Corporate governance carries great depth of meaning. To most people, it means the way a company manages its business, in a manner that is accountable and responsible to someone—usually the shareholders. In a broad sense, responsibility and accountability are seen to be to broader audiences that also include the company’s other stakeholders such as employees, suppliers, customers, and the local community. It suggests ethics and morals, as well as the best practices.

Corporate governance is usually expressed in the form of a code—such as the Cadbury code in the UK. The CII has established its committee on corporate governance. The challenge for corporate India will be to establish a set of principles or a code that is acceptable in international best practice terms. This set of codes will lead to change in the Companies Act and auditing and reporting requirements eventually.

Corporate governance practices in India are likely to be changed for the better in the coming years. Promoters are becoming more answerable and responsive to shareholders. Financial institutions are appreciating the interventionist role they need to play in ensuring sound corporate governance.

Corporate governance refers to the relationship among the owners, directors and managers.

The Cadbury Committee Recommendations (Highlights)

In Britain, the Cadbury Committee was set up to go into the details of Corporate Governance prevailing there. After detailed studies, the committee made the following recommendations:

• Boards should have separate audit and remuneration committees made up entirely of independent directors.
  
• Audit committees should meet with the external auditors at least once a year and without executive directors.
  
• The full remuneration package of all directors—including performance-related elements-should be disclosed in annual reports.
  
• Director’s terms of office should run for no more than three years without shareholder’ approval.
  
• Companies must make funds available to non-executive directors who wish to get independent professional advice.
  
• The board must meet regularly.
  
• It ought to have a formal schedule of matters for decision.
  
• Independent directors should be appointed for specified terms.
  
• Independent directors should be appointed through a formal process.
  
• Independent directors should have a standing outside the company which ensures that their views carry weights.
  
• Independent directors should be fully independent and free from links with the company other than the fees and shareholdings.
  
• Fees for independent directors should reflect the time they spend on company business.
  
• There should be an accepted division at the head of the company, which will ensure a balance of power and authority such that no one individual has unfettered powers of decision. Where the chairman is also chief executive, there should be a strong independent element on the board with an independent leader.