Corporate Governance
The Companies Act 2013 imposes detailed corporate governance requirements, particularly for public companies and large private companies. Minimum board composition. Independent directors. Audit committees. Nomination and remuneration committees. Board meetings at prescribed intervals. Detailed disclosures in annual reports. Restrictions on related party transactions. The regulatory framework creates a baseline standard that companies must meet. But compliance with these requirements doesn't guarantee good governance. We've observed companies that meticulously comply with every corporate governance requirement while making terrible business decisions and allowing conflicts to fester.
Board composition determines governance effectiveness more than most companies acknowledge. A board dominated by insiders and family members might technically comply with requirements if it includes the minimum number of independent directors. But if those independent directors are token appointments who don't meaningfully participate or challenge management, the board provides no real oversight. Similarly, a board with strong independent directors who lack relevant expertise or understanding of the business might ask hard questions without adding useful input. Effective boards balance independence with relevant experience, and engagement with respect for management's operating authority.
The relationship between board and management creates inherent tension in corporate governance. Management runs the company day-to-day and has detailed operational knowledge. The board provides oversight and strategic direction but can't micromanage operations. When this relationship works well, management presents honest assessments of business performance and strategic challenges, and the board provides input and guidance while respecting management's execution authority. When this relationship fails, management hides problems from the board or presents overly optimistic pictures, and the board either rubber-stamps management decisions or interferes inappropriately in operational matters.
Information flow determines whether boards can govern effectively. Boards can only act on information they receive. If management controls what information reaches the board and filters out anything that might trigger uncomfortable questions, the board operates with incomplete knowledge. We've seen situations where serious operational or financial problems festered for months or years while the board received sanitized reports that everything was fine. By the time the board discovered the problems, the damage was severe and options were limited. Good governance requires information systems that ensure boards receive accurate and timely information about business performance, risks, and issues requiring board attention.
Conflicts of interest reveal the gap between corporate governance theory and practice. The Companies Act requires directors to disclose interests in transactions and abstain from decisions where they're conflicted. Related party transactions need special approvals. These rules make sense: directors shouldn't use their position for personal benefit at the company's expense. But in family-run businesses and closely-held companies, nearly every significant transaction potentially involves conflicts. Family members sit on the board. The company does business with other family entities. Directors have personal relationships with major suppliers or customers. Strict application of conflict rules would paralyze decision-making. So companies either ignore the requirements or comply mechanically without addressing underlying governance issues.
Shareholder rights and protections form another dimension of corporate governance. Minority shareholders need protection against majority control being exercised oppressively. The Companies Act provides extensive remedies: rights to information, rights to challenge transactions, rights to seek relief from oppression and mismanagement. But exercising these rights requires minority shareholders to challenge the majority through legal proceedings. For most minority shareholders in private companies, this is impractical. By the time a situation deteriorates enough to justify legal action, the relationship has broken down completely. Better governance structures provide mechanisms for minority shareholders to protect their interests before conflicts escalate to litigation.
Audit and financial oversight represent critical governance functions that often fail to prevent problems. Companies maintain internal controls, conduct internal audits, engage external auditors, and have audit committees review financial statements. Despite these layers of oversight, financial irregularities and fraud still occur. Sometimes the controls are inadequate. Sometimes they're circumvented by management. Sometimes auditors don't identify issues or don't report them adequately. Sometimes audit committees don't ask the right questions or don't follow up aggressively enough. The governance framework exists, but weaknesses in execution mean problems aren't detected or addressed.
Risk management forms an essential governance responsibility that boards often handle poorly. Companies face operational risks, financial risks, compliance risks, reputational risks, and strategic risks. Boards should ensure appropriate risk management frameworks exist, significant risks are identified and monitored, and major risk decisions receive board approval. In practice, many boards get superficial risk reports that don't facilitate meaningful oversight. Management might hide risks that make them look bad. Risk discussions get buried in lengthy board presentations. The board approves risk management policies without understanding whether they're actually implemented. When risks materialize into problems, boards discover they weren't actually managing risks effectively.
Succession planning reveals whether companies have effective governance or just governance theater. Every company needs plans for replacing key management positions. For public companies, CEO succession is a critical board responsibility. For private and family businesses, succession often involves transitioning ownership and control across generations. Companies with good governance address succession proactively, identify potential successors, develop them over time, and execute transitions smoothly. Companies with poor governance ignore succession until forced to address it by crisis: a key executive quits, a founding family member dies, a major shareholder demands change. Reactive succession creates instability and conflict that proactive planning would have prevented.
Crisis response tests governance more severely than routine operations. When a company faces a major crisis—financial distress, regulatory investigation, key management misconduct, major operational failure—the board needs to act decisively to protect the company. This requires setting aside normal procedures, gathering information quickly, making difficult decisions under pressure, and often replacing management. Companies with strong governance mechanisms and boards with relevant expertise can respond effectively. Companies with weak governance discover their structures were adequate for normal times but inadequate for managing crisis.
The geography and ownership context shapes governance realities in Kolkata and Mumbai businesses. Family-controlled businesses have different governance needs and challenges than professionally-managed companies. Companies with institutional investors face different governance expectations than closely-held private companies. Manufacturing businesses have different risk profiles than service businesses. One-size-fits-all governance frameworks don't account for these differences. Effective corporate governance requires structures and processes tailored to each company's ownership, industry, size, and stage of development. The question isn't whether a company complies with governance requirements. It's whether the company's governance structures actually enable good decision-making and protect stakeholders' interests.
