Corporate Governance – A Myth or Reality?

Introduction

Corporate governance is often discussed as a framework of board meetings, committees, disclosures and regulatory compliance. For some businesses, it may appear to be a formal concept relevant mainly to listed companies and large corporations. For others, it is viewed as an essential system for ensuring accountability, transparency and responsible decision-making.

So, is corporate governance merely a myth, or is it a genuine business necessity?

In India, corporate governance is not simply a voluntary management philosophy. Several governance principles have been incorporated into the legal and regulatory framework applicable to companies. The Companies Act, 2013 contains provisions concerning directors' duties, board composition, independent directors, audit committees, related-party transactions and other governance mechanisms. Listed entities are also subject to additional requirements under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations).

At the same time, corporate governance is broader than statutory compliance. A company may technically comply with applicable requirements while still having weak decision-making, inadequate internal controls or ineffective oversight.

This raises an important question: Is corporate governance only about complying with the law, or does it represent a deeper responsibility towards shareholders, employees, creditors and other stakeholders?

What Is Corporate Governance?

Corporate governance refers broadly to the framework through which a company is directed, managed and overseen.

It concerns the relationship between:

• The Board of Directors

• Management

• Shareholders

• Auditors

• Committees of the Board

• Employees

• Regulators

• Other relevant stakeholders

Effective governance seeks to establish appropriate systems of accountability, transparency, oversight, ethical decision-making and risk management.

It is not necessarily about preventing every business failure. Rather, it is about creating appropriate structures through which significant decisions are made, risks are identified and those responsible for managing a company can be held accountable.

Is Corporate Governance a Legal Requirement in India?

The answer depends on the nature and structure of the company.

The Companies Act, 2013 contains several provisions that directly address corporate governance. For example, Section 166 sets out statutory duties of directors, including acting in good faith, exercising due and reasonable care, skill and diligence, exercising independent judgment and avoiding situations involving conflicts of interest.

Certain companies are also required to have independent directors. Section 149 provides for independent directors in specified companies, including the requirement that every listed public company have at least one-third of its total number of directors as independent directors.

Similarly, Section 177 requires specified companies to constitute an Audit Committee, with prescribed requirements concerning its composition and functions.

Therefore, corporate governance in India is not merely a theoretical concept. For companies to which these provisions apply, several governance requirements have a clear statutory basis.

Corporate Governance Under the Companies Act, 2013

The Companies Act, 2013 provides an important foundation for corporate governance in India.

Duties of Directors

Directors are central to corporate governance because they are responsible for overseeing the company's affairs.

Section 166 requires directors, among other things, to act in accordance with the company's articles, act in good faith in the interests of the company and exercise due and reasonable care, skill and diligence. It also addresses conflicts of interest and undue gains.

These provisions demonstrate that being a director is not simply a matter of holding a formal position. The role carries statutory responsibilities.

Independent Directors

Independent directors are intended to provide an element of independent oversight at the board level.

Their role can be particularly relevant when the company is considering matters involving:

• Conflicts of interest

• Related-party transactions

• Financial reporting

• Risk management

• Management performance

• Corporate accountability

The Companies Act prescribes eligibility and other requirements for independent directors in specified companies.

Audit Committee

An effective audit committee is an important component of corporate governance.

Under Section 177 of the Companies Act, specified companies are required to constitute an Audit Committee. Its functions include matters relating to auditors, financial statements, audit processes and related-party transactions, among other responsibilities prescribed by law.

The committee therefore provides a formal mechanism for oversight of important financial and control-related matters.

Corporate Governance for Listed Companies

Listed companies operate within an additional regulatory framework.

The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 contain corporate-governance requirements applicable to listed entities within the scope of the relevant provisions.

SEBI's current LODR Regulations were last amended on 14 July 2026, demonstrating that the regulatory framework continues to evolve.

The governance framework for listed entities covers areas such as:

• Board composition

• Independent directors

• Board committees

• Related-party transactions

• Disclosure obligations

• Risk management

• Corporate governance reporting

• Shareholder rights

• Compliance requirements

The precise requirements depend on the nature and classification of the listed entity and the applicable provisions of the LODR Regulations.

Corporate Governance Is More Than Compliance

This is where the distinction between myth and reality becomes important.

A company can comply with the minimum statutory requirements and still have weak corporate governance.

For example, a company may have:

• A properly constituted Board

• An Audit Committee

• Independent directors

• Written policies

• Required disclosures

Yet governance may remain ineffective if directors do not adequately question management decisions, conflicts are not properly addressed, risk reporting is ineffective or compliance issues are repeatedly ignored.

Therefore, legal compliance is a component of corporate governance, but it is not the entirety of corporate governance.

Why Corporate Governance Matters to Businesses

1. Accountability

Good governance establishes responsibility for important corporate decisions.

A clear governance structure can help determine who is responsible for approving, monitoring and reviewing significant matters.

2. Transparency

Transparent reporting and appropriate disclosures enable shareholders and other stakeholders to understand material aspects of the company's operations and financial position.

3. Risk Management

Governance mechanisms can help businesses identify and monitor legal, financial, operational and reputational risks.

4. Conflict Management

Companies frequently have situations involving competing interests. Governance mechanisms help identify and manage conflicts appropriately.

5. Protection of Stakeholder Interests

Corporate decisions may affect shareholders, employees, creditors, customers and other stakeholders. Good governance encourages decision-making within the applicable legal and fiduciary framework.

Corporate Governance and Related-Party Transactions

Related-party transactions can present significant governance concerns because they may involve parties with existing relationships with the company.

The Companies Act contains provisions governing related-party transactions, while listed entities may also be subject to additional requirements under the LODR Regulations.

The governance objective is not necessarily to prohibit every transaction involving a related party. Instead, the legal framework establishes requirements concerning approval, disclosure and oversight in specified circumstances.

Businesses should therefore ensure that related-party transactions are identified and handled through the appropriate statutory and internal processes.

Corporate Governance and Internal Controls

Strong governance depends on more than the Board.

Internal controls help organisations identify errors, irregularities, financial risks and compliance failures.

Relevant areas may include:

• Financial controls

• Approval mechanisms

• Delegation of authority

• Compliance monitoring

• Internal audit

• Risk management

• Whistleblower mechanisms

• Information controls

• Related-party transaction monitoring

Where internal controls are weak, even a well-structured Board may not receive accurate or timely information required for effective oversight.

What Happens When Corporate Governance Fails?

Weak corporate governance can expose a company to different forms of risk.

Governance Failure	Potential Consequence
Weak financial oversight	Financial irregularities may remain undetected
Poor conflict management	Decisions may be challenged
Inadequate disclosures	Regulatory or stakeholder concerns may arise
Weak internal controls	Fraud or compliance failures may go undetected
Ineffective Board oversight	Management decisions may lack adequate scrutiny
Poor documentation	Difficulty demonstrating compliance and decision-making
Repeated non-compliance	Increased legal and regulatory exposure
Lack of accountability	Disputes regarding responsibility may arise

The actual consequences depend on the applicable law and circumstances.

Corporate Governance: Myth vs Reality

Myth	Reality
Corporate governance is only for listed companies	Several governance requirements under company law apply to specified classes of companies
Governance means having more Board meetings	Governance concerns the quality of oversight and decision-making, not simply meeting frequency
Compliance automatically means good governance	Compliance is important, but effective governance also requires meaningful oversight
Independent directors are responsible for everything	Governance is a collective responsibility within the applicable legal framework
Governance only concerns financial matters	It can encompass legal, ethical, operational, risk and stakeholder considerations
Governance is only a legal department's responsibility	The Board, management and relevant functions all have roles
Governance matters only when something goes wrong	Effective governance is primarily preventive and ongoing

How Businesses Can Strengthen Corporate Governance

Businesses can consider a structured approach to governance rather than treating compliance as a once-a-year exercise.

1. Clearly Define Board Responsibilities

Directors should understand their statutory responsibilities, fiduciary obligations and the company's internal governance framework.

2. Review Internal Policies

Policies concerning conflicts of interest, related-party transactions, whistleblowing, risk management and other governance matters should be reviewed periodically.

3. Strengthen Board Reporting

The Board should receive relevant and sufficiently clear information to enable meaningful oversight.

4. Monitor Legal Compliance

Companies should maintain mechanisms for identifying applicable legal obligations and escalating material compliance issues.

5. Address Conflicts of Interest

Potential conflicts should be identified and managed in accordance with applicable law and the company's governance framework.

6. Maintain Appropriate Documentation

Board decisions, committee discussions, approvals and significant governance matters should be appropriately documented.

7. Review Governance Frameworks Periodically

Corporate governance should evolve alongside changes in the company's size, structure, business model, regulatory environment and risk profile.

Is Corporate Governance a Myth or Reality?

Corporate governance is clearly a reality from a legal and regulatory perspective in India.

The Companies Act, 2013 imposes specific governance obligations on companies and directors, while SEBI's LODR framework establishes additional requirements for listed entities.

However, the "myth" arises when governance is reduced to a checklist.

Having an Audit Committee does not automatically mean that oversight is effective. Appointing independent directors does not by itself guarantee independent decision-making. Maintaining policies does not ensure that employees and management actually follow them.

The real value of corporate governance lies in how these structures operate in practice.

FAQs About Corporate Governance in India

Is corporate governance mandatory in India?

Certain corporate governance requirements are mandatory for companies falling within the relevant provisions of the Companies Act, 2013 and, for listed entities, the applicable SEBI regulations. The exact obligations depend on the company's type and circumstances.

What is the main purpose of corporate governance?

Corporate governance aims to establish appropriate systems of accountability, oversight, transparency, responsible decision-making and management of corporate risks.

Are directors legally responsible for corporate governance?

Directors have statutory duties under the Companies Act, 2013. Section 166, for example, sets out duties concerning good faith, care, skill, diligence, independent judgment and conflicts of interest.

What is the role of an Audit Committee?

For companies to which the relevant provisions apply, the Audit Committee provides oversight in areas specified under the Companies Act, including matters relating to auditors, financial statements, audit processes and related-party transactions.

Does corporate governance apply only to listed companies?

No. While listed entities are subject to significant governance requirements under the SEBI LODR Regulations, the Companies Act also contains governance provisions applicable to specified classes of companies.

Can corporate governance reduce legal risk?

Effective governance can help businesses identify risks, improve oversight and strengthen compliance systems. However, no governance framework can eliminate all legal or commercial risks.

Conclusion

Corporate governance is not a myth. It is an important part of India's corporate legal and regulatory framework. However, its effectiveness depends on whether governance mechanisms operate meaningfully rather than merely existing on paper.

For businesses, good governance means more than fulfilling statutory requirements. It involves responsible Board oversight, transparent decision-making, effective internal controls, appropriate management of conflicts, accurate reporting and a culture of accountability.

The Companies Act, 2013 and SEBI's regulatory framework provide important legal foundations, but organisations must also ensure that these mechanisms work effectively in practice.

Ultimately, corporate governance should not be viewed as a compliance burden alone. It is a framework through which a business can make more accountable decisions, manage risks and build sustainable stakeholder confidence.

© Anhad Law Disclaimer: This article is intended for general legal information and educational purposes only. It does not constitute legal advice and is not a substitute for advice based on the specific facts and circumstances of a company. Businesses and directors should obtain appropriate professional legal advice on their individual corporate governance obligations.