Name: Ravneet Rehal

2nd year section A

Roll no. 36

Corporate Governance and Social Responsibility Assignment

Q1. Explain the concept of corporate governance with its philosophy and principles.

Q2. What is the board's role in corporate governance and how does that differ from management role?

Q3. Explain the key codes of conduct for execution of corporate governance.

Q4. List and provide details of companies which are famous for the successful execution of corporate
governance.

Answer no.1

Corporate Governance refers to the way a corporation is governed. It is the technique by which
companies are directed and managed. It means carrying the business as per the stakeholders’ desires.
It is actually conducted by the board of Directors and the concerned committees for the company’s
stakeholder’s benefit. It is all about balancing individual and societal goals, as well as, economic and
social goals.

Corporate Governance is the interaction between various participants (shareholders, board of directors,
and company’s management) in shaping corporation’s performance and the way it is proceeding
towards. The relationship between the owners and the managers in an organization must be healthy
and there should be no conflict between the two. The owners must see that individual’s actual
performance is according to the standard performance. These dimensions of corporate governance
should not be overlooked.

Corporate Governance deals with the manner the providers of finance guarantee themselves of getting
a fair return on their investment. Corporate Governance clearly distinguishes between the owners and
the managers. The managers are the deciding authority. In modern corporations, the functions/ tasks
of owners and managers should be clearly defined, rather, harmonizing.

Corporate Governance deals with determining ways to take effective strategic decisions. It gives
ultimate authority and complete responsibility to the Board of Directors. In today’s market- oriented
economy, the need for corporate governance arises. Also, efficiency as well as globalization are
significant factors urging corporate governance. Corporate Governance is essential to develop added
value to the stakeholders.

Corporate Governance ensures transparency which ensures strong and balanced economic
development. This also ensures that the interests of all shareholders (majority as well as minority
shareholders) are safeguarded. It ensures that all shareholders fully exercise their rights and that the
organization fully recognizes their rights.

Corporate Governance has a broad scope. It includes both social and institutional aspects. Corporate
Governance encourages a trustworthy, moral, as well as ethical environment.

Benefits of Corporate Governance

1. Good corporate governance ensures corporate success and economic growth.

2. Strong corporate governance maintains investors’ confidence, as a result of which, company
can raise capital efficiently and effectively.
3. It lowers the capital cost.
4. There is a positive impact on the share price.
5. It provides proper inducement to the owners as well as managers to achieve objectives that
are in interests of the shareholders and the organization.
6. Good corporate governance also minimizes wastages, corruption, risks and mismanagement.
 7. It helps in brand formation and development.
8. It ensures organization in managed in a manner that fits the best interests of all.

Corporate governance principles

Despite the regulatory, cultural and economic differences between individual countries, the general
themes and principles addressed in corporate governance codes and practices are similar throughout
the world. These common principles are summarised by the OECD’s principles of corporate governance
which were published in 2004 to form a basic global standard. These commonly accepted principles, of
which there are over 50, address several key areas:

Shareholder rights
The corporate governance framework should ensure that basic shareholder rights – such as the ability
to participate and vote in shareholder meetings, elect and remove members of the board and share in
the company’s profits – can be exercised. At the same time, shareholders should be informed of any
material changes to the company, including amendments to the statutes and articles of incorporation.
They should receive all the information required in order for them to exercise their rights effectively.

Equitable treatment of shareholders

All shareholders, including minority and foreign shareholders, should be treated in the same way and
be granted the same rights. In this context, members of the management board and key executives
must disclose whether they have a material interest in specific transactions and matters that directly
affect the company in order to avoid insider trading.

Stakeholder interests
A corporate governance framework should also reflect the rights of stakeholders that are derived from
laws and regulations or from mutual agreements and should recognise the resulting legal obligations
for the company. Corporate governance rules should further encourage the active co-operation
between the company and its stakeholders in the creation of jobs and wealth. This can include, for
example, performance-related compensation of employees to share in a company’s success or an
effective framework protecting creditors.

Disclosure and transparency

A company’s corporate governance framework should ensure timely, accurate and complete financial
reporting as well as the disclosure of any other important matters related to the performance or
governance of the company. This can encompass financial results, share ownership and voting rights,
selection and remuneration of senior management, employee and stakeholder issues and governance
structures and policies. It also concerns the need to guarantee the quality of accounting and financial
and non-financial disclosure through an annual external audit.

Guiding Principles of Corporate Governance

Business Roundtable supports the following core guiding principles:

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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 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.

8. 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.

Answer No.2

I. Key Corporate Actors

Effective corporate governance requires a clear understanding of the respective roles of the board,
management and shareholders; their relationships with each other; and their relationships with other
corporate stakeholders. Before discussing the core guiding principles of corporate governance,
Business Roundtable believes describing the roles of these key corporate actors is important.

 The board of directors has the vital role of overseeing the company’s management and
business strategies to achieve long-term value creation. Selecting a well-qualified chief
executive officer (CEO) to lead the company, monitoring and evaluating the CEO’s
performance, and overseeing the CEO succession planning process are some of the most
important functions of the board. The board delegates to the CEO—and through the CEO to
 other senior management—the authority and responsibility for operating the company’s
business. Effective directors are diligent monitors, but not managers, of business operations.
They exercise vigorous and diligent oversight of a company’s affairs, including key areas such
as strategy and risk, but they do not manage—or micromanage—the company’s business by
performing or duplicating the tasks of the CEO and senior management team. The distinction
between oversight and management is not always precise, and some situations (such as a
crisis) may require greater board involvement in operational matters. In addition, in some areas
(such as the relationship with the outside auditor and executive compensation), the board has
a direct role instead of an oversight role.

 Management, led by the CEO, is responsible for setting, managing and executing the
strategies of the company, including but not limited to running the operations of the company
under the oversight of the board and keeping the board informed of the status of the company’s
operations. Management’s responsibilities include strategic planning, risk management and
financial reporting. An effective management team runs the company with a focus on executing
the company’s strategy over a meaningful time horizon and avoids an undue emphasis on
short-term metrics.

 Shareholders invest in a corporation by buying its stock and receive economic benefits in
return. Shareholders are not involved in the day-to-day management of business operations,
but they have the right to elect representatives (directors) and to receive information material
to investment and voting decisions. Shareholders should expect corporate boards and
managers to act as long-term stewards of their investment in the corporation. They also should
expect that the board and management will be responsive to issues and concerns that are of
widespread interest to long-term shareholders and affect the company’s long-term value.
Corporations are for-profit enterprises that are designed to provide sustainable long-term value
to all shareholders. Accordingly, shareholders should not expect to use the public companies
in which they invest as platforms for the advancement of their personal agendas or for the
promotion of general political or social causes.

 Some shareholders may seek a voice in the company’s strategic direction and
decisionmaking—areas that traditionally were squarely within the realm of the board and
management. Shareholders who seek this influence should recognize that this type of
empowerment necessarily involves the assumption of a degree of responsibility for the goal of
long-term value creation for the company and all of its shareholders.

Effective corporate governance requires dedicated focus on the part of directors, the CEO and senior
management to their own responsibilities and, together with the corporation’s shareholders, to the
shared goal of building long-term value.

Key Responsibilities of the Board of Directors and Management

An effective system of corporate governance provides the framework within which the board and
management address their key responsibilities.

Board of Directors
A corporation’s business is managed under the board’s oversight. The board also has direct
responsibility for certain key matters, including the relationship with the outside auditor and executive
compensation. The board’s oversight function encompasses a number of responsibilities, including:

 Selecting the CEO. The board selects and oversees the performance of the company’s CEO
and oversees the CEO succession planning process.

 Setting the “tone at the top.” The board should set a “tone at the top” that demonstrates the
company’s commitment to integrity and legal compliance. This tone lays the groundwork for a
corporate culture that is communicated to personnel at all levels of the organization.

 Approving corporate strategy and monitoring the implementation of strategic plans. The
board should have meaningful input into the company’s long-term strategy from development
through execution, should approve the company’s strategic plans and should regularly evaluate
implementation of the plans that are designed to create long-term value. The board should
understand the risks inherent in the company’s strategic plans and how those risks are being
managed.

 Setting the company’s risk appetite, reviewing and understanding the major risks, and
overseeing the risk management processes. The board oversees the process for identifying
and managing the significant risks facing the company. The board and senior management
should agree on the company’s risk appetite, and the board should be comfortable that the
strategic plans are consistent with it. The board should establish a structure for overseeing risk,
delegating responsibility to committees and overseeing the designation of senior management
responsible for risk management.

 Focusing on the integrity and clarity of the company’s financial reporting and other
disclosures about corporate performance. The board should be satisfied that the company’s
financial statements accurately present its financial condition and results of operations, that
other disclosures about the company’s performance convey meaningful information about past
results as well as future plans, and that the company’s internal controls and procedures have
been designed to detect and deter fraudulent activity.

 Allocating capital. The board should have meaningful input and decisionmaking authority over
the company’s capital allocation process and strategy to find the right balance between short-
term and long-term economic returns for its shareholders.

 Reviewing, understanding and overseeing annual operating plans and budgets. The
board oversees the annual operating plans and reviews annual budgets presented by
management. The board monitors implementation of the annual plans and assesses whether
they are responsive to changing conditions.

 Reviewing the company’s plans for business resiliency. As part of its risk oversight
function, the board periodically reviews management’s plans to address business resiliency,
including such items as business continuity, physical security, cybersecurity and crisis
management.
  Nominating directors and committee members, and overseeing effective corporate
governance. The board, under the leadership of its nominating/corporate governance
committee, nominates directors and committee members and oversees the structure,
composition (including independence and diversity), succession planning, practices and
evaluation of the board and its committees.

 Overseeing the compliance program. The board, under the leadership of appropriate
committees, oversees the company’s compliance program and remains informed about any
significant compliance issues that may arise.

CEO and Management

The CEO and management, under the CEO’s direction, are responsible for the development of the
company’s long-term strategic plans and the effective execution of the company’s business in
accordance with those strategic plans. As part of this responsibility, management is charged with
the following duties.

 Business operations. The CEO and management run the company’s business under the
board’s oversight, with a view toward building long-term value.

 Strategic planning. The CEO and senior management generally take the lead in articulating
a vision for the company’s future and in developing strategic plans designed to create long-
term value for the company, with meaningful input from the board. Management implements
the plans following board approval, regularly reviews progress against strategic plans with the
board, and recommends and carries out changes to the plans as necessary.

 Capital allocation. The CEO and senior management are responsible for providing
recommendations to the board related to capital allocation of the company’s resources,
including but not limited to organic growth; mergers and acquisitions; divestitures; spin-offs;
maintaining and growing its physical and nonphysical resources; and the appropriate return of
capital to shareholders in the form of dividends, share repurchases and other capital distribution
means.

 Identifying, evaluating and managing risks. Management identifies, evaluates and manages
the risks that the company undertakes in implementing its strategic plans and conducting its
business. Management also evaluates whether these risks, and related risk management
efforts, are consistent with the company’s risk appetite. Senior management keeps the board
and relevant committees informed about the company’s significant risks and its risk
management processes.

 Accurate and transparent financial reporting and disclosures. Management is responsible

for the integrity of the company’s financial reporting system and the accurate and timely
preparation of the company’s financial statements and related disclosures. It is management’s
responsibility—under the direction of the CEO and the company’s principal financial officer—to
establish, maintain and periodically evaluate the company’s internal controls over financial
reporting and the company’s disclosure controls and procedures, including the ability of such
controls and procedures to detect and deter fraudulent activity.
  Annual operating plans and budgets. Senior management develops annual operating plans
and budgets for the company and presents them to the board. The management team
implements and monitors the operating plans and budgets, making adjustments in light of
changing conditions, assumptions and expectations, and keeps the board apprised of
significant developments and changes.

 Selecting qualified management, establishing an effective organizational structure and

ensuring effective succession planning. Senior management selects qualified
management, implements an organizational structure, and develops and executes thoughtful
career development and succession planning strategies that are appropriate for the company.

 Business resiliency. Management develops, implements and periodically reviews plans for
business resiliency that provide the most critical protection in light of the company’s operations.

o Risk identification. Management identifies the company’s major business and

operational risks, including those relating to natural disasters, leadership gaps, physical
security, cybersecurity, regulatory changes and other matters.

o Crisis preparedness. Management develops and implements crisis preparedness

and response plans and works with the board to identify situations (such as a crisis
involving senior management) in which the board may need to assume a more active
response role.

III. Board Structure

Public companies employ diverse approaches to board structure and operations within the parameters
of applicable legal requirements and stock market rules. Although no one structure is right for every
company, Business Roundtable believes that the practices set forth in the following sections provide an
effective approach for companies to follow.

Board Composition

 Size. In determining appropriate board size, directors should consider the nature, size and
complexity of the company as well as its stage of development. Larger boards often bring the
benefit of a broader mix of skills, backgrounds and experience, while smaller boards may be
more cohesive and may be able to address issues and challenges more quickly.

 Composition. The composition of a board should reflect a diversity of thought, backgrounds,

skills, experiences and expertise and a range of tenures that are appropriate given the
company’s current and anticipated circumstances and that. collectively, enable the board to
perform its oversight function effectively.

o Diversity. Diverse backgrounds and experiences on corporate boards, including those

of directors who represent the broad range of society, strengthen board performance
and promote the creation of long-term shareholder value. Boards should develop a
framework for identifying appropriately diverse candidates that allows the
nominating/corporate governance committee to consider women, minorities and others
with diverse backgrounds as candidates for each open board seat.
 o Tenure. Directors with a range of tenures can contribute to the effectiveness of a
board. Recent additions to the board may provide new perspectives, while directors
who have served for a number of years bring experience, continuity, institutional
knowledge, and insight into the company’s business and industry.

 Characteristics. Every director should have integrity, strong character, sound judgment, an
objective mind and the ability to represent the interests of all shareholders rather than the
interests of particular constituencies.

 Experience. Directors with relevant business and leadership experience can provide the board
a useful perspective on business strategy and significant risks and an understanding of the
challenges facing the business.

 Independence. Director independence is critical to effective corporate governance, and

providing objective independent judgment that represents the interests of all shareholders is at
the core of the board’s oversight function. Accordingly, a substantial majority of the board’s
directors should be independent, according to applicable rules and regulations and as
determined by the board.

o Definition of “independence.” An independent director should not have any

relationships that may impair, or appear to impair, the director’s ability to exercise
independent judgment. Many boards have developed their own standards for
assessing independence under stock market definitions, in addition to considering the
views of institutional investors and other relevant groups.

o Assessing independence. When evaluating a director’s independence, the board

should consider all relevant facts and circumstances, focusing on whether the director
has any relationships, either direct or indirect, with the company, senior management
or other directors that could affect actual or perceived independence. This includes
relationships with other companies that have significant business relationships with the
company or with not-for-profit organizations that receive substantial support from the
company. While it has been suggested that long-standing board service may be
perceived to affect director independence, long tenure, by itself, should not disqualify
a director from being considered independent.

 Election. Directors should be elected by a majority vote for terms that are consistent with long
term value creation. Boards should adopt a resignation policy under which a director who does
not receive a majority vote tenders his or her resignation to the board for its consideration.
Although the ultimate decision whether to accept or reject the resignation will rest with the
board, the board and its nominating/corporate governance committee should think critically
about the reasons why the director did not receive a majority vote and whether or not the
director should continue to serve. Among other things, they should consider whether the vote
resulted from concerns about a policy issue affecting the board as a whole or concerns specific
to the individual director and the basis for those concerns.

 Time commitments. Serving as a director of a public company requires significant time and
attention. Certain roles, such as committee chair, board chair and lead director, carry an
 additional time commitment beyond that of board and committee service. Directors must spend
the time needed and meet as frequently as necessary to discharge their responsibilities
properly. While there may not be a need for a set limit on the number of outside boards on
which a director or committee member may serve—or for any limits on other activities a director
may pursue outside of his or her board duties—each director should be committed to the
responsibilities of board service, and each board should monitor the time constraints of its
members in light of their particular circumstances.

Board Leadership

 Approaches. U.S. companies take a variety of approaches to board leadership; some combine
the positions of CEO and chair while others appoint a separate chair. No one leadership
structure is right for every company at all times, and different boards may reach different
conclusions about the leadership structures that are most appropriate at any particular point in
time. When appropriate in light of its current and anticipated circumstances, a board should
assess which leadership structure is appropriate.

 Lead/presiding director. Independent board leadership is critical to effective corporate

governance regardless of the board’s leadership structure. Accordingly, the board should
appoint a lead director, also referred to as a presiding director, if it combines the positions of
CEO and chair or has a chair who is not independent. The lead director should be appointed
by the independent directors and should serve for a term determined by the independent
directors.

 Lead directors perform a range of functions depending on the board’s needs, but they typically
chair executive sessions of a board’s independent or nonmanagement directors, have the
authority to call executive sessions, and oversee follow-up on matters discussed in executive
sessions. Other key functions of the lead director include chairing board meetings in the
absence of the board chair, reviewing and/or approving agendas and schedules for board
meetings and information sent to the board, and being available for engagement with long-term
shareholders.

Board Committee Structure

 An effective committee structure permits the board to address key areas in more depth than
may be possible at the full board level. Decisions about committee membership and chairs
should be made by the full board based on recommendations from the nominating/corporate
governance committee.

 The functions performed by the audit, nominating/corporate governance and compensation

committees are central to effective corporate governance; however, no one committee structure
or division of responsibility is right for all companies. Thus, the references in Section IV to
functions performed by particular committees are not intended to preclude companies from
allocating these functions differently.

 The responsibilities of each committee and the qualifications required for committee
membership should be clearly defined in a written charter that is approved by the board. Each
 committee should review its charter annually and recommend changes to the board.
Committees should apprise the full board of their activities on a regular basis.

 Board committees should meet all applicable independence and other requirements as to
membership (including minimum number of members) prescribed by applicable law and stock
exchange rules.

IV. Board Committees

Audit Committee

 Financial acumen. Audit committee members must meet minimum financial literacy standards,
and one or more committee members should be an audit committee financial expert, as
determined by the board in accordance with applicable rules.

 Overboarding. With the significant responsibilities imposed on audit committees, consideration

should be given to whether limiting service on other public company audit committees is
appropriate. Policies may permit exceptions if the board determines that the simultaneous
service would not affect an individual’s ability to serve effectively.

 Outside auditor. The audit committee is responsible for the company’s relationship with its
outside auditor, including:

o Selecting and retaining the outside auditor. The audit committee selects the outside
auditor; reviews its qualifications (including industry expertise and geographic
capabilities), work product. independence and reputation; and reviews the performance
and expertise of key members of the audit team. The committee reviews new leading
partners for the audit team and should be directly involved in the selection of the new
engagement partner. The committee oversees the process of negotiating the terms of
the annual audit engagement.

o Overseeing the independence of the outside auditor. The committee should

maintain an ongoing, open dialogue with the outside auditor about independence
issues. The committee should identify those services, beyond the annual audit
engagement. that it believes the outside auditor can provide to the company consistent
with maintaining independence and determine whether to adopt a policy for
preapproving services to be provided by the outside auditor or approving services on
an engagement-by-engagement basis.

 Financial statements. The committee should discuss significant issues relating to the
company’s financial statements with management and the outside auditor and review earnings
press releases before they are issued. The committee should understand the company’s critical
accounting policies and why they were chosen, what key judgments and estimates
management made in preparing the financial statements, and how they affect the reported
financial results. The committee should be satisfied that the financial statements and other
disclosures prepared by management present the company’s financial condition and results of
operations accurately and are understandable.
  Internal controls. The committee oversees the company’s system of internal controls over
financial reporting and its disclosure controls and procedures, including the processes for
producing the certifications required of the CEO and principal financial officer. The committee
periodically reviews with both the internal and outside auditors, as well as with management,
the procedures for maintaining and evaluating the effectiveness of these systems. The
committee should be promptly notified of any significant deficiencies or material weaknesses
in internal controls and kept informed about the steps and timetable for correcting them.

 Risk assessment and management. Many audit committees have at least some responsibility
for risk assessment and management due to stock market rules. However, the audit committee
should not be the sole body responsible for risk oversight, and the board may decide to allocate
some aspects of risk oversight to other committees or to the board as a whole depending on
the company’s industry and other factors. A company’s risk oversight structure should provide
the full board with the information it needs to understand all of the company’s major risks, their
relationship to the company’s strategy and how these risks are being addressed. Committees
with risk-related responsibilities should report regularly to the full board on the risks they
oversee and brief the audit committee in cases where the audit committee retains some risk
oversight responsibility.

 Compliance. Unless the full board or one or more other committees do so, the audit committee
should oversee the company’s compliance program, including the company’s code of conduct.
The committee should establish procedures for handling compliance concerns related to
potential violations of law or the company’s code of conduct, including concerns relating to
accounting, internal accounting controls, auditing and securities law issues.

 Internal audit. The committee oversees the company’s internal audit function and ensures that
the internal audit staff has adequate resources and support to carry out its role. The committee
reviews the scope of the internal audit plan, significant findings by the internal audit staff and
management’s response, and the appointment and replacement of the senior internal auditing
executive and assesses the performance and effectiveness of the internal audit function
annually.
Answer No. 3

Corporate governance codes

Voluntary corporate governance codes have been developed in virtually every European country.
These codes are issued by a broad range of governmental organisations, committees initiated by
governments or stock exchanges, business and industry associations and investor groups.

As a result, the compliance mechanisms and the level of recognition these codes receive vary
considerably.

Typically these codes of conduct provide companies with a range of governance recommendations.
These are usually not mandated by law, but it is hoped that the public visibility of compliance or non-
compliance generates a degree of pressure that coerces companies into compliance with their national
code.

In some countries, such as the UK or Canada, companies that do not comply with certain elements of
the national code are forced by stock market regulations to disclose why they are not complying.
Advantages of corporate governance codes
The main advantage of codes based on a ‘comply or explain’ mechanism over legislation is that they
are very flexible and can be altered and adapted much more readily than laws. Codes can also draw
on the experience and interests of companies and shareholders.

Legislation, on the other hand, achieves a high level of compliance much more quickly. Legislation is
therefore the appropriate means both to ensure a minimum standard for all companies and to establish
a functioning legal framework for the most essential governance issues.

There are also areas of corporate governance, such as financial and non-financial disclosure, where a
flexible approach is not effective. For example, the disclosure may be absolutely essential to
shareholders exercising their voting rights or to investors making investment decisions. In these cases,
legislation is the appropriate instrument to achieve a desired level of corporate governance.

If, however, different forms of governance would achieve the same objective, for example with regard
to the functioning and structure of the board, voluntary codes can provide the necessary degree of
flexibility. Codes can reflect the varying needs and practices of different industry sectors or of less
established markets in which practices are still evolving.

Company Reporting Directive

The EU supports the wider use of a ‘comply or explain’ mechanism in combination with voluntary
corporate governance codes. The EU adopted the Company Reporting Directive (incorporating
amendments to the Fourth and Seventh Company Law Directives), which introduces new rules requiring
companies whose securities trade on a regulated market to publish a corporate governance statement.
This should appear either in their annual reports or in a separate report. The statement has to refer to
the corporate governance code applied by the company and explain to what extent the company
complies with that code.

Divergence and convergence of national codes

All existing corporate governance codes have been created against the backdrop of diverse cultures,
financing traditions, ownership structures and legal frameworks. Despite their unique origins, however,
most codes are remarkably similar, not least in terms of the recommendations they make regarding the
roles and responsibilities of management boards and the composition of these bodies.

Corporate governance codes aim to present examples of best practice but recognise that the
implementation of all of the recommendations will take time to achieve.

The main differences in corporate governance practice between EU member states and states
worldwide stem from differences in company law rather than from the recommendations made by the
codes. In order to understand different national corporate governance codes, these have to be
examined in the context of the national company law regimes in which they operate.

For the same reason, differences between corporate governance codes are mostly a reflection of the
legal regime and not the expression of an entirely different attitude of what represents good corporate
governance.

Employee representation
The main difference in corporate governance practice across the EU derives from the distinct corporate
structures in countries like Austria, Germany, Denmark or Sweden. In these countries, employees of
companies that exceed a certain size have the right to elect members of the supervisory body. In most
other countries, only shareholders have the right to elect board members with a supervisory function,
giving shareholders a much more powerful role. However, despite these legal differences, corporate
governance codes generally express the idea of fostering employee participation in their companies.

Stakeholder issues
Most corporate governance codes recognise the connection between corporate success in the areas
of shareholder profit and stakeholder interests and state the need for ensuring that economic success
must also be based on social accountability. There are, however, significant differences in the ways in
which stakeholder interests and shareholder rights are emphasised in the codes.

Shareholder rights
Laws regulating shareholder rights and the equitable treatment of shareholders vary greatly between
EU member states. This affects minority rights, for example in takeovers, the organisation of annual
general meetings, and voting rights and procedures.

Although corporate governance codes advocate that all shareholders should be treated equally,
disproportionate voting rights should be avoided and shareholder participation should be supported,
differences in corporate governance practice remain.

Board structure
Despite the fundamentally different board structures – single board and two-tier board structures – that
can be encountered in the EU, corporate governance practice is relatively similar, recognising in both
systems the need for a supervisory and managerial role. While the two-tier board structure formalises
and clearly separates the supervisory body from an executive board, in practice a unitary board
structure also makes this distinction by delegating executive duties and authority to a group of
managers.

Responsibilities
Irrespective of the system, the management board or supervisory board are both responsible for:

 Electing and supervising the executive management.

 Safeguarding the internal control systems.
 Ensuring the accuracy of the financial reporting.
 General compliance with the law.
The majority of corporate governance codes are in favour of a clear separation of supervisory and
managerial roles. This may be required either in the form of independent supervisory bodies or, in those
codes that are referring to unitary boards, by calling for the appointment of non-executive and
independent directors and the separation of the roles of CEO and chairman. In the two-tier system, the
appointment of former CEOs or a large number of former executives to the supervisory board is
discouraged to ensure the independence of the supervisory body.

In addition, supervisory boards may delegate some of their duties to board committees, particularly
concerning issues where management and company interests may clash, such as audit or executive
remuneration. While the codes may suggest different processes for the nomination of members to board
committees, they recognise the need for their independence and often recommend the involvement of
non-executive or independent directors.

Disclosure
There are still no uniform disclosure requirements across the EU. However, the amount of disclosure
about corporate governance practices is nonetheless increasing, not least due to the wider adoption of
international accounting standards. Furthermore, the mandatory and voluntary reporting of corporate
social responsibility issues is becoming more frequent. Corporate governance codes have in this
context supported the conversion of standards by requesting transparency on all aspects of corporate
governance, including executive remuneration, shared ownership, independence of directors and
corporate social responsibility.

Overall there is considerable divergence between national regimes on individual issues such as the
disclosure of senior management remuneration, the personal responsibility of senior management for
the effectiveness of internal controls and stakeholder rights. However, despite the legal differences
there is a distinct trend toward the convergence of corporate governance practices within the EU.

Conclusion
Corporate governance codes are generally not binding, even if a ‘comply or explain’ disclosure is
required either by law or as a result of stock market regulation. This means companies are free to
disregard the recommendations made by a national code.
However, by articulating best practice and heightening awareness of corporate governance issues,
corporate governance codes have contributed to an increased adoption of corporate governance
standards, in combination with pressure from investors, stock market authorities and the media. In spite
of the legal differences between states, corporate governance codes also appear to have supported a
trend of convergence in corporate governance practices within the EU and internationally.

Answer no.4

ITC

COCA-COLA

P&G