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Over the past few decades, the business environment has moved towards public companies to expand and diversify their objectives; it is undeniable that these external environments are becoming more complex and prone to massive irregularities. They often get deviated from their legal obligation making it more complicated for the stakeholders. These increased regulatory concerns imposed the need for effective governance strategies to mitigate and prevent the overseen complexities in the corporation’s operational and management affairs. The corporate governance mechanisms in listed companies have proved to play a crucial part in bringing new challenges from operational, regulatory and compliance perspectives in the company management.
Corporate governance has a rich historical background; it emerged during the 16th and 17th centuries at the outset of East India Company, the Hudson’s Bay Company, Levant Company. Its importance was settled at the corporation’s managerial aspects such as the Board of directors, accountability and transparency in audit reports, shareholders protection, etc. Concerning the listed companies, the Board, management, and the shareholders are the three key actors; their stability and balance of power policy-making and decision-making strategies are the most discussed topic among academic experts, regulators, executives and investors.
Various evolution is witnessed since its emergence, post-World War II, the French revolution, industrial revolution, globalization and financial market regulation; the need and scope for corporate governance increased tremendously.
What is Corporate Governance
“Corporate governance is the system of internal controls and procedures by which individual companies are managed. It provides a framework that defines the rights, roles, and responsibilities of various groups—including management, the Board, controlling shareowners, and minority or non-controlling shareowners—within an organization.”
The essence of corporate governance is to create well-regulated company management with proper checks and balances; Board and management arrangement also plays a pivot role. The main principle which the corporate governance code follows is to minimize and manage the contradictory interests between insiders and external shareowners and stakeholders to maintain a conventional business enterprise. Its purpose is to prevent financial risks and unfair business practices; it aims to diversify the company management to alleviate one group from seizing one or more other groups within the management and maintain liquidity of company assets in the financial market. For all these functions, they endeavour to provide a structure that ensures the organization’s long-term viability.
What is Listed Company
The listed company refers to a corporation or an institution that lists its stocks and securities in the stock exchange market, facilitating the public to purchase. They have the company’s characteristic features, possessing a common seal, perpetual existence and is incorporated as a separate legal entity with liabilities and transferability of shares. The stock exchange market has fixed specific prerequisites to the company to get listed for trading; compliance with all the requisites in the listing agreement provides the stock exchange with a legal undertaking from the company to get sanctioned on any illegalities.
The features of a listed company are as follows:
- Listed companies are owned by numerous shareholder who purchases their company stocks
- The Chief executive officer undertakes the managerial affairs along with other executives
- The Board of Director, who are the elected representatives of the shareholder, will have the authority of policy-making and decision-making
- The listed company conduct timely meetings with the shareholders to make discussions and to pass resolutions
- They take the required steps for maintaining corporate social responsibility and business ethics.
The term listing refers to a process or step, or exercise involved in listing something with the stock exchanges. It is permission to quote shares and avengers officially on the trading platform in the stock exchange market. The listed shares appear on the official list of securities for trading. The purpose of recording with the stock exchange is to ensure free transferability of securities to facilitate clear transparency and open disclosure of information relating to its affairs whose securities are listed. Also, official quotation and liquidity in the trading of liquor listed securities are ensured. Listing allows for official trading in the stock exchange market by the stock exchange brokers’ registered members, which provides an ideal marketplace for securities.
The legal significance of listing makes it mandatory for a public company that intends to offer its securities or stocks to the public by issue of prospectors and which wishes to provide trading facilities to the guarantees been provided in public. This mandatory requirement provision enforces indirectly stipulating any allotment of securities made in the absence of listing or refusal of the listing is to be held to be void.
Listing securities with the stock exchanges are made possible through a listing agreement between the respective stock exchanges and the company that wants to issue securities in the market. Such listed securities are traded through secured transactions where the corporate entity offers additional protection to the public through a document like prospectors or a letter of offer. A corporate entity is free to have security listed in any stock exchanges; however, essential securities are listed on the regional stock exchange located where the company’s registered office is situated. Listing is considered a barometer of performance and its continued good performance, offering protection to the investors.
Benefits of Listing
- Enables easy marketability and liquidity that ensures easy raising of capital.
- Provides high collateral value for bank loans.
- Facilitates straightforward valuation of the actual worth of securities.
- They safeguard the general public interest by ensuring equitable allotment, easy transfer, disclosure of pertinent information, etc.
- Availability of tax advantages to listed securities.
- Provision of selling foreign for companies to mop up additional capital in future.
- Higher status and reputation for the company by enjoying the confidence of the investing public.
- Assurance of securities’ genuineness as the listing is made after a thorough analysis of companies’ capital structure, the management pattern and business prospects.
- Assures an existence of good faith or an absence of fraud concerning the issues of securities.
- Providing activities of quick transfer registration and corporate information.
Listing and Corporate Governance
Listing implies special significance in the light of the measures initiated to revamp the functioning and shape corporate management culture. In India, the Birla committee of corporate governance has recommended that the stock exchange board issue frequent directions to the listed companies dealing with stock exchanges in the financial market to introduce new listing provisions. It created a platform to secure the company’s affairs’ healthy corporate control in the stakeholders’ significant interests. The listed companies are entrusted with essential managerial duties such as forming a competent board of directors, ensuring shareholders’ rights through adequate representation and communication, and governing the company’s financial dealings more transparently and ethically. The listing requisites demanded an independent, transparent, and accountable management with fair, accurate, timely, reliable, relevant, complete and verifiable manner aligned with the corporate governance norms.
Indian Scenario – Sebi Equity Listing Agreement
Shri N. R. Narayana Murthy Committee on Corporate Governance exercised their powers conferred by section 11(1) of the Securities and Exchange Board of India Act, 1992, read with section 10 of the Securities Contracts (Regulation) Act 1956, SEBI revised clause 49 of the Listing Agreement. The revised clause 49 contains both the sub-clauses of existing clause 49 as well as new sub-clauses. The revised clause 49 was made applied to all the listed companies following the implementation schedule given in the revised clause 49. It ensured that the Stock Exchanges act as a watch-dog over implementing corporate governance provisions in the company seeking a listing in the stock exchange market.
The stock exchanges were ordered to look into whether the companies seeking listing in the stock market have set up the Board and constituted committees such as Audit Committee, shareholders/ investors grievances committee, corporate social responsibility committee etc. The Stock exchange also provides a reasonable time to comply with these conditions, and genuine legal issues will be undertaken on delaying such compliance. In such cases, while giving a listing, the stock exchanges shall obtain an appropriate undertaking from the company. If the company fails to comply with this requirement without any genuine reason, the application money shall be kept in an escrow account till the conditions are complied with.
Need for Corporate Governance in a Listed Company
REGULATING KEY CORPORATE ACTORS
Board of directors
BODs play a key role in listed companies, and they are considered the representatives of the shareholders; a robust corporate governance code facilitates proper regulation of the Board of directors. It deals concerning
- appointment of directors
- remuneration and rewards
- minimum and maximum number of independent directors, executive and non-executive directors
- determines the qualification and selection process
- considerations on the investigation and management of outside business and relationships with other stakeholders
Shareholders are the owners of a listed company; a study by Harvard and the University of Pennsylvania found that portfolios of Companies with strong Shareowner rights protections exceeded portfolios of Companies with weaker protections by 8.5% per year, the existence of multiple shareholders demands for proper protection strategies and regulations; this could be facilitated through corporate governance mechanisms; it comprises of
- determining the shareholder’s ownership in decision-making
- examining the structure and class of shareholders and their voting rights
- evaluate on the dividend fixation and biding on individual managerial remunerations.
- examine on the shareholders preemption rights that guard against dilutive instruments
- enquiry into shareholder grievances
- proposing defence mechanisms to manage market risks
Management and CEO
Managerial affairs render a primary role in stock listing management and share pricing. The corporate governance norms facilitate the determination of the following in the listed companies management:
- constitution of audit committees to check financial activities
- determination of financial and non-financial performances
- structuring the management with innovative and long-term plans
- appointing managing directors and executives members
- facilitating communication between the management and the shareholders.
Transparency and Accountability in Business Operations
One of the most important corporate governance principles is transparency and accountability in an organization; it ensures company management’s reliable performance. The Board of directors of a listed company must provide information about its activities and governance, documents concerning policies and financial reporting about the organizations market performances accurately and made available in a timely way to all the stakeholders. Transparency enables accountability since, in a listed company, accountability involves multiple parties. The corporate governance code ensures transparency and accountability in the following ways:
- The board of directors and other executives’ appointment procedure is done in the prescribed manner to eliminated impartial decision-making.
- Regular meetings are conducted to notify the shareholders of the company activities
- Assessing the company’s financial performance in the stock market and proposing the required risk management techniques.
- The Board will constitute an audit committee to track the financial transactions within and outside the company.
- A Corporate Social Responsibility Committee will be formed to perform sustainable development
- The committee should evaluate the level and quality of reporting around corporate governance and that of financial reporting and offer timely and transparent information to the investors
Listed corporations perform a crucial task in enhancing economic development by directly participating in the financial market through the stock exchange market. It improves investors’ economic standards by mobilizing their funds, and providing them high-returns on the one hand and perfects the financial market stability by maintaining liquidity, facilitating the purchase and sale of stocks. As it performs such a critical task, there is an extensive necessity for corporate governance norms in those listed entities.
Corporations, like all citizens, can sue and can be sued, and they have to perform acts within the scope of the law. The penalties for violations of the law will be served to the corporation. Compliance with legal obligations is not only appropriate; it is essential too. The Board and management should be satisfied that the company has a robust legal compliance program that effectively prevents and checks frauds and misconduct and encourages reporting potential compliance issues.
Corporations have a critical viewpoint to contribute to the public policy-making and discussions about the development, enactment and revision of the laws and regulations that have a significant impact on their businesses and the communities in which they operate and their employees. It presents an imminent need for the Board to perform a stong corporate governance strategy by involving in such political activities and should have oversight responsibility and consider adopting a policy on disclosing these activities.
Various market experts identify numerous crucial issues in listed corporations that require detailed understanding and remedial mechanism to perfect their corporate governance. Though the concept of corporate governance has emerged decades back still, it is not entirely adopted; the strategies and techniques keep changing to adapt to the dynamic nature of the financial market. It assists companies in internal and external management. Some of the most sensational public corporations’ failures and losses have highlighted the need for corporate governance practices to maintain internal control and safeguard investors’ interest.
Several studies published in recent years have shown a strong link between good corporate governance and strong profitability and investment performance measures. For example, a survey conducted by the Institutional Shareholder Services and Georgia State University found that the best-governed Companies, which Institutional Shareholder Services Corporate Governance Quotient measured; reveals that corporations that implemented high standards of corporate governance techniques had seen high returns on investment and equity that were 18.7 % and 23.8% better than those of poorly governed Companies during the year reviewed.
Research carried out by employees of the California Public Employees Retirement System on the effects of the company’s objective suggests that investment funds should attempt to improve the governance of companies that are considered poorly governed also produces good returns above-market performance. Another study ascertaining and testing a governance rating system in the German market for the period from March 1998 to February 2002 shows that a portfolio consisting of the best-governed Companies outperformed a portfolio of the worst governed Companies by a statistically significant average of 2.33% per month.
The primary stakeholder for a listed company are the shareholders or the investors; company management failures would negatively impact the financial market, which affects the liquidity of the market. In response to numerous market failures and crises, the need for corporate governance in listed companies is too globalized; many countries, industry groups, and other constituencies proposed creating and adopting new or amended corporate governance codes to perfect the business.