INSTITUTE OF COMPANY SECRETARIES OF INDIA

PROJECT REPORT
ON
CORPORATE GOVERNANCE

Prepared by:
Urvashi Sharma
250395010/04/2015
 CERTIFICATE

This is to certify that the Project Report entitled “Corporate Governance” being submitted
by Ms. Urvashi Sharma towards fulfilment of CS Management Training of 12 Months as
prescribed by the “Institute of Company Secretaries of India” is a record of bonafide work
carried on by her under my supervision.

Yours truly
For HSIL Limited

Pulkit Bhasin
Company Secretary
Membership No: 27686

PREFACE
GOOD PRACTICES AND DILEMMAS

In governance there is no one size fits all solution. The best approach will depend on the
organization’s particular circumstances Our goal is to assist Boards and directors with
identifying the governance issues that really matter, provide good practices and guidance,
and help promote a dialogue to identify and address dilemmas and improve decision-making

Corporate governance consists of various variables that interact with each other and influence
the organization’s performance, each in their own distinctive way. Boards and directors are
consequently faced with many dilemmas as they seek the right governance approach that
matches their organization

Corporate governance is becoming a more vital and all-encompassing topic with each year
that passes. We all realise that the modern corporation is one of the most ingenious concepts
ever devised. Our lives are dominated by corporations. We eat and breathe through them, we
travel with them, we are entertained by them, most of us work for them. Most corporations
aim to add value to society, and they very often do. Some, however, are exploiting, polluting,
poisoning and impoverishing us. A lot depends on the commitment, direction and aims of a
corporation's founders, shareholders, boards and management, and employees. Do they show
commitment to all stakeholders and to long-term shareholders, or mainly to short-term
shareholders? There are many variations on the structure of corporations and boards within
each country and between countries. All will agree that much depends on the personalities
and commitment of the persons of influence in the corporation.

Recently, we see that governments want to involve themselves in defending national

companies against takeovers by foreign enterprises. We also see a strong movement of green
investors, which often is well appreciated by directors. There is a move to corporate
citizenship.

Every country has its own measures however, the chapters of this book also show a
convergence. Understanding differences leads to harmony. The concept underlying the book
is of a one-volume text containing a series of reasonably short, but sufficiently detailed,
jurisdictional overviews that permit convenient comparisons, where a quick first look at key
issues would be helpful to general counsel and their clients.

ACKNOWLEDGEMENT
This project is a Culmination of the constant endeavour to learn while working and training,
while pursuing a professional course. At the outset, I would like to express my sincere
acknowledgment to my parents who have always encouraged me to pursue the Company
Secretary Course as well as all my others family members. Further, I would also like to thank
my trainer Mr. Pulkit Bhasin, who has always trained me with great enthusiasm and sincerity.

Further, I would also like to express my gratitude to my professional colleagues at work who
have always helped me while I was pursuing my management training and last but not least to
the Almighty who has given me the strength, courage, perseverance and the power to grasp
knowledge which are all essential attributes to pursue a professional course such as the
Company Secretaryship Course.

Thanking You,

Urvashi Sharma

INDEX
SL. No. Particular
1. Part -A: Introduction
2. Introduction Of Corporate Governance
3. Corporate Governance In India – A Historical Background
4. Corporate Governance And Law Reforms In India
5. Objectives of Corporate Governance
6. Key Components of Good Corporate Governance
7. Benefits of Corporate Governance
8. Theories of Corporate Governance
9. Models of Corporate Governance
10. Evolution of Corporate Governance In India
11. Need for Corporate Governance
12. Other Key Highlights
13. Review
14. Part - B: Organization of the Study And Description
15. What is Organizational or Corporate Governance?
16. Importance of Corporate Governance in an Organization
17. The Role of Corporate Governance in Modern Organizations
18. Part- C: Analysis and Interpretation about the topics of Good
Corporate Governance
19. Principles of Corporate Governance
20. Corporate Governance : A Comparative View
21. Factors affecting the quality of Corporate Governance
22. Part – D: Discovery
23. Corporate Governance - An Overview
24. Chapter – E: Conclusion
25. Summary
26. Case Study and Problems in Indian Scenario
27. Conclusion
28. Bibliography
 PART-A
Introduction

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INTRODUCTION OF CORPORATE GOVERNANCE

The initiatives taken by Government in 1991, aimed at economic liberalization and

globalisation, led brought to the forefront the need for Indian companies to adopt corporate
governance practices and standards, which are consistent with international principles. It
led to the introduction of legislative reforms prescribing the manner in which Indian
companies could implement effective corporate governance mechanisms

Over the past two decades, the investment world has seen a large numbers of scandals
relating to companies which are attributed to failure of governance. This has been caused due
to a combination of factors which can be principally classified into three corporate sins

Corporate refers to the most common form of business organisation, one which is chartered
by a state and given legal rights as an entity separate from its owners. This form of business is
characterised by the limited liability of its owners. The process of becoming a corporation,
called incorporation gives the company separate legal standing from its owners and protects
those owners from being personally liable in the event that the company issued.

Effective corporate governance is recognized as an important tool for the risk management
and the socioeconomic development, which is possible by ensuring the economic efficiency,
growth and stakeholder confidence. This can be well recognized, while analyzing the seeds of
modern corporate governance, which were most probably sown by the Watergate scandal in
the US, resulting in subsequent investigations, where the US regulatory and legislative bodies
able to pinpoint control failures, which had allowed many of the corporations to make illegal
political contributions. This led the enactment of the Foreign and Corrupt Practices Act of
1977 in USA that focuses the specific provisions for the establishment, maintenance and
review of internal control systems.1979 was recognized year for the Securities and Exchange
Commission of US, which made mandatory reporting on internal financial controls. In 1985,
following a series of high profile business failures in the USA, the most notable one of which
being the Savings and Loan collapse, the Tread way Commission was formed with its primary
role to identify the main causes of misrepresentation in financial reports and to recommend
ways of reducing incidence thereof.

The Tread way report published in 1987 highlighting the need for a proper control
environment, independent audit committees and an objective Internal Audit function. It called
for published reports on the effectiveness of internal control and requested the sponsoring
organizations to develop an integrated set of internal control criteria to enable companies to
improve their systemic measures. Accordingly Committee of Sponsoring Organizations
(COSO) was setup and its report in 1992 specified a control framework, which has been
endorsed and refined in the subsequent UK based committees reports, namely Cadbury,
Rutteman, Hampel and Turnbull. When the developments in the United States stimulated
debate in the UK, a spate of scandals and collapses in that country in the late 1980s and early
1990's led shareholders and banks to worry about their investments. These also led the UK
government to recognize that the existing legislation and regulations were ineffective.
Companies including the BCCI, British & Commonwealth, Polly Peck and Robert Maxwell’s
Mirror Group News International were victimized as the boom-to-bust in decade of the 1980s.
Some companies, which saw impressive growth in earnings, were ended the decade in a
memorably disastrous manner.

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Development in Indian Scenario
–AH

The system of corporate governance is India operates in an administered environment.

Administrative control is seen as arbitrary and enforcement as poor, as many recent scams has
demonstrated.

In the year 2000, SEBI had set up a Committee under the Chairmanship of Kumar
Mangalam Birla to promote and raise standards of corporate governance. The Report of
the committee was the first formal and comprehensive attempt to evolve a Code of Corporate
Governance, in the context of prevailing conditions of governance in Indian companies, as
well as the state of capital markets at that time. The recommendations of the Report, led to
inclusion of Clause 49 in the Listing Agreement. These recommendations were divided into
mandatory and non-mandatory recommendations and were made applicable to all listed
companies with the paid-up capital of Rs. 3 crores and above or net worth of Rs. 25 crores or
more at any time in the history of the company.

Directors from the promoter’s family have traditionally dominated the Indian boards.
Professionals and other persons close to them constitute the majority on the board. Positions
of chairman and managing director and executive directors are filled in from among the above
persons. In most of the Indian companies there is no separation of roles of the Chairman and
Managing Directors and one individual combines both the positions. Most boards of directors,
inspire of having nominees of Government controlled financial institutions, have little
information about illegal or unethical conduct of their executive. The boards find it difficult to
monitor the compliance of the company to the various legal requirements. The monitoring of
professional standards by professional association such as of chartered accounts and auditors
is also considered lax and discretionary. In government corporations the boards are a mere
legal formally. The elaborate system of accountability of public enterprises operates through
the means of parliamentary committees, independent vigilance officers and the comptroller
and auditor general of India. Accountability has remained more in form than in substance.
Major decisions such as appointments, investments, purchase contract, selling arrangements,
collaborations, and industrial relation agreements have moved out of the corporation ambit
into the bureaucracy and the political arena, bringing into focus the widespread corruption.
None of the stakeholders-boards, the stock market, the banker, the financial institutions, the
trade unions, and government-exercise major monitory role over the inappropriate actions
taken by the top management in the corporate sector.

Early corporate developments in India were marked by the managing agency system. This
contributed to the birth of dispersed equity ownership but also gave rise to the practice of
management enjoying control rights disproportionately greater than their stock ownership.
The turn towards socialism in the decades after independence, marked by the 1951 Industries
(Development and Regulation) Act and the 1956 Industrial Policy Resolution, put in place a
regime and a culture of licensing, protection, and widespread red-tape that bred corruption
and stilted the growth of the corporate sector. The situation worsened in subsequent decades
and corruption, nepotism, and inefficiency became the hallmarks of the Indian corporate
sector. Exorbitant tax rates encouraged creative accounting practices and gave firms
incentives to develop complicated emolument structures with large “under-the-table”
compensation at senior levels.

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According to Confederation of Indian Industry (CII) –Desirable Corporate Governance
Code (1998)

“Corporate governance deals with laws, procedures, practices and implicit rules that
determine A Company’s ability to take informed managerial decisions vis-à-vis its claimants -
in particular, its shareholders, creditors, customers, the State and employees. There is a global
consensus about the objective of ‘good’ corporate governance: maximizing long-term
shareholder value.”

The heart of corporate governance is transparency, disclosure, accountability and integrity.

It is to be borne in mind that mere legislation does not ensure good governance. Good
governance flows from ethical business practices even when there is no legislation.

Transparency

Accountability CORPORATE Disclosures

Integrity

Corporate Governance and Law Reforms in India

Corporate Governance Reforms in India are of recent origin – the reform process got a kick
start only with the liberalization of the Indian Economy in 1991. While the progress in
legislating and introducing corporate governance reforms in India in the last two decades has
been quite significant, so far these have largely remained on paper only.

A major criticism of the Indian corporate governance reform process is that it is primarily
based on the Anglo Saxon model of governance which has limited applicability in India.
Unlike the central governance issue in the US or the UK which is essentially that of

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disciplining the management that has ceased to be effectively accountable to the owners
(dispersed shareholders) the central focus of the corporate governance framework for India
needs to be on disciplining the dominant shareholder, who is the principal Block holder, and
in protecting the interest of the minority shareholders. Given that the Indian corporate
governance regulations have largely borrowed from the Anglo Saxon model of governance, it
is not surprising that they are found wanting in addressing issues that are peculiar to the
Indian context and, therefore, do not provide an adequate solution to India’s corporate
governance woes.

Adding to the problem arising from the application of an alien corporate governance model,
which was not suitably adapted to the Indian context, is also the problem of weak
enforcement of corporate governance regulations through the Indian legal system which raises
serious concerns on whether investors would be able to get timely dispensation of justice in
case of corporate governance wrongdoings.
Currently Corporate Governance Reforms in India are at crossroads; while there is no doubt
about the good intention behind the reforms, there is a need to look for a more complete
solution, evolved from within, and to craft a solution that would address the specific
challenges of India.

This paper provides a history of the evolution of corporate governance in India and identifies
issues that are peculiar to the Indian context which are not being fully addressed in the current
framework. Lastly, this paper gives some thought on the future direction for corporate
governance reforms to make them more suitable for Indian conditions and identifies areas for
further research in this field.

Corporate governance has been a buzzword in India since 1998. But the need to have a good
mechanism started since the beginning of 1990s when the Indian stock market rocked with
many scams. On account of the interest generated by Cadbury Committee Report (1992) in
UK, the Confederation of Indian Industries (CII), the Associated Chambers of Commerce and
Industry (ASSOCHAM) and the Securities and Exchange Board of India (SEBI) constituted
Committees to recommend initiatives in Corporate Governance. The recommendations of the
Kumar Mangalam Birla Committee, constituted by SEBI, led to the addition of Clause 49 in
the Listing Agreement. These recommendations, aimed at improving the standards of
Corporate Governance, are divided into mandatory and non-mandatory recommendations.
The recommendations have been made applicable to all listed companies, their directors,
management, employees and professionals associated with such companies. The ultimate
responsibility for putting the recommendations into practice lies directly with the Board of
Directors and the management of the company. The latest developments include constitution
of a high-powered Committee by Department of Company Affairs, Government of India,
headed by Shri Naresh Chandra, on August 21, 2002, to examine various corporate
governance issues.

Other developments include the constitution of a Committee by SEBI under the Chairmanship
of Shri N.R.Narayana Murthy, for reviewing implementation of the corporate governance
code by listed companies and issue of revised clause 49 based on its recommendations;
setting up of a proactive Standing Company Law Advisory Committee by Department of
Company Affairs to advise on several issues like inspection of corporate for wrong doings,
role of independent auditors and directors and their liability and suggesting steps to enhance
imposition of penalties. Another Committee has been constituted by the Department of

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Company Affairs known as the Working Group for examination of suggestions received on
good corporate governance. A High Powered Central Coordination and Monitoring
Committee (CCMC), co-chaired by Secretary, Department of Company Affairs and
Chairman, SEBI was set up to monitor the action taken against the vanishing companies, and
unscrupulous promoters who misused the funds raised from the public. It was decided by this
Committee that Seven Task Forces be set up at Mumbai, Delhi, Chennai, Kolkata,
Ahmadabad, Bangalore and Hyderabad with Regional Directors/ Registrar of Companies of
respective regions as convener, and Regional Offices of SEBI and Stock Exchanges as
Members. The main task of these Task Forces was to identify the companies, which have
disappeared, or which have mis-utilised the funds mobilized from the investors, and suggests
appropriate action in terms of Companies Act or SEBI Act. SEBI says that the Corporate
governance norms introduced for listed companies vide clause 49 of the listing agreement on
the basis of the Kumaramanagalam Birla Committee Report, 1999 have met with encouraging
success, since most of the ‘A’ Group companies listed on BSE and NSE have complied with
the Norms.

However, the corporate governance has remained more on paper is clear from the Report on
Corporate Governance by the Advisory Group constituted by the Standing Committee on
International Financial Standards and Codes of the Reserve Bank of India.

The following facts emerged from the report:

 The predominant form of corporate governance in India is ‘insider model’ where

promoters dominate governance in every possible way. Indian corporate which
reflect the pure ‘outsider model’ are relatively small in number.

 A distinguishing feature of the Indian Diaspora is the implicit acceptance that

corporate entities belong to founding families.

 The listing agreement, the main instrument, through which SEBI ensures
implementation of corporate governance, is a weak instrument, as its penal
provisions are not stringent. The maximum penalty a stock exchange can impose on
any company that does not follow the corporate governance norms is suspension of
trading in its shares. This penalty hurts the investor community more than the
management of the company that violates the listing agreement.

 Regional stock exchanges where a large number of companies are listed lack
effective organization and skills to monitor effective compliance with corporate
governance norms.

 A vast majority of companies that are not listed remain outside the purview of
SEBI’s measures.

 The financial institutions that have large shareholdings in most of the listed
companies have been passive observers in the area of corporate governance and do
not effectively exercise their rights as shareholders.

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It is interesting to note that despite corporate governance in the form of clause 49 was already
introduced in the year 2000; it could not prevent securities scam of 2002. Events in the stock
exchanges have exposed the lack of ethical conduct by many Indian corporate:

 Rampant insider trading by the promoters in league with big market players.

 Massive price rigging/ manipulation by the promoters in league with big market
players prior to mergers and takeovers.

 Gross misuse of bank funds for clandestine stock market operations.

 Criminally motivated investment in violation of laid down norms.

 Many companies, which raised money from the capital market through public issues,
have not paid any dividend for more than five years.

In addition small investors have lost their hard earned money in the stock markets for the
following reasons:

 Lack of ethics, selfish conscience, and breach of trust on the part of the promoters.

 Lack of adequate compliance mechanism, supervision, proper inspection, effective

regulation and preventive action by regulators like Department of Company Affairs,
Registrar of Companies, Board of Stock Exchanges as well as SEBI.

 Lack of professional ethics on the part of professionals, like Chartered Accountants,

Company Secretaries etc, who are holding onerous positions in companies.
It all establish that no matter that most of the companies may be fully complying with the
corporate governance norms laid down by clause 49, but absence of good conscience on the
part of the promoters to observe ethical practices have created little impact in practice. A
number of proposals have been made to improve corporate governance. The various
suggested reforms include:

 strengthening the position of internal and outside auditors;

 allowing mergers and acquisitions approved by a panel;

 requiring more independent outside directors on boards;

 introducing the supervisory board or two- tier system; allowing banks to own greater
equity in shares of the companies;

An important mechanism required to make the capital marked discipline is liberalization of

restrictions on mergers and acquisitions. Secondly, the bankruptcy provisions are allowed to
operate without any government interference. Another important commitment necessary on
the part of government is that it should discontinue directed lending and permit commercial
banks and government financial institutions to be run by their boards in the interest of their

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shareholders rather than the government. In India, the four clusters of legal arrangements have
been developed to respond to corporate governance problems. These are securities market
regulations, the fiduciary responsibilities of directors and officers, laws governing takeovers,
and rules governing shareholder voice. The two most important laws that control the listed
companies are the Securities Contracts (Regulation) Act, 1956 which regulate all new public
offerings, dealings in stock market and the functioning of the stock exchanges in India and the
Securities and Exchange Board of India Act, 1992 which created the Securities and Exchange
Board of India (SEBI), giving it the authority to administer the Securities Contracts
(Regulation) Act, and all the other regulation of securities. The major purpose of these laws is
to require regular, accurate, and timely public disclosure of financial Information by any
company that issued publicly traded securities and to instill public confidence in the reliability
and accuracy of information so reported. A new law called the Indian Competition Act, 2002
has been enacted to replace the MRTP Act, 1969. The objective of the new law is to prevent
practices having adverse effect on competition, to promote and sustain competition in
markets, to protect the interest of consumers and to ensure freedom of trade carried on by
other participants in markets and for matters connected therewith or incidental thereto.

OBJECTIVES OF CORPORATE GOVERNANCE

The fundamental objective of corporate governance is to boost and maximize shareholder

value and protect the interest of other stake holders. World Bank described Corporate
Governance as blend of law, regulation and appropriate voluntary private sector practices
which enables the firm to attract financial and human capital to perform efficiently, prepare
itself by generating long term economic value for its shareholders, while respecting the
interests of stakeholders and society as a whole. Corporate governance has various objectives
to strengthen investor's confidence and intern leads to fast growth and profits of companies.
These are mentioned below:

1. A properly structured Board proficient of taking independent and objective decisions

is in place at the helm of affairs.
2. The Board is balanced as regards the representation of suitable number of non-
executive and independent directors who will take care of the interests and well-being
of all the stakeholders.
3. The Board accepts transparent procedures and practices and arrives at decisions on the
strength of adequate information.
4. The Board has an effective mechanism to understand the concerns of stakeholders.
5. The Board keeps the shareholders informed of relevant developments impacting the
company.
6. The Board effectively and regularly monitors the functioning of the management
team.
7. The Board remains in effective control of the affairs of the company at all times.

KEY COMPONENTS OF GOOD CORPORATE GOVERNANCE

Good governance is conclusively the indicator of personal beliefs and values that configure
the organizational beliefs, values and actions of its Board. The Board, which is a main
functionary is primary responsible to ensure the value creation for its stakeholders. In the
absence of clarity on designated role and powers of the Board, it weakens the accountability
mechanism that subsequently, threatens the achievement of organizational goals. Therefore,
the key requirement of good governance is the clarity on part of identification of powers,

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responsibilities, roles and accountability of top position holders, including the Board, the
Chairman of the Board and the CEO. In such cases, role of the Board should be clearly
documented in a Board Charter, which can be followed throughout. To elaborate the above
discussion, following are the essential elements of good corporate governance:

 A well-structured Audit Committee setup is required to work as liaison with the

management, internal and statutory auditors. Importance of such is to review the
adequacy of internal control and compliance with significant policies and
procedures, reporting to the Board on the key issues.

 Accountability towards the stakeholders with an objective to serve the stakeholders

through strong and sustained communication processesat a regular interval.

 Clear documentation of company’s objectives as a part of long-term corporate

strategy including an annual business plan together with achievable and measurable
performance targets.

 Effective whistle blower policy is another element, whereby the employees may
report to the top management about any suspected frauds, unethical behaviour or
violation of company’s code of conduct. Appropriate mechanism should be in place
for adequate safeguard to such employees.

 Emphasis on healthy management environment, which includes appropriate ethical

framework, clear objectives, establishing due processes, clear enunciation of
responsibility and accountability, sound business planning, establishing performance
evaluation measures.

 Fair and unambiguous legislation and regulations.

 Fairness to all stakeholders.

 Focus on social, regulatory and environmental concerns.

 Identification and analyzing risk is an important element of corporate functioning

and governance, which should be appropriately taken into consideration as remedial
measures. This can be well settled by formulating a mechanism of periodic reviews
of internal and external risks.

 Transparency and independence in the functioning of the Board, where Board should
provide effective leadership for achieving sustained prosperity for all stakeholders,
which can be possible by providing independent judgment in achieving the
company's objectives.

 It enhances higher possibilities in delivering sustainable good business performance.

 It ensures that a well governed company is accountable and transparent towards its
shareholders and other stakeholders.

 It ensures that the business environment is fair and transparent enough for companies
that one may be held accountable for their actions.

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  It has emerged as new way to manage modern joint stock corporations, which are
equally significant in cooperatives, state-owned enterprises and family businesses.

BENEFITS OF CORPORATE GOVERNANCE

Corporate governance has a unique and important place for the companies and different
stakeholders. Following corporate governance codes benefits the owners and managers of
companies and increase transparency and disclosure by enhancing access to capital and
financial markets. It emphasizes to survive at a crucial period in an increasingly competitive
environment through mergers, acquisitions, risk reduction and partnerships through asset
diversification. Corporate governance ensures to provide an exit policy with a smooth
intergenerational transfer of wealth and divestment of family assets that can reduce the chance
for conflicts of interest. It leads to a greater accountability, better system of internal control
and better profit margins for the company. It also provides higher potential for future
diversification, excessive growth, attracting equity investors (nationally and abroad), and
reduction in the cost of credit for corporations.

Corporate governance can provide proper incentives for the board and management that
match the objectives, which are in the interest of the company and the shareholders. It ensures
greater security to the investment of the shareholders. It creates an environment, where
shareholders are sufficiently informed on decisions concerning fundamental. From various
empirical researches, it has been found that majority of global institutional investors are
willing to pay a premium for the shares of a well-governed company over the other poorly
governed companies, which have an impressive and comparable financial record

THEORIES OF CORPORATE GOVERNANCE

The Agency Theory

Agency Theory is also referred as the Principal-Agent Theory, as it focuses the governance
relationship between the shareholder (the Principal) and the Director (the Agent). Since the
early work of Berle and Means in 1932, corporate governance has focused upon the
separation of ownership and pedals which results in principal-agent problems arising from the
dispersed ownership in the modern corporation. They regarded corporate governance as a
mechanism, where a board of directors is a crucial monitoring device to minimize the
problems brought about by the principal-agent relationship. In this context, agents are the
managers, principals are the owners and the boards of directors act as the monitoring
mechanism (Mallin, 2004). There are two important factors in agency theory. The first is that
corporations are reduced to two participants, i.e., managers and shareholders, whose interests
are assumed to be both clear and consistent. The second factor encompasses that humans are
self-interested and disinclined to sacrifice their personal interests for the interests of the others
(Daily, Dalton & Cannella, 2003).

The seminal papers of Alchian and Demstez (1972) and Jensen and Meckling (1976),
describe the firm as a nexus of contracts among individual factors of production resulting in
the emergence of the agency theory. The firm is not an individual but a legal fiction, where
conflicting objectives of individuals are brought into equilibrium within a framework of
contractual relationships. These contractual relationships are not only with employees, but

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with suppliers, customers and creditors (Jensen & Meckling, 1976). The intention of these
contracts is that all the parties acting in their self-interest are motivated to maximize the value
of the organization, reducing the agency costs and adopting accounting methods that most
efficiently reflect their own performance (Deegan, 2004).

The agency role of the directors refers to the governance function of the board of directors in
serving the shareholders by ratifying the decisions made by the managers and monitoring the
implementation of those decisions. This role has been examined in a large body of literature
(Fama& Jensen, 1983; Baysinger & Butler, 1985; Lorsch & MacIver, 1989; Baysinger &
Hoskisson, 1990; Daily & Dalton, 1994). Much of these researches have examined board
composition due to the importance of the monitoring and governance function of the board
(Pearce & Zahra, 1992; Barnhart, Marr & Rosenstein, 1994; Daily & Dalton, 1994; Gales &
Kesner, 1994; Bhagat & Black, 1998; Kiel & Nicholson, 2003), because according to the
perspective of agency theory the primary responsibility of the board of directors is towards
the shareholders to ensure maximization of shareholder value. The focus of agency theory of
the principal and agent relationship has created uncertainty due to various information
asymmetries (Deegan, 2004). The separation of ownership from management can lead to
managers of firms taking action that may not maximize shareholder wealth, due to their firm
specific knowledge and expertise, which would benefit them and not the owners; hence a
monitoring mechanism is designed to protect the shareholder interest (Jensen & Meckling,
1976). This emphasizes the role of accounting in reducing the agency cost in an organization,
effectively through written contracts tied to the accounting systems as a crucial component of
corporate governance structures, because if a manager is rewarded for their performance such
as accounting profits, they will attempt to increase profits, which will lead to an increase in
bonus or remuneration through the selection of a particular accounting method that will
increase profits.

Arising from the above is the agency problem on how to induce the agent to act in the best
interests of the principal. This results in agency costs, for example monitoring costs and
disciplining the agent to prevent abuse (Shleifer & Vishny, 1997). Jensen and Meckling
(1976) define agency costs: the sum of monitoring expenditure by the principal to limit the
aberrant activities of the agent; bonding expenditure by the agent which will guarantee that
certain actions of the agent will not harm the principal or to ensure the principal is
compensated if such actions occur; and the residual loss which is the dollar equivalent to the
reduction of welfare as a result of the divergence between the agents decisions and those
decisions that would maximize the welfare of the principal. However, the agency problem
depends on the ownership characteristics of each country. In countries where ownership
structures are dispersed, if the investors disagree with the management or are disappointed
with the performance of the company, they use the exit options, which will be signaled
through reduction in share prices. Whereas countries with concentrated ownership structures
and large dominant shareholders, tend to control the managers and expropriate minority
shareholders in order to gain private control benefits (Spanos, 2005).

The agency model assumes that individuals have access to complete information and
investors possess significant knowledge of whether or not governance activities conform to
their preferences and the board has knowledge of investors‟ preferences (Smallman, 2004).
Therefore according to the view of the agency theorists, an efficient market is considered a
solution to mitigate the agency problem, which includes an efficient market for corporate
control, management labour and corporate information (Clarke, 2004). According to Johanson
and Ostergen (2010) even though agency theory provides a valuable insight into corporate

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governance, its‟ applies to countries in the Anglo-Saxon model of governance as in Malaysia.
Various governance mechanisms have been discussed by agency theorists in relation to
protecting the shareholder interests, minimizing agency costs and ensure alignment of the
agent principal relationship. Among the mechanisms that have received substantial attention,
and are within the scope of this study, are the governance structures (Davis, Schoorman &
Donaldson, 1997).

The Stakeholder Theory

This theory centres on the issues concerning the stakeholders in an institution. It stipulates
that a corporate entity invariably seeks to provide a balance between the interests of its
diverse stakeholders in order to ensure that each interest constituency receives some degree of
satisfaction (Abrams, 1951). However, there is an argument that the theory is narrow
(Coleman, 2008) because it identifies the shareholders as the only interest group of a
corporate entity. However, the stakeholder theory is better in explaining the role of corporate
governance than the agency theory by highlighting different constituents of a firm (Coleman,
2008). Since the shareholders are recognized as the owners of the company under the business
law in many countries and at the same time the firm has a fiduciary duty to maximize their
returns and keeping their needs on first priority. Under the existing business model, the
institution convert the inputs of employees, investors and suppliers into such forms, which are
saleable to customers, which returns back to its shareholders in a circular manner. Needs of
investors, employers, suppliers and customers are well. The stakeholder theory suggest that
the parties involved should include trade associations, governmental bodies, political groups,
trade unions, associated corporations, communities and the general public. In some
exceptional scenarios competitors and prospective clients can also be regarded as stakeholders
in improve the business efficiency.

The stakeholder theory has become more prominent because many researchers have
recognized that the activities of a corporate entity impact on the external environment
requiring accountability of the organization to a wider audience than simply its shareholders.
For instance, McDonald and Puxty (1979) proposed that companies are no longer the
instrument of shareholders alone but exist within society and, therefore, has responsibilities to
that society. One must however point out that large recognition of this fact has rather been a
recent phenomenon. Indeed, it has been realized that economic value is created by people
who voluntarily come together and cooperate to improve everyone’s position (Freeman et. al.,
2004). Jensen (2001) critiques the Stakeholder theory for assuming a single-valued objective
(gains that accrue to a firm’s constituency). The argument of Jensen (2001) suggests that the
performance of a firm is not and should not be measured only by gains to its stakeholders.
Other key issues such as flow of information from senior management to lower ranks,
interpersonal relations, working environment, etc. are all critical issues that should be
considered. Some of these other issues provided a platform for other arguments. An extension
of the theory called an enlightened stakeholder theory was proposed. However, problems
relating to empirical testing of the extension have limited its relevance (Sanda et. al., 2005).

In order to differentiate among stakeholder types, Rodriguez et al., (2002): classification was
adopted; consubstantial, contractual and contextual stakeholders (see Figure 1.2).
Consubstantial stakeholders are the stakeholders that are essential for the business’s existence
(shareholders and investors, strategic partners, employees). Contractual stakeholders, as their
name indicates, have some kind of a formal contract with the business (financial institutions,
suppliers and subcontractors, customers). Contextual stakeholders are representatives of the

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social and natural systems in which the business operates and play a fundamental role in
obtaining business credibility and, ultimately, the acceptance of their activities (public
administration, local communities, countries and societies, knowledge and opinion makers)
Rodriguez et al., (2002). Rajan and Zingales (1998) and Zingales (1998) argue that the
company has to safeguard the interests of all who contribute to the general value creation, that
is, make specific investments to a given corporation. These firms-specific investments can be
diverse and include physical, human and social capital.

The Resource Dependency Theory

The basic proposition of resource dependence theory is the need for environmental linkages
between the firm and outside resources. In this perspective, directors serve to connect the firm
with external factors by co-opting the resources needed to survive (Pfeffer and Salancik,
1978). Thus, boards of directors are an important mechanism for absorbing critical elements
of environmental uncertainty into the firm. Williamson (1985) held that environmental
linkages or network governance could reduce transaction costs associated with environmental
interdependency. The organization’s need to require resources and these leads to the
development of exchange relationships or network governance between organizations.
Further, the uneven distribution of needed resources results in interdependence in
organizational relationships. Several factors would appear to intensify the character of this
dependence, e.g. the importance of the resource(s), the relative shortage of the resource(s) and
the extent to which the resource(s) is concentrated in the environment (Donaldson and Davis,
1991).

Additionally, directors may serve to link the external resources with the firm to overwhelm
uncertainty (Hillman, CannellaJr & Paetzols, 2000), because managing effectively with
uncertainty is crucial for the existence of the company. According to the resource dependency
rule, the directors bring resources such as information, skills, key constituents (suppliers,
buyers, public policy decision makers, social groups) and legitimacy that will reduce
uncertainty (Gales & Kesner, 1994). Thus, Hillman et al. (2000) consider the potential results
of connecting the firm with external environmental factors and reducing uncertainty is
decrease the transaction cost associated with external association. This theory supports the
appointment of directors to multiple boards because of their opportunities to gather
information and network in various ways.

The Stewardship Theory

In contrast to agency theory, stewardship theory presents a different model of management,

where managers are considered good stewards who will act in the best interest of the owners
(Donaldson & Davis 1991). The fundamentals of stewardship theory are based on social
psychology, which focuses on the behaviour of executives. The steward’s behaviour is pro
organizational and collectivists, and has higher utility than individualistic self-serving
behaviour and the steward’s behaviour will not depart from the interest of the organization
because the steward seeks to attain the objectives of the organization (Davis, Schoorman &
Donaldson 1997). According to Smallman (2004) where shareholder wealth is maximized, the
steward’s utilities are maximized too, because organizational success will serve most
requirements and the stewards will have a clear mission. He also states that, stewards balance
tensions between different beneficiaries and other interest groups. Therefore, stewardship
theory is an argument put forward in firm performance that satisfies the requirements of the
interested parties resulting in dynamic performance equilibrium for balanced governance.

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The stewardship theory sees a strong relationship between managers and the success of the
firm, and therefore the stewards protect and maximize shareholder wealth through firm
performance. A steward, who improves performance successfully, satisfies most stakeholder
groups in an organization, when these groups have interests that are well served by increasing
organizational wealth (Davis, Schoorman & Donaldson 1997). When the position of the CEO
and Chairman is held by a single person, the fate of the organization and the power to
determine strategy is the responsibility of a single person. Thus the focus of stewardship
theory is on structures that facilitate and empower rather than monitor and control (Davis,
Schoorman & Donaldson 1997). Therefore stewardship theory takes a more relaxed view of
the separation of the role of chairman and CEO, and supports appointment of a single person
for the position of chairman and CEO and a majority of specialist executive directors rather
than non-executive directors (Clarke 2004).

The Enlightened Shareholders Theory

Under this theory, interests of diversified stakeholder groups (including shareholders) are
emphasized by satisfying the needs and interests of stakeholders. This has been referred as
crucial approach in corporate success and for creation of corporate wealth. This can only be
possible by satisfying stakeholder’s needs and responding to their interests resulting in
generating company’s profit and shareholders health. In this way, shareholders are benefitted
when the board satisfies the stakeholder’s interests, this is because profits are made and they
are primary stakeholders. Enlightened shareholders theory gives emphasis on shareholders
however; differ with classical stewardship theory, as boards are essentially required to take
stakeholders interest to top. Although they are required to explain their actions taken to all the
stakeholders, it includes the process in which such decisions have exposed the company to
risk.

MODELS OF CORPORATE GOVERNANCE

Corporate governance is based on different approaches including rules based, principles

based, discretionary, or legalistic. Similarly, different models are referred around the world.
Mainly five models of corporate governance are identified with their worldwide recognition,
namely, UK, American, Continental European, Japanese and Asian. Each one has its own
significance and focus. These are being examined in detail below:

The Anglo-US Model

This model governs corporations in the US, Australia, UK, New Zealand, Canada and many
other countries. The Anglo-US model is characterized by share ownership of individual, and
Increasingly institutional, investors not affiliated with the corporation (known as outside
shareholders or “outsiders”); a well-developed legal framework defining the rights and
responsibilities of three key players, namely management, directors and shareholders; and a
comparatively uncomplicated procedure for interaction between shareholder and corporation
as well as among shareholders during or outside the AGM. Major corporations in UK and US
are commonly adopting equity financing as a common method of raising capital. US have
been witnessed as the largest capital market inthe world, and at the same time the London
Stock Exchange is the third largest stock exchange in the world (interms of market
capitalization), which is after the New York Stock Exchange (NYSE) and Tokyo (TOSHO).

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Based on the above fund raising mechanism being adopted by these developed counties,
causal relationship between the size of the capital market, importance of equity financing and
the development of a corporate governance system is highly correlated. The US is considered
as the world’s largest capital market as well as the home of the world’s most-developed
system for proxy voting and shareholder activism by the institutional investors, where
institutional investors play a crucial role in the capital market and corporate governance in the
UK. Key players in the Anglo-US model includes the directors, management, shareholders,
stock exchanges, government agencies, consulting firms and self-regulatory organizations,
which advise corporations and shareholders on corporate governance and proxy voting of
these, the three major players are management, directors and shareholders. They form what is
commonly referred to as the "corporate governance triangle." The interests and interaction of
these players is diagrammatically represented below:

Management Shareholders

Board of Directors

This model was developed assuming the separation of ownership and control in most publicly
held corporations within the context of the free market economy. This distinction serves a
social purpose and valuable business, where investors contribute capital and maintain
ownership in the enterprise, by avoiding legal liability for the acts of the corporation. In this
scenario, investors avoid legal liability by abandoning to management control of the
corporation, and paying management for posing as their agent by undertaking the affairs of
the corporation. The cost of this separation of ownership and control is defined as “agency
costs”.

The Japanese Model

The Japanese model is characterized by a high level of stock ownership by affiliated banks
and companies; a banking system characterized by strong, long-term links between bank and
corporation; a legal, public policy and industrial policy framework designed to support and
Promote “keiretsu” (industrial groups linked by trading relationships as well as cross
shareholdings of debt and equity); boards of directors composed almost solely of insiders; and
a comparatively low (in some corporations, non-existent) level of input of outside
shareholders, caused and exacerbated by complicated procedures for exercising shareholders‟
votes.

Equity financing is important for Japanese corporations, where insiders and their affiliates are
the major shareholders. They have major role to play in individual corporations and in the
system as a whole. Conversely, the interests of outside shareholders are marginal. The
percentage of foreign ownership of Japanese stocks is at lower side, which becomes an

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important factor in making the model more responsive to outside shareholders. Under the
Japanese model of corporate governance, it is multi-dimensional, centering on a main bank
and an industrial network or keiretsu. Here, „main bank system‟ and „the keiretsu‟ are two
different entities, even though they are overlapping and complementary elements. Almost all
the Japanese corporations have a close end relationship with a main bank, where the bank
provides to its corporate client loans as well as variety of services including equity issues,
bond issues, settlement accounts and related consulting services. An important point need to
be noted is that the main bank is generally a major shareholder in the corporation, which is
not case in US, where anti-monopoly legislation prohibits one bank from providing this
multiplicity of services. Rather, these varieties of services are handled by different
institutions, such as investment bank - equity issues; commercial bank – loans; specialized
consulting firms - proxy voting and other services.
Many of the Japanese corporations have strong financial relationships with a network of
associated companies. These networks are characterized by trading of goods and services,
crossholdings of debt and equity and informal business contacts, which are known as keiretsu.
Government driven industrial policies are also playing key role in the governance process.
Since the 1930s, the Japanese government has pursued an active industrial policy with a
mandate to assist Japanese corporations. Under this policy emphasis was to have official and
unofficial representation on corporate boards, especially, when a corporation faces financial
instability. In comparison with the Anglo-US model, non-associated shareholders have petite
or no voice in Japanese governance, resulting in less representation of truly independent
directors, whore presents outside shareholders. The Japanese model is an open-ended
hexagon, diagrammatically presented below, where the base of the figure has four connecting
lines, representing the linked interests of the four major players, namely: management,
government, bank and keiretsu.

The German Model

The German model is significantly different from the Anglo-US as well the Japanese model
of corporate governance. Some of its elements are similar to the Japanese model, as the banks
hold long-term stakes in companies, and the bank representatives are elected to German
boards as well. Germany’s leading banks play a major role, as in some cases public-sector
banks are also key shareholders in the country. In German model three unique elements
exists, namely: two tier board structure, concern over shareholder’s rights and legalizing the
voting rights restrictions.

The German model prescribes two boards with separate members that mean a two-tiered
board structure consisting of a management board and a supervisory board. Here management
board is composed of insiders, including executives of the corporation and the ‘supervisory
board’ composed of employee representatives and shareholder representatives. As can be seen
that these two boards are completely distinctive in nature, no one may serve simultaneously
on a company’s management board and supervisory board. Interestingly, the size of the
supervisory board is set by law, which cannot be changed by shareholders. Another feature of
the model is that in Germany and other countries, which are following this model, voting right
restrictions are legal, which limit a shareholder to voting a certain percentage of the
company’s total share capital, and not based on the share ownership position.

In Germany, many companies have priority of bank financing than equity financing,
Resulting small capitalization in German stock market. As a part of conservative investment
strategy, the level of individual stock ownership is low. This reflects that corporate

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governance structure is notably building strong relationships between banks, key players, and
corporations. The system is somewhat uncertain towards minority shareholders, as it allows
them interaction by permitting shareholder proposals, which is balanced by companies by
imposing voting rights restrictions. If the percentage of foreign ownership of German equity
is considered, it was 19% in 1990.This significant factor is slowly affecting the German
model, as the foreign investors from EU and other regions started advocacy for their interests.
Similar case is noticed when in 1993Daimler-Benz AG decided to list its shares on the NYSE,
it was asked to adopt US GAAP, which is strong implication of globalization and strong
corporate governance, as a result these accounting principles were provided much greater
financial transparency than German accounting standards.

As far as key players in German model are considered, German banks and corporate
shareholders have key role to play in the German corporate governance system, as companies
are also shareholders, holding long-term stakes in other companies, they may even take place
where there is no industrial or commercial association between the two. This model is bit
similar to the Japanese model but very different from the Anglo-US model, where neither
banks nor companies are important institutional investors. Another unique feature in German
model is that it has mandatory inclusion of employee representatives on larger German
supervisory boards, which is missing in case of the Anglo-US and Japanese models.

The Asian Family Based Model

Tricker (2015) identified the Asian family based model of corporate governance, where the
‘Overseas Chinese’ term was used to describe Chinese business people. In this case over the
years, expansion of the Chinese Diaspora from mainland has now key role to play in the
business life of South East Asia region. As a result, many corporate houses in countries like
Singapore, Malaysia, Thailand, Philippines, Taiwan and Indonesia are well controlled and
managed by the Chinese residents. Majority of the shareholding lies with Chinese. Further
examining the Asian Family based model, it came into light that in the governance of these
Chinese companies, the Board structure role is crucial in terms of exercising their power,
which is primarily based on relationship between the key players (between dominant head of
the family and other members of the family at the top position in the management). They
seem to be from diversified groups with considerable delegation of power to their subsidiary
units, where family oriented small groups hold the strategic control over the corporate affair.
Under this model, outside shareholders are in minority. It is ultimately the regulatory
authorities in the Country, which emphasizes on the importance of disclosure and the control
of related party transactions. However, such models fail on many fronts, when issues like
dominance of family members, insider trading, corruption, unfair treatment of minority
shareholders.

Some of the important practices adopted under this model include the following:

 It is family centric, where family has complete control.

 The control is by keeping majority equity stake within family members.
 Decision making is centralized, with an emphasis on trust and control.
 It is strategically intuitive, where business is seen more of a succession of contracts
and relying on intuitions, sophisticated bargaining tactics and superstition.

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EVOLUTION OF CORPORATE GOVERNANCE IN INDIA

International Scenario of Corporate Governance

International scenario of corporate instability and failure is not restricted to developed or

developing countries. It is, indeed a phenomenon attracted attention world over for any such
organisation ignoring any of the five principles of corporate governance, i.e., fairness &
integrity, transparency & disclosures, accountability, equitable treatment to all shareholders
and social responsibility. The most common reasons for corporate failures and scandals were
lax board, fraud, lack of transparency and inadequate disclosure, failure of internal/external
audit and unethical business conduct. Some renowned and high volume corporate failures
leading the foundations for significant role of corporate governance in the globalized era are
summarized below.

The Barings Bank in UK failed during 1995 by losing more than $1 billion in unethical
behaviour of trading. The HIH Insurance, an Australia based company, met losses of around
US$5.3 billion during 2001 due to inefficient Board, ineffective audit committee and poor
decision making under the dominance of its CEO. In the same year Enron, a US based
company reported an accounting loss of US$618 million and reasons identified for mis
governance were unethical corporate functioning, lax board and misreporting of financial
statements. During 2002, six US based companies namely, Tyco, Xerox Corporation, Global
Crossing, World Com, Adelphia Communications and Andersen Worldwide reported
corporate failure and scandals. Major problems noticed in these cases was misreporting of
financial statements, lax and conflicted board, external audit failure, unethical behaviour, etc.

An accounting fraud of 14 billion Euros was reported in Italy based Parmalat Company
during 2003 because of the falsified accounting documents. In the same year Netherland
based Royal Ahold faced a problem of insider trading and unethical behaviour. In the
subsequent year 2004, China Aviation Oil (Singapore/China based company) reported a loss
of more than US$500 million. The reasons reported for such losses involve insider trading,
misleading statements, etc.

At the international front safeguarding corporate from financial scandals and future mis
governances was the serious concern of developed countries, especially for the USA and UK
where maximum corporate scandals have been reported, i.e., 12 and 4, respectively. As a
result, several committees constituted to address such issues have introduced various codes
and standards on corporate governance.

Indian Scenario Of Corporate Governance

The concept of corporate governance is not new in India. In ancient time of third century
B.C., Chanakya, who was a well-known teacher, philosopher and a royal advisor had referred
to four key duties of a king, which includes, Yogakshema (Safeguard), Palana (Maintenance),
Vriddhi (Enhancement) and Raksha (Protection). On analyzing these four duties in the present
context with the duties of top executives in companies, then it can be notice that all are
similar. Here ‘Yogakshema’ means safeguarding the interests of the shareholders, ‘Vridhi’
means enhancing the wealth by properly utilizing assets, ‘Palana’ refers to maintenance of
wealth through profitable affair and ‘Raksha’ is referred with protection of shareholder’s
wealth. If we move further then in existing scenario, corporate governance was not in the
agenda of Indian companies until early 90s and therefore was also not referred much.

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However, experiencing some major lapses and flaws in existing legal framework, including,
boards of directors without adequate fiduciary responsibilities, poor disclosure practices,
undesirable stock market practices, chronic capitalism and lack of transparency, it was felt to
improve in governance through rigorous reforms.

The fiscal crisis in 1991 had pushed the Indian government to take serious measures by
adopting reformative actions for economic stabilization. These reforms were part of macro
strategy of building industrial capabilities. Such reforms also involved a wide range of
institutional and corporate level initiatives, which have reflected a good sign of corporate
responsiveness and transparency in subsequent years. As a liberalization measure, the
Government amended the Companies Act, 1956 many times including in 1999, 2000, 2002
and 2003. Several measures have been adopted by the government, which includes
empowering the stock market regulator - Securities and Exchange Board of India (SEBI) and
also by improving specific measures for more disclosures and enhancing transparency. Some
of the major corporate governance initiatives taken since 1990s by the Government of India
are discussed below.

The Confederation of Indian Industry (CII) Code (1998)

Considering the importance of Cadbury Committee Report of UK, the CII took initiative with
the objective to develop and promote a code of corporate governance for its adoption by
Indian public sector and private sector companies, banking and financial institutions. In 1996
CII constituted a national level task force under the Chairmanship of Shri Rahul Bajaj, who
was former President of CII. The final draft code termed ‘Desirable Corporate Governance
Code’ was circulated in 1997 and the final code released in 1998. Considering the fact that the
corporate structure of each country vary from another country and laws pertaining to
companies may also not sufficient to bring high level of transparency, protection of small
investors, the Committee, came out with 17 major recommendations, which were desirable
and voluntary in nature. Some of the illustrious recommendations are as follows:

 Emphasized on higher involvement of Non-executive directors in the board affairs

and other key decision. They must be well defined with their responsibilities within
the board and in key committees.

 Suggested restriction on directorship in more than 10 listed companies at a time by a

single person.

 Introduction of at least 30% professionally competent Independent Non-executive

directors in listed companies, where companies have turnover of over Rs. 100 crore
and Chairman is non-executive. However, this percentage raised to 50% in cases,
where the Chairman and Managing Director is the same person.

 Mandatory to setup the Audit Committee where listed company either have turnover
of over Rs. 100 crore or a paid up capital of Rs. 20 crore.

 Recommended to have at least three members in the Audit Committee, prescribing to

be from the company’s non-executive directors.

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The Kumar Mangalam Birla Committee (2000)

The desirable code of CII was well responded by corporate sector as some of the progressive
companies adopted it. This initiated a contextual debate on voluntary vs. mandatory approach
on corporate governance, as it was felt that under Indian conditions a statutory code would be
more meaningful over voluntary code.

Consequently the second major initiative was undertaken by SEBI, by setting up acommittee
headed by Kumar Mangalam Birla in 1999, with an objective of promoting and raising the
standards of corporate governance. The Committee in its report observed “the strong
Corporate Governance is indispensable to resilient and vibrant capital market and is an
important instrument of investor protection. It is the blood that fills the veins of transparent
corporate disclosure and high quality accounting practices. It is the muscle that moves a
viable and accessible financial reporting structure”.

The committee had two segments of recommendations one mandatory recommendation and
Second non-mandatory recommendations. Focus of mandatory recommendation was
improving in quality of financial reporting through its disclosures; making Audit Committee
more responsible; adoption of formal code of conduct by the Board; and inclusion of business
risks in annual report, etc.Non-mandatory recommendation emphasized on whistleblower,
evaluating performance of non-executive directors and board members training, etc.

During 2000, SEBI Board accepted and ratified the key recommendations of Kumar
Mangalam Committee and incorporated into Clause – 49 of the Listing Agreementof the
Stock Exchanges. The recommendations were applicable on all listed companies having paid-
up capital of over Rs. 3 crore or net worth of over Rs.25 crore at any given point of time.
Adoption of these recommendations was ultimately the responsibilities of the Board of
Directors of these listed companies.

The Report Of Task Force On Corporate Excellence (2000)

The Department of Corporate Affairs (DCA) constituted a study group under the
chairmanship of Dr. P.L. Sanjeev Reddy, (Secretary, DCA) in May 2000, with akey task of
examining ways to ‘operationalize the concept of corporate excellence on a sustained basis’
so as to “sharpen India’s global competitive edge and to further develop corporate culture in
the country”. In November 2000, the task force made various recommendations containing a
range of initiatives for raising governance standards. Amongst many, some of the major
recommendations are as follows:

 Higher delineation of independence criteria and minimization of interest-conflict

potential.

 Directorial commitment and accountability through fewer and more focused board
and committee membership.

 Meaningful and transparent accounting and reporting, improved annual report along
with more detailed filing with regulatory authorities, and greater facilitation for
informed participation using the advances in converging information and
communications technologies.

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  Setting up of an independent, Autonomous Centre for Corporate Excellence to
accord accreditation and promote policy research and studies, training and education,
etc., in the field of corporate excellence through improved corporate governance.

 Clear distinction between two basic components of governance in terms of

policymaking and oversight responsibilities of the board of directors, and the
executive and implementation responsibilities of corporate management comprising
of the managing director and his or her team of executives including functional
directors.

RBI Advisory Group on Corporate Governance (2001)

The RBI established the Standing Committee on International Financial Standards and Code
to act as advisory group, with a mandate to examine and compare the status of corporate
governance worldwide in general and to compare corporate governance in India with
internationally recognized standards in particular.

RBI consultative group of directors of banks/ financial Institutions (2002)

With a view to review the supervisory role of Board of banks and the financial institutions,
the RBI setup the Advisory Group of Directors of Banks and Financial Institutions in April
2002. Task of this advisory group was to obtain feedback on the functioning of the boards
with reference to disclosure, transparency, various compliance and audit committee, etc. The
recommendations of the advisory group emphasized the key role of board of directors in an
effective manner in order to minimize risk. It also recommended reviewing existing
governing framework of the Board of the banks and the financial institutions.

The Naresh Chandra Committee (2002)

Year 2001 was a year of corporate scams and scandals. US based Enron disaster showed
Involvement of the auditor and the corporate client. Subsequently, several other scams
exposed the fall of the corporate giants in US including WorldCom, Global Crossing, Xerox
and Owest.

This resulted in consequent enactment of the stringent Sarbanes Oxley Act, 2001. This has
alarmed Indian Government to wake up and to look back for its own preparedness from such
collapses. The Ministry of Finance and Company Affairs formed a high level committee in
August 2002, under the Chairmanship of Shri Naresh Chandra, who was former Cabinet
Secretary to the Govt. of India. The objective of such committee was to examine the existing
legal provisions involving the auditor- client relationships and the role of independent
directors in the board. Recommendations of the committee includes at least 50% Independent
Director in the Board, the rotation of audit partner at every 5 years, Audit Committee to set up
with members from Independent Directors only and restriction of certain professional
assignment for the auditors. In July 2003, Shri Naresh Chandra was also assigned another key
committee on small private companies and limited liability partnership with an objective to
remove the bottlenecks in existing legal framework being faced by these legal entities.

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The Narayana Murthy Committee (2003)

The SEBI had an analysis the compliance practices on the clause-49 by the listed companies,
and subsequently felt the need to look proactively beyond the mere systems and procedures,
in order to make effective corporate governance by way of protecting the interest of investors.
The SEBI constituted a committee under the Chairmanship of Shri N.R. Narayana Murthy
(Chairman, Infosys Technologies) for reviewing implementation of the corporate governance
code by listed companies and to examine the role of companies in responding to price
sensitive information circulated in the market. This way, committee had to work deeply to
study seven important parameters, which includes, ease of implementation, transparency,
verification, importance, accountability, enforcement and fairness. The Committee came out
with strong recommendations to enhance transparency. Key recommendations related to
independent directors, related party transactions, audit committees, risk management, audit
reports, directorships, codes of conduct, director compensation and financial disclosures..

The J.J. Irani committee (2005)

Initially companies were regulated through the Companies Act 1913, which was repealed by
the Companies Act 1956. The Company act, 1956 was result of the recommendations made
by the Bhaba Committee, which had a mandate to consolidate the existing corporate laws and
providing a new system for corporate operation in 1950. Since then on many occasion it was
required to streamline the Company Act, from time to time, as the corporate sector grew in
pace with the Indian economy. In the context of fast changing global market, need was to
simplify corporate laws by the government to provide a framework that would facilitate faster
economic growth. The Government therefore took a fresh initiative in this regard and
constituted a committee under the Chairmanship of Dr. Jamshed J. Irani (Former MD,
TISCO) in December 2004. The objective of the committee was to advising the government
on the proposed revisions in the Companies Act 1956.The Committee submitted its wide
range of recommendations in May 2005, mainly focusing on related party transactions,
management and investors education and protection, accounts and audit, board governance,
minority interest, offences and penalties, access to capital, mergers and amalgamations, and
restructuring and liquidation, etc.

Central Coordination And Monitoring Committee

Consequent upon J.J. Irani Committee, The Department of Corporate Affairs setup a high
powered Central Coordination and Monitoring Committee (CCMC) to monitor the action
taken against the disappeared companies and unscrupulous promoters who have misused the
funds. The committee was co-chaired by Secretary, Department of Corporate Affairs and
Chairman, SEBI. Committee decided to form 7 Task Forces to be set up at Delhi, Mumbai,
Kolkata, Chennai, Ahmedabad, Bangalore and Hyderabad with the Regional
Directors/Registrar of Companies of respective regions as the convener and Regional Offices
of SEBI and Stock Exchanges as Members. Key objective of such task forces was to identify
and earmark such companies, which have disappeared, or which have inappropriately the
funds mobilized from the investors and thereupon suggests appropriate action in terms of
Companies Act or SEBI Act.

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ICSI recommendations to strengthen corporate governance Framework (2010)

The institute of Company Secretary (ICSI), which plays a crucial role in maintaining the
standard of company secretary profession, has also issued recommendations in order to
strengthen corporate governance framework in India. Some of the key recommendations are
referred below:

 To promote balance of power, need to demarcate the role and responsibilities of the
Chairman of the board and of the Managing Director.

 To make the Remuneration Committee and the Nomination Committee mandatory.

 Independent Directors to have a maximum 6 years term.

 Introduction of Induction training for directors need to be mandatory, which can

cover up roles, responsibilities and liabilities of directors.

 To make secretarial audit compulsory in respect of listed companies and can be

undertaken only by the company secretary in practice.

 Mandatory adoption whistle blower policy in listed companies.

 To laid down and disclose the remuneration policy for the members of the Board.

 To compulsorily undertake rigorous annual evaluation of the Board and its

committees.

 To make Corporate Compliance Committee mandatory for all public limited

companies with a paid up capital of above Rs. 5 crore.

Shri Adi Godrej Committee (2012)

The Ministry of Corporate Affairs had constituted the committee under the Chairmanship of
Shri Adi Godrej to formulate a policy document on corporate governance. “The Guiding
Principles of Corporate Governance” were developed by the committee, which was submitted
to the government on 18-09-2012. The committee had advocated some of the key suggestions
on strengthening the actual performance of corporate governance within the existing setup of
legal provisions available with Indian corporates. It is evident from the guidelines that
committee recognized the better practices that can only be encouraged by way of voluntary
adoption of existing legal framework. The committee has given a broader outline on various
areas. Some of the highlighted issues are listed below:

 Ensuring that a board functions effectively is getting the right “tone at the top” of the
corporation.

 Focus on two primary dimensions of corporate governance that need to be “balance

act”, i.e, conformance or conformity (i.e. with laws, codes, structures and roles) and
performance.

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  Significant “Board composition and diversity” needing to balance diverging
stakeholder interests

 Criteria for ensuring diversity (including gender diversity) on boards.

 To adopt a more professional, independent and transparent approach in “selection

process” for appointing independent directors.

 “On-boarding / Induction Process” for new directors.

 Appointment of “lead director” (appointed as such from among the

nonexecutive/independent directors)

 “Information acquisition and quality” of such information is key for decision

making.

 Improvement in “recoding of minutes”

 “Continuing Board Training and Education” for up to date with the latest trends in
their field

The Companies Act, 2013

The Companies Act, 1956 was active for about fifty-five years and has been amended several
times. As a replacement to existing Company Act, 1956, New Companies Act, 2013 was
passed by the Parliament and came into force on August 29, 2013. This is the most recent and
update on corporate governance in India. Some of the important remedial aspects introduced
under the New Companies Act, which categorically emphasised and analysed by Arya, et.al.
(2013), as an effective code of corporate governance are referred below:

Enabling Transparency (Sec. 120)

In order to bring transparency in companies, a new sec. on „maintenance and inspection of

documents in electronic form‟, has been introduced, which ensures to provide any document,
record, register or minute, etc., to be kept in the electronic form or allowed for inspection.
This E-governance initiative enables a transparent environment including maintenance and
inspection of documents in electronic form, option of keeping of books of accounts in
electronic form, financial statements to be placed on company’s website, holding of Board
meetings through video conferencing or any other electronic mode, voting through electronic
means, etc.

Corporate Social Responsibility (Sec. 135)

Corporate Social Responsibility, has been framed under sec. 135, enabling to constitute a
Corporate Social Responsibility Committee of the Board for every company having net worth
of Rs.500 crore or more, or turnover of Rs.1,000 crore or more or a net profit of Rs.5 crore or
more during any financial year. Mandate of such committee is to formulate and monitor CSR
policies of the company. It became mandatory to ensure that the company spends, in every
financial year, at least 2% of the average net profits, made during three immediately

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preceding financial years.This policy initiative is having two fold effects viz., one on the
various social sectors and activities including education, health, hunger & poverty, gender
equality & women empowerment, environmental sustainability, vocational skills &
employment, etc. and second on the corporate response on the CSR compulsion.

Appointment of Auditors, Sec. 139 and Not to Render Certain Services (Sec. 144)

It provides that a company shall appoint an individual or a firm as an auditor at annual general
meeting subject to his written consent who shall hold office till conclusion of sixth annual
general meeting. It also has provisions for rotation of Auditors. Under Sec. 144, certain
services have been earmarked which cannot be rendered directly or indirectly to the company
or its holding company or subsidiary company, by the auditors. These services includes,
accounting and book keeping services, internal audit, design and implementation of any
financial information system, actuarial services, investment advisory services, investment
banking services, rendering of outsourced financial services, management services.

Structure of Board of Directors (Sec. 149)

This Sec. corresponds that every company shall have a Board of Directors with minimum and
maximum number of directors prescribes on Board. Prescribed class or classes of companies
shall have atleast one women director. The sec. also seeks to provide that every company
shall have at least one director who stays in India for a total period of not less than 182 days
in the previous calendar year. It enforced all listed companies to appoint Independent
Directors at least one-third of the size of Board. Independent Directors shall hold office up to
two consecutive terms. One term is up to five consecutive years. It also enforces that
Nominee Director appointed by any institution, or in pursuance of any agreement, or
appointed by any Government to represent its shareholding shall not be deemed to be an
Independent Director. The Sec. further provides for the provisions of rotation of independent
director. Further the provision of retirement of directors by rotation shall not be applicable to
appointment of Independent Directors. The Sec. also provides that an Independent Director or
a Non-executive Director who is not a promoter or key managerial personnel shall be held
liable for acts of omission or commission by a company, which has occurred by his
knowledge.

Duties of Director (Sec. 166)

Duties of Director have been defined under this Sec., which provide that a director of a
company shall act in accordance with the company’s articles. In case of contravention,
director is punishable with fine and if a director is found guilty of making any undue gain
either to himself or to his relatives, partners or associates, he shall also be liable to pay an
amount, equal to that gain, to the company. The duties of Director have been defined and
include the following:

 To act in accordance with the articles of the company.

 To act in good faith in order to promote the objects of the company

 To exercise his duties with due and reasonable care, skill and diligence and shall
exercise independent judgment.

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  Not to involve in a situation in which he may have a direct or indirect interest that
conflicts, or possibly may conflict, with the interest of the company.

 Not to achieve or attempt to achieve any undue gain or advantage either to himself or
to his relatives, partners, or associates

 Not to assign his office and any assignment so made shall be void.

Code for Independent Directors (Schedule IV)

Considering the importance of Independent Directors, the Companies Act has a special
mention on ‘Code for Independent Directors’ under its Schedule-IV. This schedule ensure
adherence to various standards required to be comply by the Independent Directors. Focusing
on detailed guidelines and deliberations for the professional conduct, role, functions and
duties, code emphasises on the appointment, re-appointment process, removal and resignation
procedure. Under this code separate meetings of Independent Directors and their evaluation
mechanism has a scope to strengthen and bring transparency in the Board affair.

Structure of Audit Committee and Its Function (Sec. 177)

It provides the requirement and manner of constitution of audit committee. The Audit
Committee shall consist of a minimum of three directors with independent directors forming a
majority and majority of members must have ability to read and understand financial
statements. The further provides the functions of audit committee. The Sec. also provides for
the establishment of vigil mechanism in every listed and prescribed class of companies.

Prohibition on Insider Trading of Securities (Sec. 195)

This Sec. prohibits directors or key managerial person of the company to deal in securities of
a company, or counsel, procure or communicate, directly or indirectly, about any non-public
price sensitive information to any person. This Sec. also have a penalty provision with
imprisonment for a term upto five years or with fine upto five lakh rupees extendable to 25
crore rupees or three times the amount of profits made out of insider trading, whichever is
higher, or with both.

Appointment of Key Managerial Personnel (KMP) (Sec. 203)

Under this Sec., it is required for every company belonging to such class or description of
companies, as prescribed by the Central Government, shall have managing director, or chief
executive officer or manager and in their absence, a whole time director and a Company
Secretary, as whole-time key managerial personnel. It is also specified under this Sec. that a
whole-time key managerial personnel shall not hold office in more than one company (expect
in a subsidiary at the same time except that of a director if company permits him in this
regard. This Sec. further provides for punishment in case of contravention. Sec. 203 also has
provision that Company Secretary will be appointed by a resolution of the Board, which shall
contain the terms and conditions of appointment including the remuneration. If any vacancy
in the office of KMP is created, the same shall be filled up by the Board at a meeting of the
Board within a period of six months failing which, heavy penalty is imposed.

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Secretarial Audit for Bigger Companies (Sec. 204)

Under this Sec., every listed company and companies belonging to prescribed class or classes
of companies shall annex a secretarial audit report given by a Company Secretary in practice
with its Board’s report. The Board in its report shall explain any qualifications or other
remarks made by the Company Secretary in practice. The Sec. further provides penalty for the
company or any officer of the company or the Company Secretary in practice.

Defined Functions of Company Secretary (Sec. 205)

This Sec. specifies the functions of Company Secretary. The functions are inclusive in nature
and inter alia provides for ensuring compliance with the applicable secretarial standards. The
Sec. further provides that specified functions shall not affect the duties and functions of Board
of Directors, Chairperson, Managing Director or Whole-time Director. Functions of the
Company Secretary include, reporting the Board about compliances, to ensure that the
company complies with the applicable secretarial standards and to discharge such other duties
as may be prescribed.

Establishment of Serious Fraud Investigation Office (Sec. 211 and 212)

These Sections empowers the Central Government to constitute Serious Fraud Investigation
Office (SFIO), which will be headed by a director (not below the rank of Joint Secretary) and
will consist of experts from various disciplines. It provides statutory status to SFIO enabling it
to investigate into such cases of companies involved in frauds as may be assigned to it by
Central Government.

Sebi Guidelines, 2014

After the enactment of the Companies Act, 2013, the rules pertaining to Corporate
Governance were notified on March 27, 2014. The requirements under the Companies Act,
2013 and the rules notified there under would be applicable for every company or a class of
companies (both listed and unlisted) as may be provided therein.

Securities And Exchange Board Of India (listing obligations and disclosure

requirements) regulations, 2015

SEBI (LODR), 2015 regulation was notified on September 02, 2015 and has been amended 5
times applied special provision for the listed entities that are listed on any of the designated
securities on recognized stock exchanges. The regulation has set of principles which govern
the disclosures and obligations for the listed entities. LODR has a close reference to comply
with the corporate governance provisions including rights of shareholders, timely information
to shareholders, equitable treatment of all shareholders, recognising the rights of stakeholders
and encourage cooperation between listed entity and the stakeholders. It also focuses on
ensuring timely and accurate disclosure of material facts such as financial position,
ownership, performance and governance. Chapter – IV, which is the soul for effective
corporate governance of listed entity, has stringent regulations, which prominently addresses
related party transactions, vigil mechanism, board structure, Audit Committee, Nomination
and remuneration committee, Stakeholders Relationship Committee, Risk Management
Committee along with their composition and crucial provisions. It also emphasizes on the
regulatory obligations with respect to independent directors and the corporate governance

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requirements with respect to subsidiary of listed entity. Some of the Key highlights of LODR
with special focus on corporate governance aspects are discussed below.

Board Composition

An optimum combination of executive and non-executive directors is required with at least

one woman director in board and majority of directors need to be from Non-Executive (i.e.,
50% or more). In case the Chairman of the board is a Non-executive director then at least
33% of the board of directors shall comprise of Independent Directors. On the other hand
when the Chairman is not a regular Non-executive Director, then at least 50% of the board of
directors shall comprise of Independent Directors. Although in cases where the regular Non-
executive chairperson is a promoter of the listed entity or is related to any promoter or person
occupying management positions at the level of board of director or at one level below the
board of directors, then at least 50% of the board of directors of the listed entity shall consist
of Independent Directors. This further abides the Board to meet at least 4 times in a year, with
a maximum time gap of 120 days between any two meetings.

Audit Committee

The Audit Committee is powerful committee on the roadmap of effective corporate

governance, hence its composition, functioning play crucial role. Under LODR regulations
listed entity are required to have minimum 3 directors as members of the committee, which
should have majority of Independent Directors on its board (i.e. more than 67%) and having
sound finance knowledge.
At least one of the members must have expertise in accounting or related financial
management area. The chairperson of the audit committee must be an Independent Director.

The committee must meet at least 4 times in a year and more than 120 days shall not elapse
between two meetings.

Nomination and Remuneration Committee

Another important committee of the board must comprise of at least 3 Non-Executive

directors, whereas, minimum 50% of them must be Independent Directors. The Chairperson
also need to be drawn from the Independent Directors, which further provided that the
chairperson of the listed entity, whether executive or non-executive, may be appointed as a
member of the Nomination and Remuneration Committee and shall not chair such
Committee.

NEED FOR CORPORATE GOVERNANCE:

The need for corporate governance is highlighted by the following factors:

1. Wide Spread of Shareholders:

Today a company has a very large number of shareholders spread all over the nation and even
the world; and a majority of shareholders being unorganised and having an indifferent attitude
towards corporate affairs. The idea of shareholders’ democracy remains confined only to the
law and the Articles of Association; which requires a practical implementation through a code
of conduct of corporate governance.

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2. Changing Ownership Structure:

The pattern of corporate ownership has changed considerably, in the present-day-times; with
institutional investors (foreign as well Indian) and mutual funds becoming largest
shareholders in large corporate private sector. These investors have become the greatest
challenge to corporate managements, forcing the latter to abide by some established code of
corporate governance to build up its image in society.

3. Corporate Scams or Scandals:

Corporate scams (or frauds) in the recent years of the past have shaken public confidence in
corporate management. The event of Harshad Mehta scandal, which is perhaps, one biggest
scandal, is in the heart and mind of all, connected with corporate shareholding or otherwise
being educated and socially conscious. The need for corporate governance is, then, imperative
for reviving investors’ confidence in the corporate sector towards the economic development
of society.

4. Greater Expectations of Society of the Corporate Sector:

Society of today holds greater expectations of the corporate sector in terms of reasonable
price, better quality, pollution control, best utilisation of resources etc. To meet social
expectations, there is a need for a code of corporate governance, for the best management of
company in economic and social terms.

5. Hostile Take-Overs:

Hostile take-overs of corporations witnessed in several countries, put a question mark on the
efficiency of managements of take-over companies. This factors also points out to the need
for corporate governance, in the form of an efficient code of conduct for corporate
managements.

6. Huge Increase in Top Management Compensation:

It has been observed in both developing and developed economies that there has been a great
increase in the monetary payments (compensation) packages of top level corporate
executives. There is no justification for exorbitant payments to top ranking managers, out of
corporate funds, which are a property of shareholders and society. This factor necessitates
corporate governance to contain the ill-practices of top managements of companies.

BASEL COMMITTEE – FOR BANKING ORGANIZATIONS

Basel Committee published its report on Corporate Governance for Banking Organization in
September, 1999. According to the committee the boards of directors add strength to the
corporate governance of a bank when they

 understand their supervisory role and their “duty of loyalty” to the bank and its
shareholders;

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  serve as a “checks and balances” function Vis-à-vis the day-to-day management of
the bank;

 Feel empowered to question the management and are comfortable insisting upon
straight forward explanations from management.

 Recommend sound practices gleaned from the other situations;

 Provide dispassionate advice;

 Are not ever extended

 Avoid conflicts of interest activities with, and commitment to, other organizations;

 Meet regularly the senior management and internal audit to establish and approve
polices,

 Establish communication lines and monitor progress toward corporate objectives.

 Absent themselves from decisions when they are incapable of providing objective
advice;

 Do not participate in day-to-day management of the bank.

 It is found that in a number of countries, bank boards have found it beneficial to

establish certain specialized committees. Let us look at a few of them”

Risk management committee:

it provides oversight of the senior management’s activities in managing credit, market
liquidity, and operational legal and other risks of the banks.
Audit Committee:
It provides oversight of the bank’s internal and external auditors, approving their appointment
and dismissal, reviewing and approving audit scope and frequency, receiving their reports and
ensuring that management is taking appropriate corrective actions in a timely manne4r to
control weaknesses, non-compliance with policies, laws and regulations, and other problems
identified by auditors.
Compensation Committee:
It provides oversight of remuneration of senior management and other key personnel ensuring
that compensation is consistent with the bank’s culture, objectives, strategy and control
environment.
Nomination Committee:

It provides important assessment of board effectiveness and directs the process of renewing
and replacing board members.

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Corporate governance and board composition:

According to OECD key responsibilities of the board is overseeing the process of disclosure
and communication, monitoring the effectiveness of governance practices and change them.
Both the OECD Principles and the Basel Committee's guidance on corporate governance
suggest that boards should be able to exercise objective, independent judgement on corporate
affairs.

Although the Principles do not take a stand on what proportion of the board should be capable
of such judgement, they do suggest that a sufficient number of nonexecutive board members
be appointed on the board. If the board is to fulfill its functions properly, it needs to ensure
that it receives sufficient flows of information, internal and external, as well as adequate
administrative support. In this regard, the OECD Principles suggest that board members
should have access to accurate, relevant and timely information in order to fulfill their
responsibilities. Board members, especially non-executive directors, should have access to
bank staff and other technical expertise, including opportunities to obtain views from internal
and external auditors. According to the Agency theory Board composition is vital for the
performance of the Bank - Jensen and Meckling, International Corporate Governance
Network (ICGN) global governance principles states the responsibilities of the board of
directors is judgment of directors independent of management operation , establishment and
nomination of committees for audit compensation and outside director.

In the present study corporate governance of banks is evaluated in terms of composition of the
board, number of board committees, number of board meeting. Following literature was
analyzed for the present study. Cristina Alexandrina Stefanescu (2012) studied the
relationship between board committees features and the level of disclosure in case of banking
institutions listed on London Stock Exchange. Data collection was based on information
provided by banks‟ websites. The study revealed that the presence and the quality of board
committees proved to be able to explain positive influences over all types of disclosures
analyzed, but with different levels of significance. Jamie Allen, Secretary General, Asian
Corporate Governance Association (2009) highlighted the major progress in Asia in relation
to corporate governance. They highlighted the improvements in these areas such as financial
reporting, Board composition, Shareholder‟s rights, Accounting/Auditing, and Regulatory
Enforcement. In relation of financial reporting they have highlighted more detailed disclosure
rules, faster reporting, quarterly reporting, and disclosure of “material” events, director pay,
and director dealings.

In relation to Board composition and function the introduction of independent directors, board
committees, director training, higher expectations placed on directors, higher fees paid to
directors is suggested and towards shareholder rights they highlighted the formal rights to be
strengthened, retail activist groups to be formed and institutional investors voting to the
shares held by them. Where in relation to Accounting/Auditing, they have suggested local
accounting standards brought more into line with international standards, independent
regulation of audit profession in some, with respect to regulatory enforcement financial
regulators still under-equipped, but they highlighted that there has been more focus on
enforcing listing rules and key securities laws (e.g. insider trading). Gavin and Geoffrey
(2004) states that committee is a group of members to whom some specific role has been
delegated by a full board.

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Committees can be used to gather, review and summarize information and report back to the
full board for decision or can be delegated specific decision making powers. Uzun, Szewcyz
and Varma (2004) investigated that board composition and structure of oversight committees
are significantly related to the incidence of corporate fraud using 38 regression analysis. They
have used 266 companies where 133 chosen from accused firms and 133 no fraud firms. The
period of the study was 1978 to 2001.They examined that high proportion of independent
directors indicates less fraud. Weir and Laing (2001) state that “if non-executive directors
resulted in effective monitoring, their effectiveness would increase in line with their board
representation. Dalton et al. (1999) performed a meta-analysis of 131 observations on the
relationship between the board size and financial performance.

Both accounting-based indicators of financial performance (such as return on assets, return on

equity) and indicators based on market returns (such as Jensen‟s alpha, the Treynor measure,
the Sharpe measure) were used to measure financial performance. Their analysis found that
there is a strongly positive relationship between the two variables, suggesting that corporate
governance, in the form of a larger board, is associated with better firm performance. Jensen
(1993) studied that the board of directors is known as one of the most important instruments
to solve the corporate governance problem, since it is the organ primarily used by other
stakeholders to monitor management. Cadbury (1992) has highlighted the importance of
board committees and proposed to set up sub-committees of the board to focus on specific
aspects of governance that are considered problematic. Where APEC states that formation of
board of directors and deciding their remuneration is the key responsibilities of the boards of
directors. Zahra and Pearce (1989) study reveals that the diverse background of the directors
enhance the quality of their advice. Fama (1980) states that Non-executive directors may act
as “professional referees” to ensure that competition among executive directors stimulates
actions consistent with shareholder value maximization.

The Basel Committee's guidance on Enhancing Corporate Governance for Banking

Organizations notes that bank boards have found it beneficial to establish certain specialized
committees The OECD Principles further recommend that when committees of the board are
established, their mandate, composition and working procedures should be well defined and
disclosed by the board. Board can be classified into unitary board and a two tier board.
Unitary board consists of executive and non executive directors which takes decision as a
unified group. India has the unitary board system. According to the advisory group of
corporate governance in India Bank board’s should play an active role in providing oversight
of the way in which senior management approaches different kinds of risks which banks face,
such as, credit risk, market risk, liquidity and operational risk. Board of nationalised banks
need to be strengthened to pursue policies, which are in the best interests of the banks
themselves. There is a need that bank board ensures that senior management implement
policies that prohibits activities and relationships that diminish the quality of corporate
governance, such as, conflicts of interest, self dealing and preferential treatment to related
parties. Bank’s board need to take corrective steps through appropriate restructuring of the
boards.

CORPORATE GOVERNANCE IN BANKS WITH SHAREHOLDER‟S

PERSPECTIVES

The important stakeholders of banks are shareholders, depositors, employees, suppliers, and
government. The shareholders are one of the major stakeholder’s since they supply finance
for the banks and thus a need arises to look into corporate governance from the shareholder’s

32 | P a g e
perspective. The composition of the board, board committees, and board meetings,
enhancement of the shareholders‟ value and protection of shareholder’s interest are the
important aspect in the study of the corporate governance. Shareholders have suffered due to
the dilution of their rights and negligence of the management and lack of good performance
by the organization. There are certain issues related to that of shareholder’s in terms of not
receiving the information in time, lack of information, grievance not properly redressed, and
the issues related to return on their investment. It becomes prime duty of the banks to redress
these issues of the shareholder’s as part of the good governance.

There is a conflict of interest between the minority shareholders and the promoters of the
bank which has become one of the concerned issues of corporate governance. Evaluating
corporate governance in banks with shareholder’s perspectives is an important aspect.

Monika Marcinkowska (2012) paper presents key aspects requiring reforms: the role,
constitution and accountability of board, risk management, management remuneration,
transparency. New regulations and guidance are presented, creating the foundations for a new
order of the financial market. The paper also points out the banks stakeholder’s
accountability. It analyses the bank’s transparency and bank’s shareholders as part of the
study. Fahlenbrach and Stulz (2010) studied that bank with CEOs whose incentives were
more closely aligned with the interests of shareholders performed worse. Banks with higher-
option compensation and a larger fraction of compensation in bonuses for their CEOs did not
perform worse during the crisis. Elena F Pérez Carrillo (2007) has argued that shareholders
and stakeholders interests are compatible and both contribute to corporate long term
efficiency and progress. It is further argued that it is essential to achieve a wide consensus on
how to control management actions in support of stakeholder’s interests. Palepu, Kogan and
Khanna (2006) study instances of minority shareholder expropriation by Indian firms.

SEBI has been regularly receiving large number of investor complaints on these matters.
While enough laws exist to take care of many of these investor grievances, the
implementation and inadequacy of penal provisions have left a lot to be desired. Corporate
governance is considered an important instrument of investor protection, and it is therefore a
priority on SEBI‟s agenda.

To further improve the level of corporate governance, need was felt for a comprehensive
approach at this stage of development of the capital market, to accelerate the adoption of
globally acceptable practices of corporate governance. This would ensure that the Indian
investors are in no way less informed and protected as compared to their counterparts in the
best-developed capital markets and economies of the world. According to Anand Sinha,
Deputy Governor, Reserve Bank of India, The whole gamut of corporate governance could be
considered as a blend of various segments namely, regulatory governance, market
governance, stake holder governance and internal governance.

In the present chapter literature related to the study is reviewed. Banks disclosure standard
can be improvised further by disclosing information relating to the true state of the banks
affairs, their vision statements and future business strategies. Some of the gaps identified in
the study are: Most of the studies are based on firms. Many studies are undertaken for one
year which makes the study static in nature. Only limited study is there on shareholder‟s
perspective. Lots of studies are based on conceptual aspects of the only. Limited study is been

33 | P a g e
made on public sector banks. There are very few studies in relation to corporate governance
from shareholder’s perspectives.

OTHER KEY HIGHLIGHTS:

The role of the board of directors has undergone rapid transformation over the past decade.
The shift in power between the CEO and the board is perceptible. Directors are taking their
responsibilities seriously, speaking up and taking action. At the same time, these boards must
draw and respect the boundaries so that they are not viewed as running day-to-day operations
of the company for which they have only oversight responsibility. The greater challenge for
boards is to prevent crises in the organizations they govern. Performance evaluation is a key
means by which boards can recognize and correct corporate governance problems and add
real value to their organizations. Companies are increasingly making investments in
establishing processes for performance evaluation – those which are fair and transparent.
Although boards differ in the severity of their performance problems, the competitive
environment in which they work and the range of performance issues they face, there are a
number of key decisions that are relevant to all boards implementing an evaluation process.

A successful board and/or individual director evaluation, whatever the company type, could
broadly consider the following decision areas:

 Establishing objectives, scope of evaluation and target audience

 Selection of evaluation techniques
 Set up evaluation team (internal/ external) and protocols
 Implementation of recommendations

Clearly, board evaluations can contribute significantly to performance improvements at three

levels: the organizational, board and individual director level. Boards who commit to a
regular evaluation process find benefits across these levels in terms of improved leadership,
increased clarity of roles and responsibilities improved teamwork, increased accountability,
better decision making, enhanced communication and more efficient board operations.

The Board shall have optimum combination of EDs and Non-EDs with at least one woman
director on the Board of the company and not less than 50% of the Board comprising Non-
EDs.

Requirement of Woman Director is to align with Section 149(1) of the Companies Act, 2013.

As per new Companies Act, listed and other public Companies having: - paid-up share capital
of Rs.100 Cr. or more OR - Turnover of Rs.300 Cr. or more need to have Woman Director in
its Board.

Independent Directors – - Where Chairman is Non-ED - at least 1/3rd of the Board - Where
Chairman is Executive - at least 1/2 of the Board - Also Where Chairman is Non-ED but is a
promoter or is related to any promoter or person occupying management position at the Board
level or at one level below the Board

- at least 1/2 of the Board Related to any promoter: i. If the promoter is a listed entity, its
directors other than the IDs, its employees or its nominees shall be deemed to be related to it;

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ii. If the promoter is an unlisted entity, its directors, its employees or its nominees shall be
deemed to be related to it.

It should be obligatory for the Board of a company to lay down the code of conduct for all
Board members and senior management of a company. This code of conduct shall be posted
on the website of the company. All Board members and senior management personnel shall
affirm compliance with the code on an annual basis. The annual report of the company shall
contain a declaration to this effect signed off by the CEO and COO. Explanation – For this
purpose, the term “senior management” shall mean personnel of the company who are
members of its management / operating council (i.e. core management team excluding Board
of Directors). Normally, this would comprise all members of management one level below the
executive directors.

The regulator has clearly indicated a move towards increased transparency on conducting
board matters and articulated several changes in the roles and responsibilities of the board,
board committees and independent directors. This move also indicates the intent of the
regulators to align with the global standards on corporate governance adopted in mature
economies (such as the UK Companies Act, US MBCA, US-DGCL, UK FRC Code,
Stewardship Code and SOX). The board of directors is a vital link between shareholders and
management, and hence has a very critical role and responsibility in the overall governance
framework. The recent press release by SEBI confirms this aspect, wherein the
responsibilities of the board, its committees and independent directors have been the primary
focus.

Performance evaluation is a key means by which boards can recognize and correct corporate
governance problems and add real value to their organizations. Companies are increasingly
making investments in establishing processes for performance evaluation – those which are
fair and transparent. Although boards differ in the severity of their performance problems, the
competitive environment in which they work and the range of performance issues they face,
there are a number of key decisions that are relevant to all boards implementing an evaluation
process.

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 NOMINEE DIRECTOR

The exclusion of Nominee Director from the definition of Independent Director. (This is to
align the definition of Independent Director under Listing Regulations with Section 149(6) of
the Companies. Act, 2013).
Independent Directors - Definition of Independent Director has been widened in scope. Listed
companies must determine the independence of existing directors in the light of new
definition. This is to align with the definition of Independent Director under Listing
Regulations with Section 149(6) of the Companies. Act, 2013.
There shall be no nominee directors. Where an institution wishes to appoint a director on the
Board, such appointment should be made by the shareholders. An institutional director, so
appointed, shall have the same responsibilities and shall be subject to the same liabilities as
any other director. Nominee of the Government on public sector companies shall be similarly
elected and shall be subject to the same responsibilities and liabilities as other directors.

INDEPENDENT DIRECTOR

Section 149(6) of the Companies Act 2013 and Rules thereto and (Sec. 2(47), 149(6) of the
Companies Act, 2013 and Rules shall mean a Non-Executive Director (i.e., not MD, WTD)
other than nominee director of the Company:-
who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and
experience;
(i) who is or was not a promoter of the company or its holding, subsidiary or associate
company;
(ii) who is not related to promoters or directors in the company, its holding, subsidiary or
associate company;
(iii) apart from receiving director's remuneration, has or had no pecuniary relationship with
the company, company, its holding, holding, subsidiary or associate company, company, or
their promoters, or directors, during the two immediately preceding financial years or during
the current financial year;
(iv) none of whose relatives has or had pecuniary relationship or transaction with the
company, its holding, subsidiary or associate company, or their promoters, or directors,
amounting to two per cent. or more of its gross turnover or total income or fifty lakh rupees or
such higher amount as may be prescribed, whichever is lower, during the two immediately
preceding financial years or during the current financial year;
(v) who, neither himself nor any of his relatives:—
 holds or has held the position of a key managerial personnel or is or has been
employee of the company or its holding, subsidiary or associate company in any of the
three financial years immediately preceding the financial year in which he is proposed
to be appointed;
 is or has been an employee or proprietor or a partner, in any of the three financial
years immediately preceding the financial year in which he is proposed to be
appointed— (A) a firm of auditors or company secretaries in practice or Companies
auditors of the company or its holding, subsidiary or associate company; or (B) any
legal or a consulting firm that has or had any transaction with the company, its
holding, subsidiary or associate company amounting to ten per cent or more of the
gross turnover of such firm;

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  Holds together with his relatives two per cent or more of the total voting power of the
company; or
 is a Chief Executive or director, by whatever name called, of any non-profit
organisation that receives twenty-five per cent or more of its receipts from the
company any of its promoters directors or its holding subsidiary or associate company,
any of its promoters, directors or its holding, subsidiary or associate company or that
holds two per cent or more of the total voting power of the company;
 is a material supplier, service provider or customer or a lessor or lessee of the
company;

Maximum Tenure of Independent Directors (ID) - ● An Independent Director shall hold

office for a term upto five consecutive years on the Board of a Company and shall be eligible
for re -appointment appointment for another another term of upto 5 consecutive years on
passing of a special resolution by the Company.

a. The Nomination Committee shall lay down the evaluation criteria for
performance evaluation of IDs.
b. The company shall disclose the criteria for performance evaluation, as laid down
by the Nomination Committee, in its Annual Report.

REVIEW:

The aim of the review done is to check the effectiveness of corporate governance and its
effective mechanism in running and managing the business operations. The issue of
ownership and control and the principal-agent problem and its effect on corporate
governance is the main area of research in this review.

Corporate Governance Issues In India:

There are some problems also with corporate governance as it needs to achieve the objective of
each and every of its stakeholder. The goals of each of its stakeholder should be considered
and neither of it should be undermined. Some of the common issues are discussed below:

1. Interest may be conflicted

Interest may be conflicted when the one who has a controlling power has some financial
interest that could affect his decision making and may also conflict with the company’s
objectives. This will ultimately lead to a clash between different members and will affect the
normal working environment of the organization.

Issues of the oversight: For proper corporate governance to be effective the directors’ team of
the company should have proper sight over the company’s processes. There should be the
proper mechanism through which each and every task of the corporation should be monitored
otherwise it will endanger the normal growth of the business.

2. Issues of the accountability

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Accountability is something that is necessary for proper functioning of the corporate
governance. From a high-level position to lower level positions job, role and accountability
should be clearly mentioned so that there is no confusion among the members. Accountability
of each part of the corporation should be clearly defined otherwise it will endanger the success
rate of the company or investors demotivating them for their investment.

3. Issues of transparency

For bringing the transparency in the organization corporation must make accurate and fair
reporting of their profit and loss and should present a true picture of it to those who invest in
the company. Manipulating figures can seriously damage the company’s relationship with its
stakeholders and also may lead to a fine from various regulatory agencies.

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 PART- B
Organization of the Study and
description

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WHAT IS ORGANIZATIONAL OR CORPORATE GOVERNANCE?

Corporate governance has a broad scope. It includes both social and institutional aspects.
Corporate governance is the system by which companies are directed and managed. It
influences how the objectives of the company are set and achieved, how risk is monitored &
assessed, & how performance is optimized.
Corporate governance is the system of principles, policies, procedures, and clearly defined
responsibilities and accountabilities used by stakeholders to overcome the conflicts of interest
inherent in the corporate form

The international standard on social responsibility, ISO 26000, defines organizational

governance as "a system by which an organization makes and implements decisions in pursuit
of its objectives." Governance systems include the management processes designed to deliver
on performance objectives while considering stakeholder interests.

The Global Association of Risk Professionals (GARP) highlights the importance of concepts
such as credibility, transparency, and accountability in establishing effective governance.
Corporate governance is, GARP notes, "doing the right things for the organization and doing
things the right way independent of personal interests." In this context, "organization" can
refer to many different types of groups. For example, a business, an institution, a professional
society such as ASQ, and even a family may be considered an organization. Governance is
applicable in these types of organizations.

While governance starts at the top, different structures have to exist to ensure that decisions
and accountabilities are carried throughout the enterprise or organization. Table 1 compares
models of good governance and shows that regardless of the model, good governance is a by
product of the values or principles an organization adopts, the strategies it puts in place to set
direction, the policies it creates to establish boundaries, and the processes it applies to conduct
operations.

Governance, Risk, and Compliance

Governance, risk, and compliance are increasingly being treated as three parts of a single
integrated framework with the purpose of providing a holistic view of organizational
performance.

As GRC management systems increase robustness, they can add business value to
organizations by improving operational decision making and strategic planning. By
incorporating GRC considerations into a social responsibility management system, the
organization can more effectively manage its social responsibility influence.

Corporate Governance Articles

Governance as a Form of Social Responsibility (JOURNAL FOR QUALITY AND

PARTICIPATION , ASQ member exclusive) Although much of the public discussion on social
responsibility revolves around the environment and "green" initiatives, there also is a great
deal of angst concerning the way organizations make decisions and carry out their work—
particularly how those decisions and operations affect others.

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Corporate Governance Books, Primers, and Guides

 Corporate Sustainability Planning Assessment Guide: A Comprehensive

Organizational Assessment

 Bringing Business Ethics To Life: Achieving Corporate Social Responsibility

 ISO 26000 In Practice: A User Guide

 KEY CONCEPTS IN CORPORATE SOCIAL RESPONSIBILITY

 A HANDBOOK OF CORPORATE GOVERNANCE AND SOCIAL

RESPONSIBILITY

Corporate Governance Case Studies

 ISO 26000 Guideline, Nissan Motor Corporation

 Management Based on ISO 26000, Toshiba

IMPORTANCE OF CORPORATE GOVERNANCE IN AN ORGANIZATION

Over the past two decades, the investment world has seen a large numbers of scandals relating
to companies which are attributed to failure of governance. This has been caused due to a
combination of factors which can be principally classified into three corporate sins.

The executive directors of the company lost the sense of business ethics and earnings became
the only motive. Directors were not prepared to show losses which led to the use of unethical
practices like forging books of accounts to show higher earnings

Other directors acted as a puppet in the hands of executive directors, approving improper
financial statements and condoning unfair practice. Managers awarded themselves huge
bonuses and stock options, often at the expense of other shareholders

The importance of corporate governance in today’s progressive and aggressive business

environment cannot be denied. According to the Financial Times, it’s “crucial to the
achievement of a new frontier of competitive advantage and profitability.”

With so much attention focusing on this business practice, it may be time to ask: What is
corporate governance exactly, and what makes it so imperative to a company’s success?

WHAT IS CORPORATE GOVERNANCE, AND WHY IS IT IMPORTANT?

In its January 2017 Quarterly Board Matters report, Ernst & Young (EY)’s Center for Board
Matters examined corporate governance trends at Russell 2000 and S&P 500 companies.

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While it found that corporate governance is a “topic of increasing interest to policymakers,
investors and other stakeholders,” the way it’s enacted by businesses isn’t always consistent.

Some organizations concentrate on independent board leadership, EY says. Others have

shifted from staggered to annual elections. Just as no two business strategies are alike, a
corporate governance policy is likely to vary from one company to the next.

The inner workings of corporate governance strategies may differ, but the business practices
they comprise are generally more uniform. ICSA: The Governance Institute defines corporate
governance as “the way in which companies are governed and to what purpose.” To
elaborate, corporate governance impacts all aspects of an organization, from communication
to leadership and strategic decision-making, but it primarily involves the board of directors,
how the board conducts itself and how it governs the company.

Business advisory firm PricewaterhouseCoopers (PwC) calls corporate governance “a

performance issue,” because it provides a framework for how the company operates.
According to PwC, corporate governance should encompass the following:

 The company’s performance and the performance of the board

 The relationship between the board and executive management

 The appointment and assessment of the board’s directors

 Board membership and responsibilities

 The “ethical tone” of the company, and how the company conducts itself

 Risk management, corporate compliance and internal controls

 Communication between the board and the C-suite

 Communication with the shareholders

 Financial reporting

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This list provides a bird’s-eye view of corporate governance in action, and conveys the extent
to which it can influence business. To help organizations navigate corporate governance,
Deloitte offers a Governance Framework that outlines the board’s objectives and
responsibilities, and how they relate to the corporate governance infrastructure.

But simply implementing a corporate governance strategy isn’t the same as achieving success.
Most examples of good corporate governance have something in common, too: they’re built
on a foundation of transparency, accountability and trust.

Time and time again, these three terms enter into the corporate governance discourse. They
have immense value, whether a business is family-run, a nonprofit or a publicly traded
company. That’s one of the reasons why corporate governance is top of mind for so many
business professionals. Above all, the role of corporate governance in modern organizations is
to demonstrate these key principles to shareholders, stakeholders and the public.

THE ROLE OF CORPORATE GOVERNANCE IN MODERN ORGANIZATIONS

Let’s take a closer look at two of these principles: transparency and trust. Businesses today
are held to incredibly high standards by investors and customers alike — consider that 66
percent of global consumers told research firm Nielsen they would be willing to pay more for
products from a company that demonstrates corporate social good. Being honest and open
about process and operations counts a great deal. Both shareholders and consumers want to
see companies operating with integrity.

Corporate governance allows companies to put their positive traits on display. With their
intentions made visible to all, companies are more likely to be held accountable for their
behavior and actions — and thus more willing to distance themselves from duplicity.

This is especially crucial now that trust in businesses is on the decline. Communications and
marketing firm Edelman’s annual Edelman Trust Barometer, a global survey that measures
consumers’ trust in business, the media, the government and nongovernmental organizations,
found that trust in all four is down for the first time in 17 years.

The credibility of CEOs is at an all-time low too, with 63 percent of survey respondents
saying CEOs are somewhat credible or not credible at all. “Just 52 percent of respondents to
our survey said they trust business to do what is right,” reports Matthew Harrington, global
chief operating officer of Edelman, in an overview of the survey published by the Harvard
Business Review. But when trust is waning, corporate governance can lift it up again.

Displaying Social Responsibility

In an attempt to minimize the risk of distrust, companies go out of their way to emphasize
their social responsibility in their corporate governance materials. Organizations of all kinds,
including Royal Bank of Canada and Hong Kong’s Link Real Estate Investment Trust, choose
to make their corporate governance frameworks public. Doing so can go a long way toward
putting shareholders’ and customers’ minds at ease.

The Corporate Governance and Ethics section of Microsoft’s website, meanwhile, stresses
that the company strives to “build and maintain trust through a shared commitment to ethical
behavior and to act with integrity in everything we do.” Making — and keeping — this kind
of promise can have a considerable impact on an organization’s reputation and success. As

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explained in a recent PRWeek magazine article, corporate governance “affects and dictates
the internal functioning and morale of a company, and it also projects externally to the
public.”

In essence, companies must make a choice: embrace corporate governance and its implied
conventions, or reject them. And as expressed by Claudia Gioia, president and CEO of Hill
Knowlton Latin America, those who “turn away from the policies of honesty and
transparency lose credibility and competitive advantages.”

Considering Company Culture

Business priorities aside, another explanation for different corporate governance strategies
comes down to different company cultures. A company’s unique culture permeates
everything from vision to values, organizational structure, work environment and hiring
practices, so it stands to reason that it should affect corporate governance, too.

According to EY, “Corporate culture is emerging as an important consideration for boards

and audit committees, touching as it does every aspect of a company, from strategy to
compliance.” Culture is cropping up in the corporate governance policies of companies like
Bank of America and Nestlé. The more involved boards become in corporate governance, the
more they influence company culture — and vice versa. For example, on its website, Nestlé
writes:

“Our Board of Directors sets our long-term strategy and provides oversight on the basis of
strong principles and an appropriate tone from the top. It ensures the long-term success of our
company based on a clear strategy and good corporate governance. Its focus on corporate
culture helps us align the interests between our business, our wider stakeholders and society.”

In other words, corporate governance has value beyond demonstrating a company’s social
responsibility efforts and overall principles. It can also shape a company’s culture, which, in
turn, shapes the way an organization’s leaders lead, the way its workers work and how
customers perceive the businesses with which they choose to engage.

Given that good corporate governance is linked to transparency, accountability and trust, the
issue of security warrants special attention. Communication may be just one facet of
corporate governance, but the fact that it includes the internal and external exchange of
invaluable data and information makes prioritizing cyber security a key part of company
policy.

Drafting a board communications plan is a good way to ensure all parties are on the same
page about communication best practices. In its study of trends in board portal adoption,
online resource Corporate Secretary wrote, “Other methods of digital document distribution
cannot match the controlled collaboration environment offered by board portal technology.”

Control is the word to note here. Aside from communication, gaining and maintaining control
over an organization’s security has a positive effect on many other areas of corporate
governance policy, including risk management, financial reporting, board performance and
how the company chooses to conduct itself.

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The Financial Times writes, “Good corporate governance is a competitive advantage.”
Without it, a company cannot reach its potential, and that makes corporate governance
indispensable.

Interested in learning more about good corporate governance and how board portals can
complement and enhance it? Contact us for a demo today.

What is the Governance Cloud?

Board directors are obligated to perform a host of varied duties and responsibilities. Diligent
developed a suite of tried and true governance tools to help them fulfill their responsibilities
accurately and efficiently. The Governance Cloud ecosystem of products includes:

Diligent Boards

Director and officer questionnaires (pre-filled forms)

Board evaluations

Resolutions and voting

Diligent Messenger

Diligent Minutes

Insights (curated content and videos) (beta)

Entity Management

As board directors continue to express their needs to digitize governance processes, Diligent
will continue to expand to meet these needs. Collectively, these tools enable corporations to
achieve a fully digitized and integrated governance ecosystem to mitigate risk, plan for
strategic growth and ultimately, govern at the highest level.

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 Part- C

Analysis and interpretation about the

topics of Good Corporate Governance

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PRINCIPLES OF CORPORATE GOVERNANCE
Business Roundtable has been recognized for decades as an authoritative voice on matters
affecting American business corporations and meaningful and effective corporate governance
practices.

Since Business Roundtable last updated PRINCIPLES OF CORPORATE GOVERNANCE in 2012,

U.S. public companies have continued to adapt and refine their governance practices within
the framework of evolving laws and stock exchange rules. Business Roundtable CEOs
continue to believe that the United States has the best corporate governance, financial
reporting and securities markets systems in the world. These systems work because they give
public companies not only a framework of laws and regulations that establish minimum
requirements but also the flexibility to implement customized practices that suit the
companies’ needs and to modify those practices in light of changing conditions and standards.

Over the last several years, the external environment in which public companies operate has
become increasingly complex for companies and shareholders alike. The increased regulatory
burdens imposed on public companies in recent years have added to the costs and complexity
of overseeing and managing a corporation’s business and bring new challenges from
operational, regulatory and compliance perspectives. In addition, many U.S. public companies
have a global profile; they interact with investors, suppliers, customers and government
regulators around the world and do so in an era in which instant communication is the norm.
Further, in the recent past, Congress has abandoned strict adherence to the fundamental
principle of MATERIALITY, a central tenet of the disclosure requirements of the federal
securities laws. Instead, Congress has sought to use the securities laws to address issues that
are immaterial to shareholders’ investment or voting decisions. For example, Congress has
required public companies to disclose information relating to conflict minerals and payments
to foreign governments for resource extraction and mine safety, information that may be
relevant in a social context but has little relevance to material information that a shareholder
would need to make an investment decision.

The current environment has also been shaped by fundamental changes in shareholder
engagement, which has become a central and essential topic for public companies and their
boards, managers and investors in the early 21st century. Public companies have undertaken
unprecedented levels of proactive engagement with their major shareholders in recent years.
Many institutional investors have also increased their engagement efforts, dedicating
significant resources to governance issues, company outreach, the development of voting
policies and the analysis of the proposals on the ballots of their portfolio companies. In
addition, overall levels of shareholder activism remain at record highs, imposing significant
pressures on targeted companies and their boards.

Further, many of today’s shareholders—and not only those typically viewed as “activists”—
have higher expectations relating to engagement with the board and management than
shareholders of years past. These investors seek a greater voice in the company’s strategic

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decisionmaking, capital allocation and overall corporate social responsibility, areas that
traditionally were the sole purview of the board and management. Moreover, some
shareholder-driven campaigns to change corporate strategies (through spin-offs, for example)
or capital allocation strategies (through share repurchase programs) suggest that in some
cases, at least, shareholder input on these matters has been heard in the boardroom. Some
commentators view this rise in shareholder empowerment as appropriate, arguing that
shareholders are the ultimate owners of the company. Others question, however, whether
activists’ goals are overly focused on short-term uses of corporate capital, such as share
repurchases or special dividends. Capital allocation strategies focusing on short-term value
may be entirely appropriate for a shareholder, regardless of the length of its investment
horizon. The board, however, has a very different role when considering the appropriate use
of capital for the company and all of its shareholders. Specifically, the board must constantly
weigh both long-term and short term uses of capital (for example, organic or inorganic
reinvestment, returns to shareholders, etc.) and then determine the appropriate allocation of
that capital in keeping with the company’s business strategy and the goal of long-term value
creation.

Business Roundtable CEOs believe that shareholder engagement will continue to be a critical
corporate governance issue for U.S. companies in the years to come. Further, it is our sense
that there is a growing recognition in corporate America that an increase in shareholder access
to the boardroom cannot come without a corresponding increase in shareholder responsibility.
Here, as in many areas of corporate governance, transparency is a basic but essential element
—for example, in this “age of information,” a shareholder that wishes to influence corporate
behavior should be encouraged to publicly disclose the nature of its identity and ownership,
even in cases where the federal securities laws may not specifically require disclosure.

More fundamentally, we believe that the responsibility of shareholders extends beyond

disclosure. We sense that there is a rising belief that shareholders cannot seek additional
empowerment without assuming some accountability for the goal of long-term value creation
for all shareholders. Moreover, we believe that shareholders should not use their investments
in U.S. public companies for purposes that are not in keeping with the purposes of for-profit
public enterprises, including but not limited to the advancement of personal or social agendas
unrelated and/or immaterial to the company’s business strategy.

We believe that this concept of shareholder responsibility and accountability will—and

should—become an integral part of modern thinking relating to corporate governance in the
coming years, and we look forward to taking a leadership role in discussions relating to these
important issues.

In light of the evolving landscape affecting U.S. public companies, Business Roundtable has
updated PRINCIPLES OF CORPORATE GOVERNANCE. Although Business Roundtable believes
that these principles represent current practical and effective corporate governance practices,

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it recognizes that wide variations exist among the businesses, relevant regulatory regimes,
ownership structures and investors of U.S. public companies.

No one approach to corporate governance may be right for all companies, and
Business Roundtable does not prescribe or endorse any particular option, leaving
that to the considered judgment of boards, management and shareholders.
Accordingly, each company should look to these principles as a guide in developing
the structures, practices and processes that are appropriate in light of its needs and
circumstances.

GUIDING PRINCIPLES OF CORPORATE GOVERNANCE

Business Roundtable supports the following core guiding principles:

a. The board approves corporate strategies that are intended to build sustainable long-
term value; selects a chief executive officer (CEO); oversees the CEO and senior
management in operating the company’s business, including allocating capital for
long-term growth and assessing and managing risks; and sets the “tone at the top” for
ethical conduct.
b. Management develops and implements corporate strategy and operates the
company’s business under the board’s oversight, with the goal of producing
sustainable long-term value creation.
c. Management, under the oversight of the board and its audit committee, produces
financial statements that fairly present the company’s financial condition and results
of operations and makes the timely disclosures investors need to assess the financial
and business soundness and risks of the company.
d. The audit committee of the board retains and manages the relationship with the
outside auditor, oversees the company’s annual financial statement audit and internal
controls over financial reporting, and oversees the company’s risk management and
compliance programs.
e. The nominating/corporate governance committee of the board plays a leadership role
in shaping the corporate governance of the company, strives to build an engaged and
diverse board whose composition is appropriate in light of the company’s needs and
strategy, and actively conducts succession planning for the board.
f. The compensation committee of the board develops an executive compensation
philosophy, adopts and oversees the implementation of compensation policies that fit
within its philosophy, designs compensation packages for the CEO and senior
management to incentivize the creation of long-term value, and develops meaningful
goals for performance-based compensation that support the company’s long-term
value creation strategy.
g. The board and management should engage with long-term shareholders on issues
and concerns that are of widespread interest to them and that affect the company’s
long-term value creation. Shareholders that engage with the board and management

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 in a manner that may affect corporate decisionmaking or strategies are encouraged to
disclose appropriate identifying information and to assume some accountability for
the long-term interests of the company and its shareholders as a whole. As part of
this responsibility, shareholders should recognize that the board must continually
weigh both short-term and long-term uses of capital when determining how to
allocate it in a way that is most beneficial to shareholders and to building long-term
value.
h. In making decisions, the board may consider the interests of all of the company’s
constituencies, including stakeholders such as employees, customers, suppliers and
the community in which the company does business, when doing so contributes in a
direct and meaningful way to building long-term value creation.
i. This post is intended to assist public company boards and management in their
efforts to implement appropriate and effective corporate governance practices and
serve as spokespersons for the public dialogue on evolving governance standards.
Although there is no “one size fits all” approach to governance that will be suitable
for all U.S. public companies, the creation of long-term value is the ultimate
measurement of successful corporate governance, and it is important that
shareholders and other stakeholders understand why a company has chosen to use
particular governance structures, practices and processes to achieve that objective.
Accordingly, companies should disclose not only the types of practices they employ
but also their bases for selecting those practices.

CORPORATE GOVERNANCE : A COMPARATIVE VIEW

In India, the concept of Corporate Governance is relatively new. The developments in the UK
had tremendous influence in India. As a result of the interest generated by the Cadbury
Committee report, the issue was studied in depth by the Confederation of Indian Industries
(CII) in 1997, it evolved a code of conduct on corporate governance with 17
recommendations to improve the quality of governance and to protect the interest of all
concerned. However, this was a voluntary effort, it lagged the force of law for its compliance.

Securities Exchange Board of India (SEBI) on May 07, 1999 appointed a committee on
corporate governance under the chairmanship of Mr. Kumar Mangalam Birla, one of its
Board member to evolve detailed guidelines on corporate governance primarily to protect the
interest of investors and increase the degree of economic disclosures by listed companies to
improve the general environment for investment in the country. The committee consisted of
18 other members having expertise covering wide spectrum of activities. The term of
reference of the committee was as under:

a. To suggest suitable amendments to the listing agreement executed by the stock

exchanges with the companies and any other measures to improve the standards of
corporate governance in the listed companies, in areas such as continuous disclosure
of material information both financial and non-financial, manner and frequency of
such disclosures, responsibilities of independent and outside directors;

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b. To draft a code of corporate best practices;

c. To suggest safeguards to be instituted within the companies to deal with insider

information and insider trading.

The committee took into consideration report of the Cadbury Committee, Greenbury
Committee, Combined Code of London Stock Exchange, OECD code of corporate
governance, Blue Rubbon Committee on corporate governance in USA and code of
corporate governance published by CII. after taking into consideration the suggestions
made by various professional bodies and Sir Adrian Cadbury himself, the committee
made detailed recommendations dividing it into mandatory and no mandatory categories.

It recommended implementation in phased manner. All group A listed companies on BSE

as on January 01, 2000 were required to implement the recommendation during the
financial year 2000-2001 but not later than March 31, 2001 and by all the companies with
a paid up share capital of 10 crores or above or net worth of 25 crores during the financial
year 2001-2002 but not later than March 31, 2002, companies with paid up share capital
of 3 crores and above to implement the recommendations within financial year 2002-2003
but not later than March 31, 2003. For non-mandatory recommendations, it is
recommended that SEBI should write to appropriate regulatory bodies and governmental
authorities to incorporate the necessary recommendations in their respective regulatory or
control framework. The recommendations of the committee were applicable to all listed
private and public sector companies, their directors, management, employees and
professionals associated with such companies.

The committee has made elaborate recommendations regarding constitution of the Board
of Directors, audit committee, remuneration committee, functioning of the Board,
management, rights and responsibilities of the shareholders including institutional
shareholders. It has also made detailed recommendations regarding manner of
implementation of its report. The committee was seized of the fact that corporate
governance extends beyond corporate law and therefore it suggested that its
recommendations should be reviewed from time to time, keeping pace with the changing
expectations of the investors, shareholders and other stakeholders and with the increasing
sophistication achieved in the capital market. However, one of the biggest drawbacks in
the prevailing system is that we have a very poor service delivery with hardly any
defective accountability mechanism in the corporate set up. As a result, not only small
company but also the large corporations are cheating their shareholders, suppliers,
distributors, financial institutions, community and consumers from time to time without
any deterrent action against them.
The organizational framework for corporate governance initiatives consists of the
Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India
(SEBI). Thereafter SEBI has set up another committee under the chairmanship of Mr.
N.R. Narayana Murthy, to review Clause 49 of Listing Agreement. Based on the report of
Shri N.R. Narayan Murthy to further improve the standards of corporate governance in
India, SEBI29 has introduced some major amendments to Clause 49 of Listing
Agreement. The significant features of these amendments may be summarized as under:-
 Broadening of the definition of independent director.

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  Fixing of norms relating to non-executive directors compensation and disclosures.

 Additional duty on the independent director to periodically review the legal.

 Compliance reports prepared by the company and steps taken by the company to
improve Obligation on the Board of Directors to lay down a code of conduct for
all Board.

 Members and senior management of the company Fixation of the term of Non-
executive Directors to a maximum of nine years.

 Requirement of all members of the Audit Committee being financially literate.

 Increase in the powers of the Audit Committee.

 Additional duty on the Audit Committee to review of certain information by the.

 Audit Committee Requirements relating to Audit reports and Audit Qualifications.

 New requirements of Whistle Blower Policy.

 Applicability of the requirements to subsidiary companies relating to composition

of the Board of Directors, laying of minutes of the Board meeting before the board
of the holding company and additional requirement to be included in the Board
report of the Holding company.

 Disclosure of contingent liabilities.

 Additional Disclosures.

 Certification by CEO/CFO.

 Change in the Format of reporting to Stock Exchanges relating to Corporate.

 Governance Entitlement to practicing Company Secretaries to certify of the

conditions of corporate governance
With the goal of promoting better corporate governance practices in India, the Ministry of
Corporate Affairs, government of India, has set up National Foundation for Corporate
Governance (NFCG) in partnership with Confederation of Indian industry (CII), Institute of
Company Secretaries of India (ICSI) and Institute of Chartered Accountants of India (ICAI).

India’s liberationsation measures have gained importance in the context of all round changes
in the global business scene. The emergence of US as the arbiter of world affairs, the
resurgence of Germany, the break up of USSR and the demise of COME CON‟ China’s
fusion into market economy, formation of the New European Commission and the emergence
of Japan as the new monitor of International Affairs are some of the significant developments
for the international business environment. Indian new industrial policy now facilitates the

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entry of operations from the various countries unto the Indian market with their wide range of
products.

Emerging markets can no longer ignore the issues of Corporate Governance, arguing that they
are something of relevance only to the developed world. The mere fact that investors make a
distinction based on corporate governance and that analyst and commentators write about its
growing significance and are beginning to find evidence that it does make a difference means
that it is indeed becoming more important. It matters because enough people think it makes a
difference. However, it is still premature to believe that one model of good corporate
governance is appropriate in all markets. Different markets have different institutional and
corporate contexts that affect the suitability of the corporate governance model that is applied.
In Asia in particular the fact that family firms or family interests are so important more so
than in a highly liquid market with extremely dispersed ownership structures and a great
dependence on family or bank finance rather than equity.

Even if family were not the only complicating factor many Asian markets also have entities
upon which the government can apply pressure in the interests of “national service” at the
expense of individual shareholders. This is more serious because in the case of many of these
markets the countries are young and the governments believe that they have a duty to build
their nation through “pillar industries” and other forms of direction of capital to projects
whose jurisdiction is not only economic. There is no such pressure in the UK or the US
though a developed country such as France exhibits similar tendencies. The importance
attached to good corporate governance depends on the time horizons of investors – a function
of their assets, portfolios and investment philosophies. It also depends on who is investing
and on whose behalf and, in the end, on timing: before, during or after a crisis in which a
company has hit the headlines.
[
The key to better corporate governance today lies in a more efficient and vibrant capital
market. Over a period of time, it is possible that Indian corporate structures may approach the
Anglo-American pattern of nearly complete separation of management and ownership. At that
stage, India too would have to grapple with governance issues like empowerment of the
Board. Until then, the vital issues as enumerated above, which dominate the Anglo-American
literature on corporate governance are of peripheral relevance to India.

The economic deregulation aimed at integrating India with the global economy is no longer
considered a matter of choice for India. The inflow of foreign capital and technology would
facilitate India in releasing its domestic Industrial Liberalization and financial deregulation
have ushered in a new era for the capital market, in turn, is accelerating the globalization
process.

Globalization has added an important dimension while globalization has opened new
opportunities for sharing good business practices and for advancing growth in developing
countries. It has also raised concerns that multinational corporations operating away from
their home countries might not pay enough attention the social and environment aspects of
their activities. The Global Corporate Governance Forum (the Forum) was founded in 2001
by the World bank and the Organization for Economic Cooperation and Development
(OECD) following the financial crisis in Asia and Russia in the latter part of the 1990‟s. It
was established to promote initiatives to raise corporate governance standards and practices in

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developing countries and emerging markets, using the OECD Principles of Corporate
Governance as the basis for its work. The Forum promotes sustainable economic growth and
poverty reduction within the framework of agreed international development targets. The
Forum focuses on practical, targeted corporate governance initiatives at the local, regional
and global level.

The corporate governance laws, standards and practices are not uniform throughout the world.
This factor creates another impediments in the way of foreign direct and portfolio investment.
Foreign investors would like the companies in which they make investments or the
subsidiaries, they set up to be governed by the same or similar standards and practices as
applicable to them in their countries, That is more often than not possible, however, it is
possible to move towards harmonizing the corporate governance standard and practice all
over the world by endeavoring to develop standards and practices which are not only
fundamentally sound but also take into account different development stages in which various
countries are in terms of their industrialization and marketization.

Globalization has to encompass reforms in industry, trade and also fiscal and monitory
policies. They can offer opportunities to the industry such as impetus to quality, efficiency
better technology and availability of raw materials and components, access to restructuring
and diversification. Globalization of financial markets has exposed issuers, investors and
intermediaries to the higher standards of disclosure and corporate governance that prevail in
more developed capital markets. “Almost all the large Indian groups started off on a journey
to globalize their operations, either organically or through acquisitions. Now, cashing in on
this march of Indian companies into global markets are international market research firms
which have recently set up their base in India. The Indian arm of French market research
multinational Ipsos India is learnt to be pitching with large groups like the Mahindras, Bajaj,
Hero and the Tatas to offer them international expertise based out to India and in the process
help them globalize. As for the Indian companies, they are keen on understanding new
markets like Africa. Looking at the sense of urgency with which Indian group, both big and
small, are expanding globally, Ipsos India appears to be counting on this one to sustain its
30% annual growth.

FACTORS AFFECTING THE QUALITY OF CORPORATE GOVERNANCE

There are some factors which affects the quality of corporate governance, as under:-

1. Role and powers of Board:

The Foremost requirement of good governance is the clear identification of powers, roles,
responsibilities and accountability of the Board, CEO and Chairman of the Board.

2. Legislation:

Clear and unambiguous legislation are fundamental to effective corporate governance.

Legislation that requires continuing legal interpretation or that is difficult to interpret on a day
to day basis is prone to deliberate manipulation or inadvertent misunderstanding.

3. Management Environments:

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It includes settling clear objectives and appropriate ethical framework, establishing clear cut
processes, providing for transparency and accountability, implementing sound business
planning, encouraging business risk assessment, having right people and right skills for the
jobs establishing clear boundaries for acceptable behaviour, establishing performance
measures, evaluating performance and sufficiently recognising individual and group
contribution.

4. Board Skills:

Each of the directors should have unique and valuable quality. Board must possess the
necessary blend of qualities, skills, knowledge and experience operational or technical
expertise including policy skills and leadership experience, financial skills, legal skills and
knowledge of Govt. and regulatory requirements. 10 Bankvoor Handel en Scheepvaart N.V. v
Slaford (1951) 2 ALC ER 779, 799 (KBD) The directors are deemed to be the trustees of the
company‟s money, property and assets and there are several judicial decisions which have
consistently held that directors are liable to make good the moneys of the company which
they have misapplied on the same footing as if they are trustees. They are agents of a
company also. The board of directors has a pivotal position in the structure of corporate
governance. A company in law is equal to a natural person and has a legal entity of its own.
Though a company is itself a „person‟ it is an artificial legal person created by law and can
therefore, of necessity, act only through the agency of natural persons. It is on account of the
peculiar character of a company that the need for directors arises. The combined effect of
Sections 201 and 633 of the Companies Act, 1956 is that it is necessary for the court to be
satisfied that the director had acted honestly and reasonably.

5. Board Induction and Training:

Director must have a broad understanding of the area of operation of business, corporate
strategy and current issues facing the Board. Continuous educational and professional
development programs are essential to ensure that directors remain aware of any
developments that have an impact on their corporate governance and other duties.

6. Board Independence:

The directors independence is necessary to ensure that there are no actual or perceived
conflicts of interest. The Board must be preactive in assessing the performance of
management.

7. Board Meeting:

Directors must devote time and attention necessary to fulfil their obligations. The
effectiveness of Board Meetings is dependent on carefully planned agenda and providing
Board papers and relevant materials to directors sufficiently prior to Board Meeting.

8. Board Resources :

Board members should have sufficient resources to enable them to discharge their duties
effectively.

9. Code of Conduct:

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It is essential that the organizations guiding ethics and code of conduct are clearly understood
and followed by each members of the organization and communicated to all stakeholders. The
language, attitude and actions of directors and senior management affect the integrity, ethics,
values and other aspects of Corporations culture. Adherence to the code of conduct should be
periodically evaluated and immediate action should be taken, whenever necessary.

10. Strategy Setting:

The objectives of the company must be clearly documented in the form of a long term
corporate strategy and an annual business plan together with targets and milestones should
clearly depict the strategy.

11. Business and Community obligation:

Though basic activity of a business entity is inherently commercial yet it must also take care
of its community obligations. Commercial objectives and community service obligations
should be clearly documented and approved by the Board. The stakeholders must be informed
about the strategies, to be met with for the community obligations, as under: a. To verify that
the statements of accounts are drawn up on the basis of the books of the business. b. To
exhibit a true and fair state of affairs of the business. c. To confirm that the management has
not exceeded the financial administrative powers. d. To investigate matters in regard to which
have suspicion around as to the result of a certain action on the part of the employees of the
company? e. To perform his duties by exercising reasonable skills and care. Reporting on
matters contained in Directors Report in so far as information which is required to be given
by the Act in the statements of account or can be given in a statement annexure to the
accounts are contained in the report of the Directors. (Provision to Section 222)
Manufacturing and other companies (Auditors Report) Order (MAOCARO) - The auditors
report should include a statement on the matters specified in the order. The Audit Committee
is responsible for liasioning with the management, the adequacy of internal control and
compliance with significant policies and procedures and finally reporting to the Board on the
audit work.

12. Risk Management:

There should be clearly established process of identifying, analysing and treating risk the
absence of which could prevent the company from effectively achieving its objectives. It also
involves establishing a link between risk and determination of return and resources priorities.
The company should subject itself to periodic external and internal risk reviews. Companies
need to frame a strong risk management framework to systematically manage and regularly
review the risk profile at a strategic, operational and functional level. Whistle blowers policy
which is ingrained in the model code of conduct of a few corporations in India should be
made mandatory for all the listed companies to encourage transparency.

13. Mechanism and Controls:

Corporate Governance mechanisms and controls are designed to reduce the inefficiencies that
arise from moral hazard and adverse selection. For example, To monitor manager‟s
behaviour, an independent third party (the author) attests the accuracy of information
provided by management to investors. An ideal control system should regulate both
motivation and ability. Internal corporate governance controls are by way of Monitoring by

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the board of directors, Remuneration, Disclosure i.e. the Annual Report should contain the
name of the Chairman, Deputy Chairman, CEO & Non Executive Directors, The Audit &
Remuneration Committee members, Number of meeting held by the board & Number of
Directors attended, significant commitment of the chairman, how board & committee
performance evaluation has been conducted. Moreover internal controls are by way of Audit
committees, Proxy fights and Financial structure: leverage also. External corporate
governance controls encompass the controls external stakeholders exercise over the
organisation. It includes debt covenants, govt. regulations, media pressure, takeovers,
competition, managerial labour market and telephone tapping. The trend is becoming more
and more evident day by day as 7 out of the 10 biggest bankruptcy and corporate frauds ever
since in the corporate history have taken place in USA in last five years only. In India the
situation is worst because of variety of factors including poor skills of management, lack of
participation, over dependence of professionals with poor ethics etc. To arrest this trend
government and corporations are introducing more stringent control mechanism to make them
more responsive and accountable. 7. Constituents of Corporate Governance.

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CHAPTER -D

DISCOVERY

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CORPORATE GOVERNANCE - AN OVERVIEW

Corporate Governance as a practice has been gaining importance ever since the economic
turmoil caused by the bursting of the dot com bubble in 2002. Corporate Governance is
basically a detailed disclosure of information and an account of an organization’s financial
situation, performance, ownership and governance, relationship with shareholders and
commitment to business ethics and values. The relevance of corporate governance has
increased several times since the concept was introduced. With the introduction of
globalization and competition, managing shareholder expectations is no longer the mantra for
success. The current economic crisis is often blamed at poor regulatory and check
mechanisms for the business, which has led to ramifications which are far reaching both
geographically and socially.

A corporation is created to address objectives which are much more than creating products
and services, it has to serve the larger purpose of satisfying multilevel needs of the society.
Healthy corporate governance practices are no longer the need of the law but have become
essential for the very survival of the organizations, the current economic crisis has proven that
beyond doubts.

The corporations have always faced the tug of war of protecting the interests of the
shareholders (the legal owners) or the stakeholders which includes suppliers, creditors,
government and communities.

It would be interesting to note that the definition of corporate governance changes in different
cultural contexts, for e.g. let us study a definition provided by the Center of European Policy
Studies or CEPS as it is called. CEPS defines corporate governance as the whole system of
rights, processes and controls established internally and externally over the management of
the business entity with the objective of protecting the interests of the stakeholders.
Contrasting to this, the Anglo American defines it with an emphasis on creating the
shareholder value. Let us also look at the definition provided by OECD or Organization for
Economic Corporation and Development, which brings together different democratic
governments which are committed to sustainable growth and improving the living standards
of the communities.

OECD defines corporate governance as Corporate Governance is the system by which

business corporations are directed and controlled. The corporate governance structure
specifies the distribution of rights and responsibilities among different participants of the
corporation such as the board, managers, shareholders and other stakeholders, and spells out
the rules and procedures for making decisions on corporate affairs. By doing this, it also
provides the structure through which the company objectives are set, and the means of
attaining those objectives and monitoring performance.

The biggest incident which shook the world and questioned the existing corporate governance
practices was the Enron debacle in the USA. The doctored accounts which flouted all the
established norms of the accountancy practices, false financial statements and the executives
who pocketed millions of dollars by selling their share of stocks while laying-off the 20% of
the organization’s workforce, painted a grim picture for the investors all across the world.

The fundamental question posed by the Enron crisis was the morality of corporate decisions,
embezzlement of funds and the larger interest of all the stakeholders right from employees to

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society in general. The disturbing aspect was the inability of the external agencies like
auditors, credit rating agencies and security analysts to see the real picture. A more recent
example is the involvement of Satyam Computers Services Ltd, a reputed software firm of
India in multimillion dollar accounting fraud which ultimately led to a huge face loss for the
entire Indian IT industry. The involvement of the reputed external agency like
PricewaterCoopers (PWC) in the scandal made the entire episode a nightmare for the
regulatory bodies, the government and the employees of the organization.

The objective of the corporate governance is prevention of such scams in the business which
have a huge bearing not only on the immediate shareholders but also on the morale of the
larger stakeholder groups.

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 PART - E

CONCLUSION

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SUMMARY

In compliance, we believe it is important that all directors, officers and employees act with integrity
based on the ethics and values requested of members of the enterprise and society. To ensure this, we
have formulated the Code of Conduct, the Corporate Standards of Conduct, and the Regulations for
Teijin Group Corporate Ethics, and we are promoting greater group-wide awareness of these policies
through training and education at all workplaces.

In risk management, we believe it is essential that the various risks and uncertainties faced by the
whole Teijin Group be dealt with through comprehensive and efficient assessment/management of
the risk. We have introduced the Total Risk Management (TRM) Committee alongside the Board of
Directors to accelerate group-wide decision-making that effectively counters business operating and
management strategy risk that may arise. Additionally, we are promoting establishment of business
continuity plans so that we can protect ourselves from loss of corporate value in emergencies, such
as accidents and disasters, by preventing interruption of our business activities or by quickly
restoring the activities if interrupted.

The need for good governance is not something which is peculiar and typical to our Indian
economy only, even in the countries where regulatory mechanisms are more demanding in
their content, more vigil in their implementation; flagrant violations under the veil of
corporate impenetrability have generated a strict demand for better governance. Corporate
practices in the matter of disclosure, transparency, group accounting, role of directors, degree
of accountability to the shareholders, lenders and overall public are some of the critical issues
which require a fresh and closer look. There is a widespread feeling that the system of
corporate governance is in need of reforms in today‟s globalized business world where
corporations need to access global pools of capital, need to attract and retain the best human
capital from various parts of the world, need to part with vendors on mega collaborations and
need to live in harmony with the community.

The concept of corporate governance came from the day corporates have been into existence
especially in 1980‟s when several companies collapsed due to huge problems of Scams and
failures occurring in the corporate sector worldwide. The need for corporate governance arose
also due to demand for new corporate ethos and stricter compliance with the law of land and
now with the changing times, greater accountability of companies is required towards their
shareholders and customers. Corporate Governance is a set of processes, customs, policies
and laws affecting the way in which a corporation is directed, administered or controlled.
Corporate Governance is not just corporate management; it is something much broader to
include a fair, efficient and transparent administration to meet certain well-defined objectives.
It is a system of structuring, operating and controlling long-term goals to satisfy shareholders,
2 creditors, employees, customers and suppliers and complying with the legal and regulatory
requirements apart from meting environmental and local community needs.

The concept of corporate governance has assumed importance both in the public and the
private sector. Corporate governance is a system by which companies are run. It is used to
monitor whether outcomes are in accordance with plans to motivate the organization to be
more fully informed in order to maintain or alter organizational activity. It relates to the set of
incentives, safeguards and the dispute resolution processes that are used to control and
coordinate the actions of the agents on behalf of the shareholders by board of directors.
Corporate governance is the acceptance by management of the rights of shareholders as the

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true owners of the corporate and of their own role as trustees on behalf of the shareholders.
Shareholders are responsible for appointing the directors and auditors. Corporate governance
is beyond the realm of law. It stems from the culture and mindset of management and cannot
be regulated by legislation alone. Government can play a catalytic role in creating the
environment for quality governance through an appropriate regulatory framework. Corporate
governance has to take care of the interest of the employees i.e. their past, present and future
which comprises the whole life-cycle including planning, future needs, recruitment, training,
working environment and retirement procedures.

CONCLUSION

Quality of corporate governance helps to assess whether firms are practicing better quality or
worst quality in governance issues. Daily & Dalton and Khanchel study also stated that
corporate governance quality distinguish the firms between best and worst. Khanchel study
stated that corporate governance quality is important because investors (like institutional
investors) uses the quality to perform a crucial role in the capital market and management
give special emphasize on corporate governance quality when quality of corporate
governance is at bottom line. This study finds that corporate governance quality is measured
by different names such as corporate governance ranking, corporate governance score,
corporate governance index, corporate governance quality in percentage form, corporate
governance rating etc. though the basic objectives are same.

Most of the researchers developed their self structured corporate governance index on the
basis of code of best practice or governance guidelines, listing requirement, disclosure
practices, corporate law or law applicable for companies, and previous literature to measure
the corporate governance quality where as few researcher used the corporate governance
index provided by rating agencies. This study observed that variation of- overall and
individual attributes of corporate governance; categories or sub-indices of corporate
governance; scoring in each item; weighted and un-weighted method; statistical method; time
period; financial and non financial companies; guidelines or requirement in he code of best
practice or corporate governance; listing requirement; disclosure practices; legal environment,
firms characteristics and country perspective and therefore, there is no unique measurement or
process to assess the quality of corporate governance.

This study also finds that quality of corporate governance varies in the firms within the same
country. This study also observed that overall corporate governance quality is very low in
most of the studies though the measurement of corporate governance quality is different. This
study recommends that the boundary of corporate governance quality should be defined based
on the agreed set of rules and regulation, code of governance and practices. This study also
suggests that the regulator and policy makers should more emphasize on code of corporate
governance and regulatory framework and monitoring to improve the quality of corporate
governance

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CASE STUDY AND PROBLEMS IN INDIAN SCENARIO

CASE BY WHICH THE NEED OF THE CORPORATE GOVERNANCE WAS FELT:

SATYAM COMPUTERS

Probably the biggest corporate scam in India came from one of the largest IT companies in
India and ironically, the company involved was Satyam Computer Services which means
truth. The Satyam founder Ramalianga Raju, who was the Chairman of the Company
confessed about cooking its books for the last several years by inflating its revenues and
profits. It cash and book balance and showed interest income which did not actually exists
and overstated its debtors to promote its sales figures. He kept lying about the Company’s
financial position to its shareholders, employees and public around the globe. He claimed
that he overstated assets bon Satyam’s Balance Sheet and the income nearly every quarter
to meet the analyst expectations.

Most of the Shareholders made exit from the share market and by the end of the day
massive sale by FIIS drove the stock market down by 78% In order to cover the misdeed,
Raju wanted to sell out $ 1.6 billion to acquire his son’s companies, Maytas Properties and
Mayta’s Infra. He wanted to make fictitious cash transfers to come out of financial scams.
Merrill Lynch, the Companies financial advisor, terminated its agreement with satyam to
advise it on strategic options because of material accounting irregularities by the end of
Wednesday, there was a huge hue and cry by investor to probe against Raju, Satyam and its
auditors with SEBI, the Exchanges, ICAI and department of Company.

The Chairman, Ramalingum Raju has admitted that the Company had been cooking figures
in its financial statements and showing higher revenues and lower liabilities. It has been
overstating its profits and reserves. From September 2007 to December, 2008, the
Company’s bank balance was overstated by Rs 5040 Crores and accrued interest by Rs 376
Crore. Liabilities were understated by Rs 1720 Crore. Thus the overall financial statement
was overstated by Rs 7136 Crores. The purpose of the scam was to keep the financial
position of the Company look good. As the promoter had a small percentage of equity, the
poor performance of the Company could result in takeover. It was therefore important that
the Company was presented as a growing company.

Acquisition of Maytas, a real estate firm owned by Raju family was seen as the last attempt
to fill company’s fictitious assets with real ones. Investors of Maytas viewed it is a good
disinvestment opportunity Maytas was proposed to be bought for about Rs 6400 Crore and
turned into a wholly –owned subsidiary of satyam. It was hoped that the payment to maytas
could be delayed. Since payment had to be made to maytas which was owned by raju
family for its share, only on paper Rs 6400 Crores would move out from satyams book into
raju family hands. Satyam could have acquired Mayta’s share in turn. The payment was
just a formality where Raju family technically received Rs 6400 Crores. This would results

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in satyam’s inflated reserves and surplus to come down to actual level without showing
that the books are overstated.

The Satyam Computer scandal brought to light the importance of business ethics and its
relevance to corporate culture. The Satyam scandal has been perhaps the biggest example
of corporate mis-governance in India in recent years.

The economic offence court convicted and sentenced to imprisonment to Raju’s wife, their
sons among 84 directors convicted evading income tax of around 30 crores. However, on
the same day special judge suspended the sentence for a month to enable the convicted
persons to seek remedial measures.

In 2005, SEBI ordered Raju and his family to return Rs. 1803 crore of their ill-gotten money
plus interest.

Six years after he confessed, Raju was held guilty by a trial court, an imprisonment of
seven years and a fine of Rs. 5 crore. Other convicted and sentenced were Raju’s brother,
Vadlamani Srinivas, former CFO at Satyam and former Price Waterhouse auditors; the two
were also banned for life by ICAI. Their special leave petition was dismissed.

After the scam, the Government of India considered the scrutiny of role of auditors of the
Company to meet the needs of investors, management and society as a whole. The Central
Government under the Companies Act, 2013 established the National Financial Reporting
Authority (NFRA) to scrutinize the role of those Chartered Accountants who are associated
with ensuring compliance with accounting standards and policies.

The

act also has provisions for rotation of auditors to avoid nexus between auditors and

directors.

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 CONCLUSION

Poor governance leads to, and encourages and breeds, corruption in a number of ways, for
instance through bribery and extortion, nepotism and fraud and embezzlement, It reduces the
efficiency on which an economy depends, and by increasing the cost of investment, lowers
the potential return. It also reduces the government’s resources and hence its capacity for
investment.

Common to other South Asian countries, corruption in Pakistan is unique because it occurs up
stream, it has wings which encourage flight of capital rather than wheel which encourage
reinvestment and it often rewards rather than punishes as the legal processes to fight
corruption are weak in themselves and the lower judiciary is amenable to letting off the
accused if the ‘price is right” (Ismail and Rizvi, 14). Corruption is not a problem that can be
attacked in isolation. It is not sufficient for the criminal law to search for bad apples and
punish them. Of course, the state may need to establish credibility by punishing highly visible
corrupt officials, but the goal of such prosecutions is to attract notice and public support, not
solve the underlying problem. Anticorruption laws can only provide a background for more
important structural reforms”

For almost all the reforms introduced by the Musharraf government in governmental and
administration fields the basic assumption was that the society was sufficiently educated and
hence eager and ready to change. The assumption proved wrong and rocked the whole
foundation of the reforms agenda as the society proved to be ready for grabbing new
opportunities but not to change its work ethics. If this society is to be saved and the country
has to shake off the tag of a failing or failed state, urgent and stringent measures need to be
taken.

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 BIBLIOGRAPHY:

ACTS, RULES AND REGULATIONS REFERRED:

1. Companies Act, 2013.

2. Secretarial Standards (Issued by The Institute of Company Secretaries of India).

3. SEBI (Listing Obligation and Disclosure Requirement) Regulations, 2015.

BOOKS REFERRED:

1. Ethics, Governance and Sustainability (Module)

WEBSITE'S REFERRED:

1. www.icsi.edu
2. www.mca.gov.in
3. www.sebi.gov.in

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