Corporate Governance Framework and Principles
What the exam tests
This domain examines corporate governance as the system by which companies are directed and controlled, and tests whether you can connect theory to Indian law. Expect questions on the OECD and Cadbury definitions, governance theories, the principles in SEBI LODR Regulation 4, and the boundary between mandatory, comply-or-explain and voluntary codes.
Core rules and concepts
- Agency theory explains monitoring because ownership is separated from control; stewardship theory treats managers as trustees; stakeholder theory widens the board's accountability; resource dependence theory views directors as providers of expertise and access.
- SEBI LODR Regulation 4 requires board independence, transparency, equitable treatment of shareholders, accountability, and recognition of stakeholder interests. It is the closest statutory statement of principles for listed entities.
- Companies Act 2013 supplies the hard rules: s.149(4) (one-third independent directors for listed public companies), s.166 (duties), s.177 (audit committee), s.134(3) (Board's report), and s.241/242 (oppression and mismanagement).
- ICSI Secretarial Standards SS-1 and SS-2 are mandatory under s.118(10) and govern board and general meetings.
- Governance is not management: the board sets strategy, appoints and monitors the CEO, approves risk appetite, and assures controls; executives run the business.
Worked example
A listed public company has nine directors and three independent directors; its chairperson is the promoter. Section 149(4) requires at least one-third independent directors, so three satisfies the Act. But LODR Regulation 17(1)(b) requires at least half where the chairperson is a promoter, i.e. five of nine. The company must add two independent directors within the permitted time. Reasoning: the Act is the floor, not the ceiling; the stricter listed-entity rule prevails for a listed company.
Traps that cost marks
- Treating non-executive and independent as synonyms; a promoter's relative can be non-executive but not independent.
- Citing OECD principles as enforceable Indian law.
- Saying the board should run day-to-day operations.
- Forgetting that comply-or-explain applies only where the LODR expressly allows it.