[Submitted by CA. C. Giri Prasad]

September 7, 2008

Corporate governance is a concept of 19th century which is getting relevance in 20th century. Corporate governance is a system through which the companies are directed and controlled in an effective and efficient manner.

What is the need for corporate governance?

The companies have faced a continuous corporate failures, scams, wrong statements, misrepresentation of financial statements, and lack of directors' responsibility for the matters of the company. In the concept of corporate governance the affairs are looked after by a group of non-executive directors.

Even in India the essentiality of corporate governance has been envisaged and as first step SEBI appointed Kumar Mangalam Birla Committee which submitted its report called Kumar Mangalam Birla Committee Report (KMBC) 2000 which given a desirable corporate governance code, announced by Confederation of Indian Industries (CII).

The Companies (Amendment) Act, 2000 has also inserted Section 292A which envisages appointing an Audit Committee by every public company having paid up capital of not less than Rs.5 crore, with not less than 3 non-executive directors and 2/3rd of such members should be directors. They have full access to the information of the company and to have frequent meetings with the internal auditors on internal control matters. They have exclusive rights that their recommendations in any matters in relation to financial management, including audit report are binding on the Board.

Even Clause no.49 of listing agreement of SEBI recommends Audit Committee with minimum of 3 members who are non-executive directors and financial literates and one should have accounting and related management expertise. They have power to investigate any activity, seek information from any employee, and obtain outside legal or professional advice.

From the above powers and duties we can see that how the country is insisting for the appointment of the independent persons so as to make the management of the affairs of the company transparent to the outsiders.

Aim:

The Audit committee is appointed so as to make the affairs of the company transparent to the outsiders, make the persons accountable, to make fair disclosure, integrity, integrity functioning of statutory audit function. It is a high mortal framework, wherein they should concern on satisfying multi stakeholders of the company but not merely increasing shareholders value without a fair return.

Needs:

  • The investors are tending towards companies which have efficient management.
  • It is useful for the various stakeholders so as to get transparent look of the company
  • It is an important instrument for investor protection.

Benefits:

  • The financial reporting and practices are improved due to transparency
  • They can look for the growth of the company as they are independent
  • Due to discussion with internal auditors, the weaknesses in internal control can be corrected.
  • They give timely information to the Board and senior management
  • They reduce the chances of frauds and malpractices
  • Enhancing the credibility of the financial disclosures and prompting trust by the investors.
  • They act as a liaison between internal auditors, management and shareholders.

Most of the public companies are following the concept of corporate governance but only few companies have taken initiative to use it as an important instrument for growth. Most of the companies have formed because it is a requirement as per Companies Act and listing requirements of SEBI. It may take time to be aware of the benefits of corporate governance, as miracles won't happen immediately.