Recommendation of Narayana Murthy Committee

Recommendations of Narayana Murthy Committee

Recommendations of Narayana Murthy Committee

According to the observation of the Narayana Murthy Committee, best-managed corporations also recognise that business ethics and corporate awareness of the environmental and societal interest of the communities, within which they operate, can have an impact on the reputation and long-term performance of corporations. According to the Narayana Murthy Committee on Corporate Governance, the most common school of thought would have us believe that if management is about running businesses, governance is about ensuring that it is run properly. All companies need governing as well as managing. The aim of “Good Corporate Governance” is to enhance the long-term value of the company for its shareholders and all other partners.

The report of the first CII Task Force on Corporate Governance under the Chairmanship of Rahul Bajaj (1998) has pointed out that there is a diversity of opinion regarding beneficiaries of corporate governance. The Anglo-American system tends to focus on shareholders and various classes of creditors. Continental Europe, Japan and South Korea believe that companies should also discharge their obligations towards employees, local communities, suppliers, ancillary units, and so on.

Most of the definitions articulated in the codes of the reports on corporate governance relate corporate governance to control of the company, of corporate management, or of company conduct or managerial conduct. A simple definition, but very broad in its implications, which is often quoted, is provided by the Cadbury Report (UK) – “Corporate governance is the system by which businesses are directed and controlled.”

In its narrowest sense, the term may describe the formal system of accountability of senior management to the shareholders. At its most expansive, the term is stretched to include the entire network of formal and informal relations involving the corporate sector and their consequences for the society in general. Corporate governance, however, as generally understood, includes the structure, process, cultures and systems that engender the successful operation of the organisations.

The Cadbury Report has elaborated that “corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align society.”

as nearly as possible the interests of individuals, of corporations and of “The concept of corporate governance primarily hinges on complete transparency, integrity and accountability of the management. There is also an increasingly greater focus on investor protection and public interest.”

The second CII Task Force on Corporate Governance, under the chairmanship of Naresh Chandra (2009) observes – Good corporate governance involves a commitment of a company to run its businesses in a legal, ethical and transparent manner – a dedication that must come from the very top and permeate throughout the organisation. That being so much of what constitutes good corporate governance has to be voluntary. Law and regulations can, at best, define the basic framework – boundary conditions that cannot be crossed.

According to the OECD Principles of Corporate Governance, corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.

Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring. In addition, factors such as business ethics and corporate awareness of the environmental and societal interests of the communities in which a company operates can also have an impact on its reputation and its long-term success.

The N. R. Narayana Murthy Committee on Corporate Governance, appointed by SEBI, seems to confer with the OECD view when it observes that corporate governance is the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal and corporate funds in the management of a company.

According to the minimal definition purported by the first CII Task Force (1998), corporate governance deals with laws, procedures, practices and implicit rules that determine a company’s ability to take managerial decisions vis-a-vis its claimants – in particular, its shareholders, creditors, customers, the State and employees.

The CII Task Force observes that there is a global consensus about the objective of ‘good’ corporate governance maximising long-term shareholder value. Since shareholders are residual claimants, this objective follows from a premise that, in well performing capital and financial markets, whatever maximises shareholder value must necessarily maximise corporate prosperity, and best satisfy the claims of creditors, employees, shareholders, and the State.

Report of SEBI committee (India) on Corporate Governance defines corporate governance as “the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company.”

The definition is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution. Corporate Envernance is viewed as business ethics and a moral duty.

In short, “Corporate Governance may be defined as a set of systems, processes and principles which ensure that a company is governed in the best interest of all stakeholders. It is the system by which companies are directed and controlled. It is about promoting corporate fairness, transparency and accountability. In other words, ‘good corporate governance’ is simply ‘good business’.

It ensures:

  1. Adequate disclosures and effective decision-making to achieve corporate objectives,
  2. Transparency in business transactions,
  3. Statutory and legal compliances,
  4. Protection of shareholder interests,
  5. Commitment to values and ethical conduct of business.

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