"Beyond Compliance: Unlocking Business Growth through Good Governance"
CS Riya Jain
12 Jul 2023
The Significance of Good Governance in Business Growth!
As a promoter or director of a private limited company, you may consider yourself an expert in the art of doing business, knowing the ins and outs of 'Dhanda.' However, there may be a missing piece of the puzzle that explains why your company is not at the top of the table or as widely recognized as industry giants like Reliance, TCS, or Infosys. The missing piece is governance. While compliance with the law is crucial, good governance goes beyond mere compliance. It involves following the law with both the letter and spirit, enabling your company to reach new heights. This essay will delve into the importance of governance and highlight specific governance practices that can contribute to the growth and success of a company.
The Gap in Governance:
According to the Monthly Information Bulletin released by the Ministry of Corporate Affairs (MCA) in January 2023, an astonishing fact emerges: a whopping 95% of companies registered under the Companies Act are privately held. Out of the total of 1,517,008 active companies, only a mere 6,739 are listed publicly.
This striking disparity between registered and listed companies highlights the crucial role that governance plays in the development of a company. Although adhering to compliance requirements is essential, it alone is insufficient to guarantee long-term prosperity and acknowledgment.
Understanding Good Governance:
Good governance is not limited to tick-box compliance; it is about embracing the intent behind these compliances. Building a strong compliance team comprising chartered accountants, company secretaries, legal advisors, and more is commendable, but it does not automatically translate into practicing good governance. To truly practice good governance, one must comprehend the underlying purpose of various compliance requirements.
Enabling Growth through Governance
It is essential for companies to understand the true intent behind various compliance measures to practice good governance effectively. Some important aspects of governance include:
Importance of Board Meetings:
While it is now widely known that conducting 4 Board Meetings per year is a necessary compliance requirement, understanding the significance of these meetings is crucial. Quarterly board meetings allow for a comprehensive review of the company's performance, alignment with objectives, and consideration of future goals and transactions. It provides an opportunity to assess the effectiveness of current strategies and make necessary adjustments.
Placing DIR-8 and MBP-1:
Placing DIR-8 and MBP-1 at the first Meeting of the Financial Year ensures that all Directors are aware of any potential conflicts of interest and disqualifications. This transparency establishes a strong foundation for ethical governance practices.
Rotation of Auditors:
Changing auditors after their two-term limit helps maintain their independence and ensures unbiased opinions. Independent judgments from auditors contribute to presenting the company's true financial position, facilitating accurate decision-making.
Rotation of Independent Directors:
Similar to auditors, changing independent directors after their two-term limit promotes independence and brings fresh perspectives. These directors play a vital role in providing unbiased advice in the best interest of the company.
No Remuneration for Independent Directors:
Non-remunerated independent directors enjoy freedom from obligations and are able to provide objective opinions. Their impartiality enhances decision-making and benefits the company as a whole.
Timely Circulation and Signing of Minutes:
Draft minutes should be circulated within 15 days of the meeting to ensure directors' accurate recollection of discussions. By signing the minutes promptly, directors certify the accuracy of the information discussed, protecting themselves against potential legal issues.
Notice for Board Meetings:
A notice served at least seven days in advance ensures maximum participation by directors and provides ample time to review agenda papers thoroughly. This allows directors to make informed decisions without feeling rushed or ill-prepared.
Annual reports serve as a comprehensive review of the company's performance, achievements, and areas for improvement. By presenting the annual report in the board meeting, directors are well-informed about its contents before it enters the public domain.
Quarterly Review of Financial Results:
Regular review of financial results on a quarterly basis keeps directors updated on the company's financial performance. This timely information enables proactive measures to address any issues or capitalize on opportunities.
Embracing the Intent of Governance:
It is essential to recognize that these governance provisions are not arbitrary obligations but thoughtful measures designed for the benefit of businesses, promoters, directors, and all stakeholders. Viewing governance through the lens of compliance or obligation limits its potential. Instead, it should be embraced as a framework that ultimately serves the best interests of the company.
In conclusion, good governance is a pivotal factor in determining a company's success and growth. Compliance is just the first step; true success comes from understanding the intent behind these regulations and implementing them diligently. By embracing good governance practices, your company can reach new heights and thrive in the competitive business landscape. Remember, it's not just about ticking boxes; it's about ensuring the long-term interests and sustainability of your business.