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As a qualified Corporate Director, I am inspired to write this article to raise awareness among the public, particularly new entrepreneurs, and investors, about the importance of Corporate Governance. It is essential for them to gain a basic understanding of governance principles to avoid unnecessary and unforeseen obstacles that can arise from neglecting best practices. By following the right protocols, entrepreneurs can ensure smoother growth and mitigate risks that may otherwise hinder their success.
Corporate governance refers to the framework of rules, practices, and processes by which a company is directed and controlled. It ensures accountability, fairness, and transparency in a company’s relationship with its stakeholders (including shareholders, employees, customers, and the community). While corporate governance is often discussed in the context of large corporations, it is equally important for entrepreneurs and the common man in India.
Entrepreneurs, particularly those running startups and small and medium enterprises (SMEs), often overlook corporate governance, assuming it is only necessary for large corporations. However, strong governance practices from the outset can provide significant advantages. Implementing corporate governance helps entrepreneurs maintain transparency in their dealings and decisions. This can attract investors who look for companies with strong governance practices. India’s regulatory environment for businesses is increasingly complex. Governance structures ensure that entrepreneurs comply with laws and regulations (like the Companies Act, 2013, and SEBI regulations), avoiding penalties and building credibility. Good governance helps in identifying and managing business risks. A well-structured board, clear decision-making processes, and strong financial reporting practices can enhance investor confidence. Corporate governance is essential for long-term growth.
Corporate governance is not just for entrepreneurs or large corporations. It also affects the common man in several ways, especially as consumers, investors, and members of society. Individuals who invest in stocks, mutual funds, or other financial products, corporate governance ensures that companies operate in their best interest. A company with strong governance practices is more likely to manage its resources efficiently, avoid financial scandals, and provide returns to shareholders. Companies with good governance are more likely to be ethical and socially responsible. This benefits consumers, as they are assured of quality products and services. Governance helps ensure companies follow environmental, social, and ethical standards, which impacts the common man directly. Good corporate governance in companies also ensures fair labour practices, equal opportunity, and compliance with employment laws.
India has made significant strides in corporate governance in recent years. Some of the key developments include Companies Act, 2013: This act has provisions that promote transparency, protect minority shareholders, and impose stricter compliance for Indian companies. The Securities and Exchange Board of India (SEBI) has introduced several governance norms for listed companies, such as the requirement for independent directors, board committees, and increased disclosure. The role of independent directors has been strengthened, ensuring that there is a neutral and unbiased voice on the board. Indian companies with a certain level of turnover are required to spend a percentage of their profits on Corporate Social Responsibility (CSR) activities, ensuring that companies give back to society and contribute to social development.
Despite the benefits, corporate governance in India faces several challenges: Many entrepreneurs and small businesses are unaware of governance practices, viewing them as cumbersome rather than beneficial. Family-owned businesses and SMEs often resist separating ownership from management, which is crucial for sound governance. While regulations like the Companies Act and SEBI norms exist, they are sometimes complex and difficult for small businesses to comply with. Even with strong laws, enforcement of governance standards remains a challenge, particularly in unlisted and small companies.
Improving corporate governance is essential for fostering transparency, accountability, and long-term business sustainability. Here are several key strategies to enhance governance in organizations, ranging from large corporations to small businesses: Ensure that the board is composed of individuals with diverse skill sets, experiences, and perspectives. This diversity enhances decision-making and problem-solving. Ensure that the board is composed of individuals with diverse skill sets, experiences, and perspectives. This diversity enhances decision-making and problem-solving. Increase the number of independent directors who bring unbiased perspectives. They can challenge management decisions and ensure that the interests of minority shareholders and other stakeholders are protected. Periodically evaluate the board’s performance to ensure its effectiveness.
Companies should ensure timely, accurate, and comprehensive disclosure of financial and operational information. These builds trust with investors, regulators, and the public. Strengthen the internal audit function to ensure that financial controls, compliance mechanisms, and operational processes are effective and aligned with company goals Establish a whistleblower mechanism to allow employees and other stakeholders to report unethical or illegal activities anonymously. This promotes transparency and accountability within the organization.
Corporate governance is crucial for both entrepreneurs and the common man in India. For entrepreneurs, it offers a framework for sustainable growth, risk management, and investor confidence. For the common man, governance in companies they interact with—as consumers, employees, or investors—ensures that those companies operate ethically and responsibly. With India’s evolving regulatory framework, corporate governance will continue to play a pivotal role in shaping the business landscape, promoting fairness, transparency, and accountability in all sectors.
These pieces are being published as they have been received – they have not been edited/fact-checked by ThePrint