What is corporate governance?

Corporate governance is the system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests between companies and their stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the society. Corporate governance specifies the distribution of rights and responsibilities among different participants in the business. It also offers the guidelines as to how the company can be engaged or controlled such that it can fulfill its goals and objectives in a manner that adds to the value of the company and is also beneficial for all stakeholders in the long term.

According to the World Bank, Corporate Governance is about promoting corporate fairness, transparency, and accountability. SEBI’s report on corporate governance mentions the need for those in control to be able to distinguish between what are personal and corporate funds while managing a company. So, the corporate governance assumes  a trustee’s roles such as conducting the business with all integrity and fairness, being transparent with regard to all transactions, making all the necessary disclosures and decisions, complying with all the laws of the land, accountability and responsibility towards the stakeholders and commitment to conducting business in an ethical manner. Particularly, it is crucial for the banks to ensure that promoters and managers of banks are persons of sound integrity so as to protect the interest of depositors and integrity of financial system. For that reason, as a part of corporate governance, banks are required to follow due diligence procedures for appointment of directors on the boards of private sector banks and regarding role and responsibilities of independent directors. Banks are also required to take steps to fortify risk management framework and constitute various committees in conformity with corporate governance.