Corporate Governance Past, Present & Future In India

While corporate governance may not dictate the economic prospects of developing countries, it certainly plays an integral role in shaping them. Corporate governance deals with the rights and responsibilities of a company’s management, its board, shareholders and various stakeholders.

- Vipin Agarwal

Corporate governance in a developing country setting takes on additional importance. Good corporate governance is vital because of its role in attracting foreign investment. The extent of foreign investment, in turn, shapes the prospects for economic growth for many developing countries. While India’s corporate governance framework is advanced for a developing country, it still can be significantly improved.

Why Corporate Governance? – Investors primarily consider two variables before making investment decisions–the rate of return on invested capital and the risk associated with the investment. In recent years, the attractiveness of developing nations as a destination for foreign capital has increased, partly because of the high likelihood of obtaining robust returns and partly because of the decreasing attractiveness of developed nations.

The lure of achieving a high rate of return, however, does not, by itself, guarantee foreign investment; the attendant risk weighs equally in an investor’s decision-making calculus. Good corporate governance practices reduce this risk by ensuring transparency, accountability, and enforceability in the marketplace. While the presence of a good corporate governance framework ensures neither stability nor success, it is widely believed that corporate governance can raise efficiency and growth, especially for countries that rely heavily on stock markets to raise capital.

Strong corporate governance has beneficial consequences even for countries that choose to follow a development strategy that does not focus on attracting foreign investment. Many developing countries are home to strong distribution cartels that waste scarce resources. Good corporate governance can reduce this wasteful behavior and, thus, “overcome the obstacles to productivity growth”.