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G20/OECD Principles of Corporate Governance 2023

GS4/ GS2 Paper 

 Syllabus: Corporate Ethics/ Corporate Governance

  

Source: OECD

 

Context: On September 11th (2023), the OECD launched the revised G20/OECD Principles of Corporate Governance, a set of international standards aimed at promoting corporate sustainability, market confidence, and financial stability.

 

What is Corporate Governance?

Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the community.

 

Ethical Issues with Corporate Governance in India:

  • Conflict of Interest:The challenge of managers potentially enriching themselves at the cost of shareholders
  • Weak Board:Lack of diversity of experience and background represents a major area of weakness for these boards.
  • Separation of ownership and management:In the case of family-run companies, the separation of ownership and management remains a key challenge
  • Independent directors

 

About G20/OECD Principles of Corporate Governance

The G20/OECD Principles of Corporate Governance are the international standard for corporate governance. It was first issued in 1999 and the revised Principles were endorsed by G20 Leaders in 2023.

 

Key points of G20/OECD Principles of Corporate Governance 2023

PrincipleKey Points
ObjectiveThe principles aim to evaluate and enhance the legal, regulatory, and institutional framework for corporate governance to support economic efficiency, sustainable growth, and financial stability.
Scope of Corporate GovernanceCorporate governance encompasses relationships among a company’s management, board, shareholders, and stakeholders, providing the structure for achieving objectives and monitoring performance.
Non-Binding NatureThe principles are non-binding and don’t replace national law
ApplicabilityThe principles primarily focus on publicly traded companies but can benefit smaller and unlisted companies, taking into account their diversity.
Monitoring The principles are used as benchmarks globally and monitored through various mechanisms, such as the OECD Corporate Governance Factbook.
Structure of the PrinciplesThe principles are organized into six chapters.
Chapter IEnsuring the basis for an effective corporate governance framework:

·        Legal and regulatory requirements should be consistent with the rule of law.

·        Due attention to the associated risks of Digital technologies

 

Chapter IIThe rights and equitable treatment of shareholders and key ownership functions: Address conflicts of interest inherent in related transactions.

 

Chapter IIIInstitutional investors, stock markets, and other intermediaries: Prohibition of insider trading and market manipulation

 

Chapter IVDisclosure and transparency: Include Capital structures, group structures, voting rights, etc. Annual external audit by an independent agency

 

Chapter VThe responsibilities of the board: Treat all shareholders fairly, and ensure a formal and transparent board nomination and election process, etc.

 

Chapter VISustainability and resilience: Corporate governance policies addressing sustainability contribute to a company’s long-term success; Sustainability-related disclosure frameworks should be consistent with internationally recognized standards.

 

Suggestions to improve Corporate Governance in India:

Recommendations of Uday Kotak Panel:

  • Diverse board members: Minimum 6 directors to be on the board of listed entities; every listed entity to have at least 1 independent woman director
  • Transparency: More transparency on the appointment of independent directors
  • The audit Committee must review the use of loans.
  • Robust risk management policies
  • Effective governance infrastructure
  • Evaluation of the Board’s performance
  • Communication: Facilitating shareholder communication with the board is key.

 

Good Examples by corporates in India: TATA Groups

Tata companies continually aspire to better ethics, just as they are committed to better business practices. Philanthropic trusts control over 66% of Tata holdings. While the Tata family has a very small shareholding.

 

Insta Link:

Corporate Governance

 

Mains Link:

Explain the concept of corporate governance. Does it have the potential to address the problems of conflict of interest in the business sector? Give your view with recent examples