Difference between Administration and Governance

Introduction

Company law in India is one of the most significant and most sought after laws for the administration and governance of corporations. This article will analyse in detail the difference between administration and governance in legal terms.

Meaning of Administration

The term administration has not been defined under the Companies Act, 2013. In simple terms, the administration of a corporate involves managing the affairs of the corporate and taking short as well as long term decisions for the growth and development of the corporate as per the Corporate’s goals and objectives.

Functions of Administration

The following is the role of the administration or management of the company-

1. To select and supervise the company employees.
2. To keep the Board of Directors up-to-date with the company’s decisions and performance.
3. To develop and implement the budget.
4. To take long-term and short-term decisions pertaining to financial activities, while staying within the corporate policies.
5. To make sure that the company is functioning smoothly in the direction the objectives set by the Board of Directors.

Importance of Administration

The importance of management is enumerated below-

1. The management can accommodate the changes in the external and internal environment while ensuring that the core principles of the organization stay intact.
2. It can ensure that the 7 M’s of business, i.e. man, money, management, materials, methods, machines and markets are efficiently used in the company.
3. An effective management can properly represent the interest of the employees, while keeping in mind the policies set by the Board.
4. Managers can provide innovative ideas to help in the growth and development of the organization or to tackle any issues within the company.
5. It can bring harmonization amongst the various teams and departments with proper communication and motivational attitude.

Key Managerial Personnel

The key managerial personnel, as defined by sub-section 51 of Section 2 of the Companies Act, includes Chief Executive Officer, managing director and the manager; Company secretary; whole time director; chief financial officer; any officer just one level below the Board of directors; other officers as prescribed. A CEO holds the highest position in the chain of command in case of Key Managerial Personnel. The main role of the key managerial personnel is to ensure the smooth management of the company.

Manner of appointment- The manager, whole-time director or managing director is appointed for a period of maximum 5 years in a term by passing a board resolution and an ordinary resolution in a General Meeting. The 5 year limit is inapplicable to a private company. The other key managerial personnel are appointed by way of board resolution.

Meaning of Corporate Governance

Corporate Governance is the process of governing the corporate, creation of corporate policies, while keeping the vision and mission in mind, also while catering to the interests of all the stakeholders including, shareholders, employees, government, suppliers, customers, creditors, management, environment, etc. Corporate Governance, in its simplest sense means, a set of laws, rules and regulations to govern the functioning and growth of a business.

Corporate Governance has been enumerated by the Institute of Company Secretaries of India as-

“Corporate Governance is the application of best management practices, compliance of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders”.[1]

Objectives of Corporate Governance

Sir Adrian Cadbury has discussed the objectives of Corporate Governance in Corporate Governance and Chairmanship: A Personal View (2002), as-

“…holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, the organisation and society.”

The following are the objectives of Corporate Governance are-

1. To protect the stakeholder’s interest, including the interests of the community, government and environment.
2. Triple Bottom Line- To take care of the three elements- economy, social and environmental which form a part of corporate social responsibility.
3. Imposes on obligation on companies and businesses to follow the policies as well as statutory rules on corporate governance and which will bring value to the society as a whole.
4. To protect the companies from the menace of corporate frauds and scams.
5. To align business frameworks with human rights, environmental reforms, anti-corruption reforms, other statutes, etc.
6. To separate ownership and power, by separating shareholders from governing bodies.

Role of Corporate Governance

The following is the role of Corporate Governance in a company-

1. Creating policies- Creation of company policies in line with the mission and vision of the organization. It also has to be ensured that the policies and procedures established minimise risk to a great extent.
2. Accountability at all levels- It has to ensure that there is a proper accountability of the board of directors and the management and that there are procedures in place to report malpractices within the company.
3. Shareholder Meetings- One of the primary functions of corporate governance is to keep the shareholders in the loop regarding the status and ongoing practices of the company. The Board of directors are therefore, under a mandate due to corporate governance, to organize meetings with the shareholders to keep them updated about the organization.
4. Meeting Legal Standards- the Company has to ensure that the policies and practices are in line with the legal standards required and are not in contravention with any legal statutes. There are many compliances, especially under the Companies Act, 2013, which have to be kept in mind. For example, the appointment of women directors and independent directors have to be ensured beyond a specific threshold.
5. Creation of ethical practices- The Company policy and procedures has to be such that they maintain high ethical standards, by determining the acceptable behaviour in the organization. For example, emphasis on Corporate Social Responsibility, effective procedures to report harassment, etc. help in maintaining company ethics.
6. Creation of culture within the company- The culture of the company refers to the manner the staff of the company interacts with one another. The body which is governing the company has the power to decide and create such a policy which influences the culture of the organization in a sustainable way.

Board of Directors

It is the role of the Board of Directors of the company to govern a company. The board is constitution in different companies is given below-

A company can increase the maximum number of directors by passing a special resolution. The Board of Directors are hired by the shareholders. However, certain directors, like the nominee director, alternate director or additional director are not hired by the shareholders. This creates a diverse body of individuals in the Board of Directors which leads to the representation of different kinds of stakeholders. The independent director plays an important role in making sure that the corporate governance compliances are met by the company and there are no malpractices undertaken by the company.

A small shareholder director is elected by the small shareholders and represents their interest. A nominee director is nominated by a bank or a financial institution and ensures that their interest is protected. Therefore different types of directors play different roles and represent various interests of the stakeholders, which helps in guiding the policies. This provides for a balance of interest of various stakeholders related to the company.

Difference between Administration and Corporate Governance

It is necessary to distinguish between company administration and corporate governance, for the proper functioning and growth of the company. The Cadbury Code of 1992 made the recommendation to separate the roles of administration and governance by splitting the roles of CEO and Chairman, following which, in 1999, 95% of all the FTSE 100 companies in UK made the split, as per this article.

In layman terms, company administration is the managerial activities, which focuses on the narrower picture, whereas, corporate governance is the decision making activity, which ensures that the interests of all stakeholders are upheld and follows the broader picture.

The following table elucidates the difference between Company administration and corporate governance-

Why the distinction is necessary

The following advantages are there by separating the concepts of Company administration and Corporate Governance-

1. There is a higher level of accountability, whether it be at the higher managerial positions or lower managerial positions.
2. It helps in ensuring that there is a focus on both protection of interests as well as the development of the company.
3. If either one of the components, administration or corporate governance, is missing, the same leads to the breakdown of the company as both are essential for proper functioning. If corporate governance is missing, then the management may take undue advantage of the same while oppressing the shareholders and if the management is inefficient, the company policies, no matter how good, will lay to waste and the company will stop growing.
4. If both the power to make rules and implementation is placed in one hand, the managing and governing authority will get excessive powers, which will deteriorate the interests of the stakeholders.
5. If there is no separate body to ensure proper governance, the persons controlling the company will gain undue advantage and may cause harm to the shareholders.
6. It becomes difficult to replace the inadequate management if both the administration and governance are controlled by the same person.
7. A conflict of interest is created if both the roles are given to the same person.
8. There exists autonomy with the management and the board of directors.
9. The chairman or the Board of Directors can also act as an advisor to the CEO, by advising in crucial matters.

However, there are some people who state that this power of management and governance should lie in one person only. They utilize the Stewardship theory to support their arguments, according to which, there should be an unambiguous authority, which is concentrated in a single person. According to this line of argument, having a single leader makes for easier communication of the shareholder’s needs to the business and vice versa. It is argued, that it leads to a strong leader, which is internally efficient as there is unity in command, and that the conflict between the chairman and CEO is removed via this approach.

Harmony between Administration and Corporate Governance

The following points may be kept in mind to ensure that there is harmony in the company-

1. Professionals in the fields may be hired which will create a strong board and management.
2. There should be training programs conducted for the training of management as well as board members for drafting of policies and implementation of policies.
3. The corporate policies of the company should be such that the roles of every individual in the management is clearly defined without any ambiguities.
4. The role of the board members and their interference in the management should also be clearly defined so as to ensure that the management is given enough space to do their work.
5. There should be regular meetings between the administration and the governing body to make sure that there is a smooth communication between both and both are aware of the interests of the company as well as the stakeholders.
6. The corporate environment should be such that the administration feels free to take advice from the governing body without hesitation.

Conclusion

In a nut shell, a company has three components- the owners or shareholders, the governing body or Board of Directors and the administrative or managing body. The governing body deals with policy decisions while balancing the interests and ensuring organization’s goals are met. On the other hand, it is the duty of the managerial or administrative staff to ensure that the policies formulated by the governing body are implemented effectively with high efficiency. It is necessary to create this distinction in order to divide the powers and ensuring the best outcome for the company as well as the society.

References:

[1] Dr. Sanjiv Agarwal, ETHICS IN GOOD CORPORATE GOVERNANCE, Tax Management India (2009), https://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=545 (last visited Feb 3, 2021).