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Pankaj Tyagi
| Updated: 28 Feb, 2021 | Category: Latest News

Factors that Influence Corporate Governance in India

Corporate Governance in India

The corporate Governance in India states the set of processes, principles, & systems that control the company. On this basis, these processes, principles, & guidelines controls company & direct the decisions to meet its goals & objectives. It also helps the company to reap more value and proves productive for all the stakeholders in the long term. In this write-up, you will learn about the factors affecting corporate Governance along with its objectives.

Corporate Governance in India is not just a legal compliance but is a need to ensure the right balance between economic & social goals and between individual & communal goals. Corporate Governance is about advocating transparency, corporate fairness & accountability. It is about working legitimately and striking the right balance between economic and social goals. It encompasses the ability to function profitably while staying in line with existing regulations.

Elementary Principles Related to the Corporate Governance in India

  • Elementary principles related to corporate Governance in India are as follows;
  • Good corporate Governance aims to carry the business activities with all fairness, integrity.
  • It makes sure all that transactions remain as transparent as possible. 
  • The company makes all the decisions & disclosure within the legal framework.
  • It takes responsibility & accountability towards the stakeholders. Commit to carrying business activities with all integrity and fairness. 
  • Given SEBI reports regarding the essentials of Corporate Governance, the company’s controller must be able to draw a thick line between personal and corporate funds.

Scope & Application of the Corporate Governance in India 

The scope of Corporate Governance in India includes collecting processes, procedures, & provisions through which the company operates & controls. It refers to the mechanism by which an organization manages and directs its affairs. Business ethics play a vital role in Corporate Governance & it is the substantial factor influencing Corporate Governance.

The ideal model of Corporate Governance excels on the globally accepted principles of corporate Governance. As per the ideal model, the company conducts its business as per the stakeholder’s desire to reap profits. Board of Directors (BODs) and other associated committees are accountable for running the company and maintaining a balance between individual and societal goals, and social goals, and economic goals.

Factors Affecting Corporate Governance in India 

Corporate Governance is an ideal practice that comprises provisions & procedures to manage the organization. It influences and gets influenced by various factors. These factors can range from internal to external factors. Let us read more about the factors affecting corporate Governance.

The market factor[1] can be considered as a perfect example of external factors; meanwhile, the practice of communication can be regarded as an example of internal factors. 

There are various models of corporate Governance there are active at present as per the affiliated economic ecosystem and local laws. These have multiple problems as per the organization’s affairs and the influence of external factors. 

Following are the viable factors that influence Corporate Governance in India 

Factors Affecting Corporate Governance

Shareholders Activism 

Activist shareholders influence organizations to stamp approval for their proposal. Such individuals have reason to believe that the proposal will improve equity’s market values.

They may try out several ways to influence the board, such as leveraging legal proceedings and seeking representation on the board. Intimating their concerns with a member during shareholders’ meetings or even in the public domain is another way practiced by activist shareholders to affect the decision making.

Read our article:Shareholders Right – Know Its Variations and Procedures of Modification

Legal Environment

Another factor that affects the bonding of an organization and its stakeholders is the existing legal framework. The legal system affects the affairs of corporate Governance.

Shareholders tend to have improved protection in nations where common law is in existence. As per this system, the previously held ruling can be considered as the rule of law. This is not identical to the civil law system, where the law book’s rules have the utmost authority. The compensation, punishment, and procedures are defined in the law book, and rulings depend on these established laws. 

Hostile Takeover

The management acts as the shareholder’s agent. The ultimate responsibility of the board is to serve the shareholder’s interest. If the management fails to serve this purpose, the shareholders may go for the board’s replacement. Shareholders conduct such tasks with an aim to improve managerial performance for the sake of better results. 

This threat keeps the management under continuous pressure to act in the interest of the shareholders. Policies, practices, and procedures opted by the boards are affected by their alignment with the shareholder’s interest. This may act as a factor to push the stakeholders back and to keep them in a disadvantaged position. Good corporate governance principles anticipate that the board works legitimately without being unbiased to anyone. 

Shareholders Expectation from Corporate Governance

Businesses adhere to social responsibility to make profits in tandem with social welfare. To increase the investor’s share value in the short-term, the company might opt for unreasonable measures such as reducing expenditure on R&D, putting off the safety corners, stopping the funding for customer support activities, etc. These steps will ensure the improved share value and meet the investor’s requirement for a shorter timeframe. 

However, this is not precisely what shareholders wish for. Shareholders seek a better return in the shorter as well as longer-term. The increased return will ensure the increased dividends. These goals cannot be accomplished without a perfect Corporate Governance model. Dissatisfied shareholders adversely affect Corporate Governance, which leads to negative growth for a company. 

Conclusion

For a smooth and better company’s operation, the MCA (Ministry of Corporate Affairs) has mandated good Corporate Governance. It keeps the stakeholders intact with the organization. The company could focus on growth prospects and profit. 

The organization needs to stay in line with the fundamentals of corporate Governance to ensure stable growth. Taking utmost care of factors influencing corporate Governance paved the roadmap for stakeholders’ satisfaction. 

In case of overlooking the good corporate Governance, companies confront severe consequences such as disconnection with shareholders, drop in share prices, etc. Please share your doubts and question related to the working of Corporate Governance in India in the message box. 

Read our article:Shareholders Meeting is Crucial to Your Business. Learn Why!

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Pankaj Tyagi

Pankaj has a diverse experience of writing research papers, blog, and articles during his college time. Earlier, he was working as a tax consultant in a financial firm, but his interest in writing drives him to pursue a career in the writing field.

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