Roadmap for Answer Writing 1. Introduction Start with a definition: Briefly introduce the concept of fiduciary duty in corporate governance. Example: “Fiduciary duty refers to the obligation of individuals in positions of trust, especially corporate directors, to act in the best interests ...
Model Answer India's burgeoning start-up ecosystem, with over 70,000 start-ups and more than 100 unicorns, faces several corporate governance challenges. These issues often arise from the pressures to scale rapidly and attract venture capital funding, which can sometimes overshadow sound business prRead more
Model Answer
India’s burgeoning start-up ecosystem, with over 70,000 start-ups and more than 100 unicorns, faces several corporate governance challenges. These issues often arise from the pressures to scale rapidly and attract venture capital funding, which can sometimes overshadow sound business practices.
1. Misreporting of Financials
Start-ups often face immense pressure to present favorable financials to secure funding. For example, Go-Mechanic’s co-founder admitted to grave errors in financial reporting. Such misreporting compromises the trust of investors and stakeholders.
2. Lack of Transparency
The failure to disclose key decisions in a timely manner is another challenge. In 2023, Deloitte resigned as the auditor of Byju’s, citing delays in the release of financial statements, highlighting a significant transparency issue.
3. Concentration of Power
Centralized decision-making can lead to conflicts of interest and arbitrary decisions. Ashneer Grover’s controversies at BharatPe demonstrate the risks of a highly centralized management structure.
4. Unethical Business Practices
Aggressive growth strategies, like those of BYJU’s, have been criticized for unethical practices, such as mis-selling courses and excessive spending on sponsorships, while executing mass layoffs.
Steps to Mitigate Governance Issues
- Role of the Leader: Founders must cultivate a strong organizational culture and uphold governance metrics.
- Investor Scrutiny: Investors should enforce governance standards and help set processes.
- Appointing Directors: A formal board of directors can ensure proper oversight and reduce centralized power.
- Setting Realistic Expectations: Shifting focus from growth at all costs to sustainable business practices is crucial.
Utilizing platforms like Startup India’s MAARG Portal can further assist start-ups in strengthening corporate governance practices.
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Model Answer Fiduciary duty in corporate governance refers to the legal and ethical obligation of individuals, particularly the Board of Directors, to act in the best interests of the company and its stakeholders. In India, this concept is rooted in both statutory provisions and common law principleRead more
Model Answer
Fiduciary duty in corporate governance refers to the legal and ethical obligation of individuals, particularly the Board of Directors, to act in the best interests of the company and its stakeholders. In India, this concept is rooted in both statutory provisions and common law principles, which emphasize trust, transparency, and accountability within corporations.
Key Aspects of Fiduciary Duty
The duty of loyalty requires that directors act in the company’s best interest rather than their own personal interests. A prime example is avoiding self-dealing—such as entering into transactions that benefit a director personally, at the expense of the company or its shareholders. This principle is reinforced under Indian laws, including the Companies Act, 2013, which prohibits such conflicts of interest (Section 184).
Directors must provide full and accurate information to shareholders to enable them to make informed decisions. For example, Indian companies are required to disclose their financial performance through periodic reports such as the income statement and balance sheet. This aligns with the principle of transparency, a key aspect of corporate governance.
Directors must make decisions based on objectivity and independence, without undue influence from external factors or personal interests. This duty is reflected in the requirement under Indian corporate law for the appointment of Independent Directors (Companies Act, 2013, Section 149). These directors are expected to safeguard the interests of minority shareholders and provide unbiased oversight.
Directors must act honestly and with sincere intent to advance the company’s welfare. An example includes honoring contractual obligations even after the contract ends, ensuring that the company’s long-term interests are protected.
Directors are expected to make decisions with due diligence and care, ensuring that their actions support the company’s growth and risk management. This includes thoroughly evaluating strategic moves, such as mergers or acquisitions, and ensuring that the company’s assets are properly managed.
In conclusion, fiduciary duty in India ensures that directors act responsibly, transparently, and ethically, fostering trust and accountability in corporate governance. This concept is crucial for protecting the interests of stakeholders and sustaining the company’s long-term health.
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