Corporate Governance for RBI Grade B: Principles, Theories, Factors and Mechanisms

Last updated: 2026-11-14 · MockMentor

The syllabus line is "Corporate Governance: factors affecting it and its mechanisms". Those two areas carry most of the marks, so this page gives them the most space after a quick grounding in the basics.

Meaning

The Cadbury Committee (1992) defined corporate governance as "the system by which companies are directed and controlled." More fully, it is the set of relationships among a company's management, board, shareholders, auditors and other stakeholders, and the rules and incentives through which its goals are set and its performance is monitored.

It is needed because shareholders own the company but managers run it (the separation of ownership and control), because minority shareholders need protection, and because good governance builds investor confidence and prevents fraud.

Principles

The Organisation for Economic Co-operation and Development (OECD) and G20 Principles of Corporate Governance (revised in 2023) are the main global reference; the Basel Committee has separate principles for banks. Most codes rest on fairness, transparency, accountability, responsibility and independence. The Cadbury Committee also introduced comply or explain: follow the code or publicly explain why not.

Theories

Models

The Anglo-Saxon model (USA, UK) has dispersed ownership and a single board. The German model has two tiers, with employees on the supervisory board. The Japanese keiretsu model rests on cross-holdings around a main bank. Family-based models dominate much of Asia. India is a hybrid: its rules follow the Anglo-Saxon model, but many companies are promoter-controlled, so the main risk is often the controlling shareholder taking advantage of minority shareholders.

Evolution in India

• Confederation of Indian Industry (CII) Code, 1998: voluntary code.
• Kumar Mangalam Birla Committee, 1999: led to Clause 49 of the Listing Agreement in 2000.
• Naresh Chandra Committee, 2002: auditor independence and rotation.
• Narayana Murthy Committee, 2003: strengthened Clause 49.
• Companies Act, 2013: independent directors, audit committees, auditor rotation, CSR, shaped by the Satyam scandal of 2009.
• SEBI Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015.
• Uday Kotak Committee, 2017: larger and more independent boards, at least one independent woman director.

Factors affecting corporate governance

1. Ownership structure: dispersed owners face a manager problem; promoter-controlled firms face a minority-shareholder problem.
2. Board composition: size, expertise and real independence decide whether the board challenges or rubber-stamps.
3. Leadership and tone at the top: one person acting as both chair and chief executive concentrates power.
4. Organisational culture: Satyam won governance awards while its accounts were being falsified.
5. Information asymmetry: management knows far more than the board or shareholders.
6. Auditor independence: auditors paid by the company they check, especially with consulting fees, may lose objectivity.
7. Pay and incentives: short-term bonuses encourage risk; deferred pay and clawback correct this.
8. Regulatory environment: credible enforcement by RBI, SEBI, the Ministry of Corporate Affairs and the National Financial Reporting Authority deters wrongdoing.
9. Market forces: share prices, lenders, media, proxy advisers and ESG raters apply outside pressure.
10. National culture: deference to authority makes directors less likely to challenge a dominant founder.

Mechanisms of corporate governance

Internal mechanisms are controlled by the board and management:

• The board of directors, with independent directors (at least one-third of a listed company's board, and half where the chair is executive or a promoter).
• Board committees: audit (majority independent, under Section 177 of the Companies Act), nomination and remuneration, stakeholders' relationship, risk management and CSR.
• Internal audit, internal controls and risk management.
• Executive pay linked to long-term performance.
• Whistleblower policy and code of conduct.

External mechanisms come from outside:

• Statutory audit by independent auditors.
• Regulation and law: Companies Act, SEBI LODR, RBI directions.
• The market for corporate control: the threat of takeover disciplines weak management.
• Shareholder activism and institutional investors, with proxy advisory firms.
• Media, credit rating agencies and ESG ratings.

Governance in banks

Banks need stronger governance because they use depositors' money and a failure can spread through the system. In India, the P. J. Nayak Committee (2014) led to the Banks Board Bureau in 2016, replaced in 2022 by the Financial Services Institutions Bureau (FSIB), which recommends heads and whole-time directors of public sector banks. RBI rules for private sector banks require an independent director as chair.

What the full chapter covers

Our complete chapter also covers the key constituents of governance, objectives and elements of good governance, Sarbanes-Oxley, ESG, detailed RBI board rules for banks, governance problems in India and their remedies, and lessons from failures such as Satyam, IL&FS and PMC Bank. Related reading: Ethics at the workplace and the Management syllabus overview.

The full chapter, with chapter-wise MCQs and evaluated descriptive practice, is part of our RBI Grade A/B courses.

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• Evolution of Management Thought
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• Motivation Theories
• Leadership & Emotional Intelligence

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