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Issues In Corporate Governance

Corporate governance is intended to ensure the accountability of the Board of Directors of a company towards its stakeholders. In putting into practice the concept of corporate governance, the following major issues emerge:

(i)    Composition of Board of Directors,
(ii)    Role of Board of Directors,
(iii)    Audit Committee, and
(iv)    Shareholders’ Committee.

The areas of concern in corporate governance are discussed below:

(i)    Composition of Board of Directors. Several committees on corporate governance in India and abroad have highlighted the role of non-executive directors in corporate governance. The Board of Directors of a company must contain a certain percentage of non-executive directors as they can exercise independent judgment in the evaluation of corporate practice, performance management and monitoring of corporate policies and programs. The Cadbury committee suggested that the non-executive directors should be selected thought a formal process and the Board as a whole should decided their nomination. The should be appointed for a specific term and their reappointment should not be automatic.

 Many big corporations raise huge funds from the financial institutions which are authorized to nominate their representative on the Board of the concerned company. Kumar Mangalam Birla Committee recommended that the practice of nomine directors should be done away with for fear of insider trading. But it would be better to streamline the system by removing its deficiencies rather those persons as directors who can work independently in the interest of the company and its stakeholders.

(ii)    Role of Board Directors. The role played by Board of Directors of a Company determines the quality of corporate governance. This is because of the fact that it is the responsibility of the board to guide the management and to oversee the operations of the company to subserve the interests of company’s stakeholders. The board is expected to ensure that the management complies with the legal and ethical standards. It is also responsible for installing information and control systems which can report failure of management in discharging its responsibility towards various stakeholders of the company.

(iii)    Audit Committee. Formation of an independent audit committee is now considered an integral part of corporate governance. SEBI code of corporate governance has laid down the constitution and role of audit committee. It is also agreed by corporate leaders that audit committee must have a specific percentage of independent non-executive directors to be really effective percentage can improve the quality of financial reporting by periodically reviewing the financial statements, creating a climate of discipline and control and reducing financial statements, creating a climate of discipline and control and reducing the opportunity for fraud. It can provide communication link with external auditors and take steps to strengthen eh position of internal audit in the company.

(iv)    Shareholder’s Committee. The shareholders of a company are usually widely scattered and are not able to attend shareholders meetings. But they may have some grievances against the company. In order to attend to the grievances of shareholders, a shareholders committee should be constituted. Such a committee should function under the chairmanship of a non-executive director.

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