25 Landmarks in Corporate Governance

Landmarks in the
Emergence of Corporate
Governance
Corporate Governance
Committees
 Over a period of time, a change had come in
the perception of people about corporate
governance from the exclusive benefits of
shareholders to the benefit of all stakeholders.
 Corporate governance gained importance in
the US after the Watergate scandal that
involved US corporates making political
contributions and offering bribes to government
officials
 In England, seeds of modern corporate governance were
sown in the aftermath of the Bank of Credit and
Commerce International (BCCI) scandal. BCCI, a global
bank was made up of holding companies, affiliates,
subsidiaries, banks-with-in-banks. The BCCI entities
flagrantly evaded legal restrictions in the movement of
capital and goods almost on a daily routine.
 Barings Bank, Britain’s oldest merchant bank failed
because of unhealthy trades on behalf of its customers
and lost $1.4 billion and pulled its shutter down.
Committees
Throughout the US, UK, and other
countries a number of committees got
appointed to recommend reforms and
regulations in corporate governance.
They are all known by the names of the
individuals that had chaired the
committees.
The Cadbury Committee on Corporate
Governance, 1992 - Sir Adrian Cadbury
 Stated Objective was “to help raise the

standards of corporate governance and
the level of confidence in financial
reporting and auditing by setting out
clearly what it sees as the respective
responsibilities of those involved and
what it believes is expected of them”.
 TheCadbury committee investigated the
accountability of the board of directors to
shareholders and to the society. The
Cadbury Code of best Practices had 19
recommendations in the nature of
guidelines to the board of directors, non-
executive directors, executive directors
and such other officials.
 The Paul Ruthman Committee
 The Greenbury Committee, 1995
 The Ron Hampel Committee, 1995
 The Combined Code (1998) was derived from
Hampel’s report, Cadbury report, and
Greenbury report. The combined is mandatory
for all listed companies in the UK. The
stipulations of the combined code required the
boards should maintain a sound system of
internal to safeguard the shareholders’
investment and company assets.
 The directors should annually conduct a review of
the effectiveness of the group’s system of internal
control covering all controls , including financial,
operational, and compliance and risk management,
and report to the shareholders that they have done
so.
 The Turnbull Committee (1999) was set up by the
Institute of Chartered Accountants in England and
Wales to provide guidance to assist companies in
implementing the requirements of the Combined
Code relating to internal control.
World Bank guidelines for
 The world bank report on corporate
governance recognizes the complexity of the
very concept of corporate governance and
focuses on the principles such as
transparency, accountability, fairness, and
responsibility which are universally applicable.
 It could be argued that international investors
and capital markets are bringing about a
degree of convergence over governance
practices worldwide.
 Corporate governance ideally should
hold the balance between economic and
social goals and between individual and
communal goals. The governance
should encourage the efficient use of
resources and equally to require
accountability for the stewardship of
those resources.
 States would permit investments from the global
corporations if only their activities would
encourage economic development and discourage
fraud and mismanagement. The foundation of any
corporate governance structure has to be
disclosure as openness is the basis of public
confidence in the corporate system and funds will
flow to the those centers of economic activity
which inspire trust.
The Organization for Economic
Cooperation and development
(OECD)
 The Organization for Economic Co-operation and Development
(OECD) is an international organization of 30 countries that
accept the principles of representative democracy and free-
market economy. Most OECD members are high-income
economies with a high HDI and are regarded as developed
countries.
 The Organization for European Economic Co-operation (OEEC)
was founded in 1948 to help Marshall Plan for the reconstruction
of Europe after World War II. The headquarters was in the
Chateau de la Muette in Paris, France. As the Marshall Plan was
out of date , the OEEC focused on economic questions
 The OECD, a non-governmental body spelled out
recommendations providing voluntary principles and
standards for responsible business conduct for
multinational corporations operating in or from
countries adhered to the Declaration. The Guidelines
are legally non-binding. Originally the Declaration and
the Guidelines were adopted by the OECD on 1976
and revised on 1979, 1982, 1984, 1991 and 2000.
 OECD spelled out principles and practices that should
govern corporates in their goals to attain long-tern
shareholder value.
 OECD recommendations contained following
aspects of corporate governance:
 Rights of shareholders
 Equitable treatment of all shareholders
 Role of stakeholders in corporate governance
 Disclosure and transparency
 Responsibilities of the board
McKinsey Survey on
McKinsey, the international management
consultant organization, conducted a survey
with a sample size of 188 companies from six
emerging markets (India, Malaysia, Mexico,
South Korea, Taiwan, and Turkey) to
determine the correlation between good
corporate governance and the market
valuation of the company. The results of the
survey pointed out a positive correlation
between the two.
McKinsey had evaluated the performance of
the companies based on:
 Accountability: transparent ownership, board size,
board accountability, ownership neutrality
 Disclosure and transparency of the board: timely
and accurate, independent directors
 Shareholder equality: one share-one vote
Following results of the survey indicated
that good corporate governance
increased market valuation
 Increasing financial performance
 Transparency of dealing, thereby reducing
the risks the boards will serve their own
self-interest
 Increasing investor confidence
Sarbanes-Oxley Act, 2002
 Sox came into existence after a series of
corporate scandals in the US. The act
calls for protection to those who have the
courage to expose frauds. It is an
attempt to address all issues associated
with failures to achieve quality
governance and to restore investor’s
confidence.
Important provisions of SOX
1. Establishment of Public Company Accounting
Oversight Board (PCAOB) – all accounting
firms are to register with this Board. The
accounting firms have to provide details of
fees collected for audit and non-audit
services, financial information of the firms,
staff details etc. The board will conduct
periodical inspections of the firms.
The Board reports to US Securities &
Exchange Commission (SEC)
2. The SOX provides for a new improved audit committee –
committees composed of independent directors – are responsible
for appointment, fixing fees, and oversight of the work of the
independent auditors
3. Conflict of interests – firms should not perform any audit services
to a company wherein its CEO, CFO, etc were working for the
accounting firms one year prior to the initiation of audit
4. Audit partner rotation of lead/coordinating partner of the
accounting firm once every 5 years
5. Improper influence on conduct of audits – unlawful for any
executive or director of the company to fraudulently influence,
coerce, manipulate, or mislead any auditor engaged in auditing
6. Prohibition of non-audit services- auditors prohibited
from providing non-audit services concurrently with
audit financial services review
7. CEOs and CFOs required to affirm/certify financials
filed with SEC. If there are instances of ‘material’
non-compliance as result of misconduct, the
CEOs/CFOs will have to return to the company
bonuses and incentives received. False and
improper certification can invite fines like $1 million
to 5 million or up to 10 years imprisonment
8. Loans to Directors- Companies making or
arranging new personal loans. Existing loans
may be found okay unless material
modifications or renewable of loans are
involved.
9. Attorneys dealing with the publicly traded
companies are required to report evidence of
material violation of securities law or breach
of fiduciary duty or similar violations by the
firms
10. The SOX requires disclosure of conflict
of interests by the securities analysts
and brokers and dealers whether:
 Do they have investments in the companies
 Any compensation received by them are appropriate in
the public interest and consistent with the protection
investors
 The company (issuer) has been a client of the broker or
dealer
 Etc.
Penalties
 Penalties prescribed under SOX for any
wrong doing is very stiff. Penalties for
willful violations are even stiffer.
Indian Committees and
Guidelines

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Landmarks in the

 Stated Objective was “to help raise the

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