CORPORATE GOVERNANCE ON INFORMAL AGREEMENTS AMONG THE SHAREHOLDERS

Abstract

Corporate governance is the strategy by which a company is controlled and directed. Good corporate governance strategy can govern the strategic part of the company such as ensuring that the company functions in accordance with the Memorandum and Articles of Association. Even the company with best governance strategy fails in dealing with the character oriented part of the company. All corporate frauds from Sahara to Speak Asia happened when the company failed in governing the character oriented functions of its members. The informal agreements among the member very well happen when the members act in concert with the desire to get effective control. These agreements are not captured in the Articles of Association. Informal agreements are mainly done to restructure the regulatory framework and others have to complete the formal traffic and incur the transaction costs. It is to make the governance structure more compatible with the actual rail-freight transactions. When this process happens, there are higher chances of manipulation by the parties to the private agreements.

Informal agreements are legally unenforceable agreements. Private agreements have no binding effect on either the company or its shareholder as for as India is concerned. When some proceedings happen informally it is very clear from the start that it avoids legality and thus it also cannot seek for enforceability. The impacts these informal agreements have on the company through insider trading are against the best interest company and also result in market manipulation.