from their guidance and inputs.
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What
is the National Foundation of Corporate Governance?
The
National Foundation for Corporate Governance (NFCG) has been set up the
Department of Company Affairs, Government of India, in partnership with
Confederation of Indian Industry (CII), Institute of Company
Secretaries of India (ICSI) and Institute of Chartered Accountants of
India (ICAI) with the goal of promoting good corporate governance
practices in India.
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What
are the objectives of the National Foundation of Corporate Governance?
The
NFCG will focus on the following areas:
- Creating
awareness on the importance of implementing good corporate governance
practices both at the level of individual corporations and for the
economy as a whole. The foundation would provide a platform for quality
discussions and debates amongst academicians, policy makers,
professionals and corporate leaders through workshops, conferences,
meetings and seminars.
- Encouraging
research capability in the area of corporate governance in the country
and providing key inputs for developing laws and regulations which meet
the twin objectives of maximizing wealth creation and fair distribution
of this wealth.
- Working
with the regulatory authorities at multiple levels to improve
implementation and enforcement of various laws related to corporate
governance
- In
close coordination with the private sector, work to instil a commitment
to corporate governance reforms and facilitate the development of a
corporate governance culture
- Cultivating
international linkages and maintaining the evolution towards
convergence with international standards and practices for accounting,
audit and non-financial disclosure.
- Setting
up of “National Centres for Corporate Governance’
across the country, which would provide quality training to Directors
and aim to have global recognition and acceptance
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