Open Access Research Article
CORPORATE GOVERNANCE AND ETHICS UNDER THE COMPANIES ACT, 2013 : A STUDY
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Article Details
CORPORATE GOVERNANCE AND ETHICS UNDER
THE COMPANIES ACT, 2013 : A Study
AUTHORED BY - 1 Sanjib
Roy, LLM Student,
ICFAI Law School, The ICFAI
University, Dehradun
CO-AUTHOR - 2 Ashish Kumar
Singhal, Associate Professor,
The ICFAI University, Dehradun
ABSTRACT
Business Ethics/ Corporate Ethics is
the study and evaluation of decision making by the Corporations according to
moral concepts and judgements. The
initiative to effectively introduce Corporate Governance was taken up by Naresh
Chandra Committee and Narayan Murthy Committee who previewed Corporate
Governance model working in Companies from the viewpoint of shareholders
investors and other stakeholders of the Company.
The real change in the corporate sector could
be felt with the introduction of 2009 Mandatory Corporate Governance Voluntary
Guidelines which has to be complying by companies listed on stock exchange by
Clause 49 of Listing Agreement. The final assent to Corporate Governance
practices in the effective management of the company can be seen as
introduction to new significant provisions introduced in the Companies Act,
2013 in form of independent directors, women directors on the board, corporate
social responsibility and mandatory compliance of Secretarial Standards issued
by Institute of Company Secretaries of India as per Section 118 of Companies
Act, 2013.
The main theme of corporate
governance is to integrate sound management policies in the corporate framework
in such a manner to bring economic efficiency in the organization to achieve twin
goals of profit maximization and shareholder welfare.
Human values are rooted in virtues
which are difficult to monitor, measure and quantify. Therefore, ‘Principle Centred’ corporate
guidelines are encouraged to replace ‘Rule based’ ones. Ethical governance has become an important
issue in the context of unethical behaviour and malpractices by the corporate
houses.
KEY WORDS: Company Law – 2013, Corporate
Governance/ Ethics
Introduction
The ‘Corporate Ethics’ is also called
as the “Business Ethics”. The Business
Ethics/ The Corporate Ethics is the study and evaluation of decision making by
the Corporations according to moral concepts and judgements. The Corporate Ethics range from practical,
narrowly defined issues, such as Company’s obligation to be honest with its
customer, to broader social and philosophical questions, such as company’s
responsibility to preserve the environment and protect employee’s rights. In other words, “The application of a moral
code of conduct to the strategic and operational management of a business” is
Corporate Ethics.
Corporate Governance is the new
golden term coined in the Corporate Sector in the late 1990 by the Industry
Association on Confederation of Indian Industries as a voluntary measure to be
adopted by the Indian Companies. The
initiative to effectively introduce Corporate Governance was taken up by Naresh
Chandra Committee and Narayan Murthy Committee who previewed Corporate
Governance model working in Companies from the viewpoint of shareholders
investors and other stakeholders of the Company. Corporate Governance guidelines both mandated
and voluntary have evolved since 1998 due to the sincere efforts of several
committees appointed by the Ministry of Corporate Affairs and SEBI. The real change in the corporate sector
could be felt with the introduction of 2009 Mandatory Corporate Governance
Voluntary Guidelines which has to be complying by companies listed on stock
exchange by Clause 49 of Listing Agreement. The final assent to Corporate
Governance practices in the effective management of the company can be seen as
introduction to new significant provisions introduced in the Companies Act,
2013 in form of independent directors, women directors on the board, corporate
social responsibility and mandatory compliance of Secretarial Standards issued
by Institute of Company Secretaries of India as per Section 118 of Companies
Act, 2013.
Objectives of the Study
The objective of the present study is
to discuss some theoretical aspects of Corporate Governance and to highlight
the provisions of the Companies Act 2013 relating to corporate governance.
Methodology
It’s purely a theoretical paper based
on information collected from different sources like law books, journals etc.
The author proposes that some theoretical aspects of corporate governance to be
discussed in the primary stages of ‘discussion and analysis’ part of this paper
and then present the key features of company act 2013 relating to corporate
governance. Finally, a conclusion will be drawn based on discussion and
analysis.
Discussions and Analysis
Corporate Governance is a
multi-faceted subject and difficult to comprehend in a concise definition. The
main theme of corporate governance is to integrate sound management policies in
the corporate framework in such a manner to bring economic efficiency in the
organization to achieve twin goals of profit maximization and shareholder
welfare.
Need of Corporate Governance:
The collapse of international giants
like Enron, WorldCom, Tyco, AOL, and financial scams like Satyam have been big
eye-openers in the corporate arena to make realize the company’s management,
ownership, and stakeholders the emergent need to comply with Corporate Governance
principles in order to prevent themselves from paying huge corporate criminal
liabilities in the future. These huge corporate giants paid the cost for lack
of good corporate governance practices and corrupt policies adopted by
management of these companies and their financial consulting firms. The significance of good corporate governance
solutions has widened because of the increasing conflict between ownership and
management disciplines, the non-compliance of financial reporting by auditors
which inflicts heavy losses on investors and lack of fair and transparent
culture in the company which shook’s investor trust in the financial viability
of the company and its ethical standards.
Human values are rooted in virtues
which are difficult to monitor, measure and quantify. Therefore, ‘Principle Centred’ corporate
guidelines are encouraged to replace ‘Rule based ones[1]. Ethical governance has become an important
issue in the context of unethical behaviour and malpractices by the corporate
houses.
Scope of Corporate Governance:
Corporate governance instills ethical
standards in the company. It creates space for open dialogue by incorporating
transparency and fair play in strategic operations of the corporate
management. Key Market Players Involved
in Corporate Governance: The Corporate management decisions have an impact on
various people and entities associated with the company who are collectively
known as stakeholders which include shareholders, directors, creditors,
employees, suppliers, government agencies and society at large. But there are
only key stakeholders like shareholders, directors, officers who are active
participants in corporate governance process and other stakeholders who
themselves are not involved in corporate governance practices but rather are
recipients of benefits derived from companies having good corporate governance
practices.
Corporate Ethics towards the people:
The
primary objective of a corporation is to earn profits; however the corporations
should conduct their business in a healthy manner. There are several cases which shows that some
of the corporations very badly behaved and neglected their duties towards the
people. [2]Some
of the leading cases are (Reddy, 2014) :
(a) Union Carbide Corporation Vs. UoI
(1991), 4 SCC 584 : Bhopal Gas Leak Disaster case.
(b) M.C Mehta and another Vs. Shri Ram
Foods and Fertilizer Industries (AIR
1987 SC 965) : Oleum Gas Leak Case
(c) Indian Council for Enviro-Legal
Action and others Vs.UoI & Others (1996 – SCC 212): H-Acid & Chemical
Case)
(d) Narula Dyeing and Printing Works Vs.
UoI (AIR 1995 Guj 185): Effluent Treatment Pollution Case.
Even after three decades, in some of
the cases the victims are not paid the appropriate compensations. Here at this juncture, the Corporate Ethics
must be followed by every corporation not to cause the environmental pollution.
Corporate Ethics towards the
consumers:
The manufacturers of the goods have
special duty towards their consumers.
Donoghue Vs. Stevenson (1932 AC 562) is a famous case in the Law of
Torts which laid down Manufacturers Liability for Negligence – Neighbor
Rule. There are several statues such as
The Food Safety and Standards Act, 2006; the Prevention of Food Adulteration
Act, 1954, the Weight and Measurement Act, 1976 etc. have been imposing the
civil and criminal liabilities against the wrong doers. Here at this juncture, the Corporate Ethics
must be followed by every corporation to supply the hygienic foods and goods.
Corporate Ethics towards its own
employees:
Every corporation must treat its
employees in harmonious terms. They are
the foundation of every industry. There are laws and rules regulating the
management and workmen relations. The
laws and rules are different from the ethics. Moral ethics must be combined with the laws
and rules to improve the quality and quantity of the goods and services.
Social Accountability:
Corporate ethics include social
accountability. It is a concept
describing the communications of social and environmental effects of a company
economic action to particular interest groups within the society and to the
society at large.
Therefore,
the Corporations are liable to follow the Corporate / Business Ethics. The very least corporation can do is to be
honest about what it does each day.
Key Features of Corporate Governance
in Companies Act, 2013
The new Companies Act, 2013 has
introduced various key provisions which have changed the corporate regime in
such a way to run the corporate machinery in alignment with the globalised
corporate world by mandatory disclosure requirements for[3]:
1. Independent Director under the
Companies Act, 2013
The strength of number of Independent
Directors for the prescribed companies under Section 149(4) read with Rule 4 of
Companies (Appointment and Qualifications of Directors) Rules, 2014 for listed
Public Company is at least one third of total number of directors and public
companies having turnover of 100 crores rupees or more at least 2 directors and
public companies having paid up capital of 10 crores rupees or more at least
two directors.
2. Audit Committee
1. The Audit Committees of the
Companies Act, 2013 has undertaken both private and public companies within its
ambit to constitute audit committees. The constitution of audit committee has
also seen change as compared to clause 49 with minimum with three independent
directors on the board along with the chairperson who should be able to read
and understand the financial statement.
2. Section 177 of the Companies Act,
2013 and Rule 6 and 7 of Companies (Meetings of Board and its Powers) Rules,
2014 deals with the Audit Committee.
3. The Board of directors of every
listed company and the following classes of companies, as prescribed under Rule
6 of Companies (Meetings of Board and its powers) Rules, 2014 shall constitute
an Audit Committee.
I. All public companies with a
paid-up capital of Rs. 10 Crores or more;
II. All public companies having
turnover of Rs. 100 Crores or more;
3. Internal Audit
Companies Act, 2013 has mandated the
internal audit for certain classes of companies as specified under Section 138
of the Companies Act, 2013.
4. Serious Fraud Investigation Office
(SFIO)
Section 211 (1) of the Companies Act,
2013 shall establish an office called the Serious Fraud Investigation office to
investigate fraud relating to Company. The powers are given to SFIO under the
act as mentioned that he can investigate into the affairs of the company or on
receipt of report of Registrar or inspector or in the public interest or
request from any Department of Central Government or State Government.
5. Corporate Social Responsibility
The concept of CSR rests on the good
corporate citizenship where corporate contributions to societal growth as a
part of their corporate responsibility for utilizing the resources of the
society for their productive use. The Ministry
of Corporate Affairs has recently notified Section 135 and Schedule VII of the
Companies Act as well as the provisions of (CRS Rules) which has come into
effect from 1 April 2014.
Applicability
Section 135 of the Companies Act
provides the threshold limit for applicability of the CSR to a Company:
1. Net worth of the company to be Rs.
500 crore or more;
2. Turnover of the company to be Rs.
1000 crore or more;
3. Net profit of the company to be
Rs. 5 crore or more.
Further, as per the CSR Rules, the
provisions of CSR are not only applicable to Indian companies but also
applicable to branch offices of a foreign company in India.
CSR Committee and Policy
Every company as prescribed in
Section 135 of the Act and Company (Corporate Responsibility) Rules, 2014
within the threshold limit requires spending of at least 2% of its average net
profit for the immediately preceding 3 financial years on CSR activities.
Further, the company will be required to constitute a committee (CSR Committee)
of the Board of Directors (Board) consisting of 3 or more directors. The activities which may be included by
companies in their Corporate Social Responsibility Policies Activity relating
to :
(i)
Eradicating
extreme hunger and poverty.
(ii)
Promotion
of education
(iii)
Promoting
gender equality and empowering women.
(iv)
Reducing
child morality and improving maternal health
(v)
Combating
human immune deficiency virus, and other diseases
(vi)
Ensuring
environmental sustainability
(vii)
Employment
enhancing vocational skills
(viii)
Social
business projects
(ix)
Contribution
to the Prime Minister National Relief Fund set up by the Central Government or
the State Government for socio economic development and funds for the welfare of Scheduled Caste,
the Scheduled Tribe and other Backward Classes, miniorities and Women.
Conclusion
The study reveals that the Companies
Act, 2013 empowers independent directors with proper checks and balances so
that such extensive powers are not exercised in an unauthorized manner but in a
rational and accountable way. The
Directors must balance the ideal against the practical – the need to get a
reasonable profit for the company’s shareholders with honesty in business
practices, safety in the workplace and larger environmental and social
issues. However, the corporate ethics
issues in business have become more complicated because of the global and
diversified nature of many large corporations and because of the complexity of
Government laws and regulations that define the limits of criminal
behavior. It is our duty to encourage
the corporations including the MNCs to adhere to ethical standards.
As brought by the other researchers
as well, the changes are a step forward in the right direction to smoothly run
the management and affairs of the companies in the interest of stakeholders.
These are all welcome changes in the globalized corporate world of today and
they will strengthen the core corporate machinery by introducing strong
corporate governance norms in a company leading to economic efficiency and
higher ethical standards which will always inspire the company’s management to
work in the direction to uphold its goals of maximization of wealth of
stakeholders backed with good corporate repute.
REFERENCES:
1.
Sujatha
Law Series on Companies Act, 20134 by Gade Veera Reddy
2.
Corporate
Governance under the Companies Act, 2013: An Overview by Amit Kumar Chakraborty
3.
Ethical
Governance and the Role of Company Secretaries:
A Comprehensive Review by Dr. Dileep Kumar S.D
4.
The
Institute of Company Secretaries of India : Ethics, Governance &
Sustainabilty
5.
Article
on Company Secretary and Corporate Social Responsibility by Bhavesh A
Kinkhabwala, ACS
Article Information
CORPORATE GOVERNANCE AND ETHICS UNDER THE COMPANIES ACT, 2013 : A STUDY
Authors: SANJIB ROY, ASHISH KUMAR SINGHAL
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/04/18
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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