Contents:

1. Introduction to Corporate Governance

2. Meaning of Corporate Governance

3. Objectives of Corporate Governance

4. History of Corporate Governance

5. Need of Corporate Governance

6. Importance of Corporate Governance

7. Principles of Corporate Governance

8. True Spirit of Corporate Governance

9. Code of Corporate Governance

10. Provisions related to Corporate Governance as per Companies Act 2013

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 1. Introduction to Corporate Governance:

When a company is formed, elected representatives of the shareholders run the

organisations. These representatives are the directors of the company and are
usually the shareholders holding majority of company’s shares. They are mostly
the promoters of the company. These elected representatives elect a
chairperson from amongst them who chairs the meetings of the Board of
Directors.

Shareholders’ stake in the company is limited to the value of shares held by

them. Most of the shareholders belong to general public who invest to earn
returns in the form of dividends and capital gains. They are not aware of the
management problems and operations and believe that their elected
representatives, the directors, will look after their interests. The relationship
between shareholders and directors is fiduciary in nature.

It is a relationship of trust and faith. However, the interests of shareholders are not
always protected by the directors. They tend to use shareholders’ money for
their personal benefit and not for the benefit of the company. While
shareholders attend meetings where annual reports are presented with profit
and loss statements and balance sheets, they do not technically know the way
these accounts have been prepared.

Some expenses may not be shown in the profit and loss statements and, thus,
inflated figure of profits may be shown. The firm is shown to report profits while
actually it may have suffered losses. Such financial irregularities can, in the long
run, lead to scams which the country has witnessed in the past. The companies
try to use loopholes in law for their personal benefit at the cost of shareholders’
money.

With increasing competition in the market, companies want to make high and
quick profits. They want sustainable competitive advantage for which they start
looking to short cuts to the basic business fundamentals which provide them
competitive advantage like differentiation in price, product, service and
promotion, cost leadership, market focus etc.

As a short cut to price differentiation, CEOs may reduce the price of goods but
at the same time, may also reduce the quality of goods buying raw materials
from their known suppliers. While supplier gets an order, the CEO gets his share
from the supplier. Such malpractices become long-term habits resulting in long-
term loss of profits and goodwill of the companies.

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As these problems became rampant, there arose the need to form committees
to look into financial and non-financial irregularities of the firms and bring the
business back to the age- old value-based management system based on
cultural and ethical beliefs. The formation of such committees to look into the
problems of companies came to be known as corporate governance.

The concept of corporate governance gained wide popularity in 1990s to

improve the effectiveness of corporate enterprises. Attention on role of
corporate governance in economic development came as a consequence of
adopting market-based approaches in defining economic policies.

It attempts to remove corporate failures and dis-satisfaction of the stakeholders.

In the era of globalisation, corporate governance plays an important role. Since
reliance on private sector increased, it led to greater concern on how
corporations operate and control and how suppliers of funds get fair return on
their investments.

Corporate governance aims to achieve balance between all the interests

present in corporations: management, shareholders and other stakeholders. The
corporate governance framework ensures that timely and accurate disclosure is
made on all material matters regarding the corporation, including the financial
situation, performance and ownership.

It ensures that corporate managers run their businesses successfully and take
care of long-term interests of their stakeholders. It improves capital efficiency of
companies and attempts to deploy their wealth in productive areas of the
economy.

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 2. Meaning of Corporate Governance:

As ownership of the company is distributed amongst large number of

shareholders majority of whom hold a small percentage of capital, the
company is managed by the elected board of directors and the chairperson
who look after interests of the stakeholders with the help of managers and
employees of the firm. The top level managers have the prime responsibility to
use resources with commitment and dedication to ensure organisational
success.

Governance is the process whereby people in power make decisions that

create, destroy or maintain social systems, structures and processes. Corporate
governance is, therefore, the process whereby people in power direct, monitor
and lead corporations, and thereby either create, modify or destroy the
structures and systems under which they operate. Corporate governors are both
potential agents for change and also guardians of existing ways of working. As
such they are, therefore, a significant part of the fabric of our society.

“Corporate governance deals with the ways in which suppliers of finance to

corporations assure themselves of getting a return on their investment.”

“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 in 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.” — OECD April 1999.

A corporation or company is an enterprise authorised by law to conduct

business. Governance implies control to be exercised by key stakeholders’
representatives to promote corporate growth and protect stakeholders’
interests.

Being guided by the principle of shareholders’ democracy, companies have to

make their policies clear in running the business. Corporate governance ensures
how effectively the board of directors and management discharge their
functions in building and satisfying stakeholders’ confidence.

Corporate governance can be narrowly defined as relationship of a company

to its shareholders and broadly, as its relationship to society. It provides the
structure of corporate enterprises. It defines objectives, means of attaining those

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objectives and monitoring organisational performance to ensure that objectives
are optimally achieved.

“Corporate governance is the application of best management practices,

compliance of law in true letter and spirit and adherence to ethical standards
for effective management and distribution of wealth and discharge of social
responsibility for sustainable development of all stakeholders”. - Institute of
Companies Secretaries of India

“Corporate governance is about promoting corporate fairness, transparency

and accountability.” — J. Wolfensohn.

In simplest terms, corporate governance is formal system of accountability of

senior management to corporate stakeholders. It includes company
accountability to shareholders and other stakeholders such as employees,
suppliers, customers and local community.

Corporate governance is concerned primarily with holding balance between

economic and social goals and between individual and community goals.

Corporate governance is:

1. Relationship amongst stakeholders used to determine and control the
strategic direction and performance of organizations.

2. Concerned with identifying ways to ensure that strategic decisions are made
effectively.

3. Used in corporations to establish order between owners and top-level

managers.

The corporate governance structure specifies the rules and procedures for
making decisions on corporate affairs. It also provides the structure through
which company objectives are set and means of attaining and monitoring the
performance of those objectives are also framed.

Corporate governance is used to monitor whether outcomes are in

accordance with plans and to motivate the organization to be more fully
informed in order to maintain or alter organizational activity. It is the mechanism
by which individuals are motivated to align their actual behaviours with the
overall participants.

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 3. Objectives of Corporate Governance:

Corporate governance has the following objectives:

1. To align corporate goals with goals of its stakeholders (society, shareholders

etc.).

2. To strengthen corporate functioning and discourage mismanagement.

3. To achieve corporate goals by making investment in profitable outlets.

4. To specify responsibility of the board of directors and managers to ensure

good corporate performance.

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4.History of Corporate Governance:

Deficiencies in the Accounting Standards led to failure of many companies in

the U.K. This brought to need some norms and codes, to remedy the improper
accounting system. Serious concerns were raised regarding corporate
governance and the committee on corporate governance was set up in 1991
by the London Stock Exchange to look into financial aspects of corporate
governance. Sir Adrian Cadbury led the committee.

It submitted its report on corporate governance in December 1992. The report of

this committee activated the need for corporate governance in India also.
Amendments were made in the Companies Act, 1956 in 2000. Additional
stipulations were made in the listing agreement and annual award was
instituted for excellence in corporate governance.

The first formal attempt to evolve a code of corporate governance for Indian
companies was put forward by the Birla Committee Report (or Kumar
Mangalam Report). The objective of this committee was “enhancement of the
long term shareholders’ value while at the same time protecting the interests of
other stakeholders.”

The main recommendations of the report are as follows:

(i) Board of directors:
The Board of Directors guide and control company’s operations and provide
objective judgment, independent of the management, to the company. The
Board remains accountable for its actions to shareholders. The basic
responsibilities of the Board include: strategic development of the company,
maintain good member relations, protect its assets and fulfill legal requirements.

(ii) Audit committee:

Companies must have an audit committee responsible for financial reporting.
This committee shall have access to all financial information and power to
investigate any activity within its terms of reference, seek information from any
employee for effective financial reporting. The purpose of appointing audit
committee is to present and disclose correct, sufficient and credible financial
information of the company to stakeholders.

(iii) Remuneration committee:

The report recommended setting up of a remuneration committee that will
determine and account for the policy on remuneration of directors.
Remuneration also includes pension rights and compensation payment to them.

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(iv) Accounting standards and financial reporting:
The committee recommended issuing of Accounting Standards by the Institute
of Chartered Accountants of India regarding upgrading of accounting
standards and financial reporting system in India.

Companies are required to present:

(i) Consolidated accounts for all subsidiaries, and

(ii) Financial reporting for each of their product segments so that shareholders
have complete financial picture of the company in one statement.

(v) Management:
While the Board of Directors ensure that corporate policies and strategies are
laid according to the code of corporate governance, management of the
company ensures that policies and strategies are implemented successfully for
attainment of corporate objectives. The role of management should be clearly
defined by the Board of Directors.

Management of the company comprises of its Chief Executive Officer (CEO),

executive directors and managers at various organizational levels. The
committee recommended that annual report to shareholders should contain
Management, Discussion and Analysis report besides Directors’ report. This report
should contain matters like opportunities and threats, risks, internal control
systems, development of human resources etc.

(vi) Shareholders:
Shareholders are owners of the company. They have the right to obtain timely
information from the company, right to transfer and register their shares,
participate and vote in shareholders’ meetings, elect members of the Board
etc. These rights recommend that shareholders evaluate corporate governance
performance of the company.

Shareholders participate in general body meetings to ensure that it functions for

their interests. In this regard, the committee recommended that company’s
quarterly results and various financial presentations may be put up on its web
site for access by shareholders.

The Birla Committee Report laid sound foundation for good corporate
governance of Indian companies.

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5. Need for Corporate Governance:

Corporate governance is needed for the following reasons:

(i) Separation of ownership from management:
A company is run by managers. Corporate governance ensures that managers
work in the best interests of corporate owners (shareholders).

(ii) Global capital:

In the globalized world, global capital flows in markets which are well- regulated
with high standards of efficiency and transparency. Good corporate
governance gains credibility and trust of global market players.

(iii) Investor protection:

Investors are educated and enlightened of their rights. They want their rights to
be protected by companies in which they have invested money. Corporate
governance is an important tool for protecting investors’ interest by improving
efficiency of corporate enterprises.

(iv) Foreign investments:

Significant foreign institutional investment is taking place in India. The investors
expect companies to adopt globally accepted practices of corporate
governance and well-developed capital markets. Demanding international
standards of corporate governance and greater professionalism in
management of Indian corporates substantiates the need for good corporate
governance.

(v) Financial reporting and accountability:

Good corporate governance ensures sound, transparent and credible financial
reporting and accountability to investors and lenders so that funds can be
raised from capital markets.

(vi) Banks and financial institutions:

Banks and financial institutions give financial assistance to companies. They are
interested in financial soundness of companies which can be provided through
good corporate governance,

(vii) Globalisation of economy:

Globalisation and integration of India with the world economy demands that
Indian industries conform to the standards of international rules. Corporate
governance helps in doing this.

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6. Importance of Corporate Governance:

Corporate governance is important for the following reasons:

1. It shapes the growth and future of capital markets of the economy.

2. It helps in raising funds from capital markets. Sound governance practices

contribute to investors’ confidence in corporations to attract long-term capital.

3. It links company’s management with its financial reporting system.

4. It enables management to take innovative decisions for effective functioning

of the enterprise within the legal framework of accountability. The effectiveness
of legal and regulatory framework is indispensable to assess the impact of
corporate governance on overall economic performance.

5. Good corporate governance enhances the structures through which

objectives of the corporations are set, means of attaining such objectives are
determined and performance is monitored.

6. It supports investors by making corporate accounting practices transparent.

Corporate enterprises disclose financial reporting structures.

7. It provides adequate and timely disclosure reporting requirements, code of

conduct etc. Companies present material price sensitive information to outsiders
and ensure that till this information is made public, insiders abstain from dealing
in corporate securities. It, thus, avoids insider-trading.

8. It improves efficiency and effectiveness of the enterprise and adds to wealth

of the economy. Corporate governance is, thus, an instrument of economic

growth.

9. It improves international image of the corporate sector and enables home

companies to raise global capital.

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7. Principles of Corporate Governance:

Issues involving corporate governance principles include:

1. Oversight of preparation of the entity’s financial statements.

2. Internal controls and independence of the entity’s auditors.

3. Review of the compensation arrangements for the chief executive officer and
other senior executives.

4. The way in which individuals are nominated for positions on the board.

5. The resources made available to directors in carrying out their duties.

6. Oversight and management of risk.

7. Dividend policy.

The corporate governance principles align the interest of individuals and

community goals, corporations and society in the following ways:

1. Transparency:

Companies have to be transparent. Transparency means accurate, adequate

and timely disclosure of relevant information to the stakeholders. Transparency

and disclosure inform the stakeholders that their interests are taken care of.

2. Accountability:

Chairman, board of directors and chief executive of the company should fulfill

their accountability to the shareholders, customers, workers, society and the

Government. Since they have considerable authority over company’s

resources, they should accept accountability for all their decisions and actions.

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3. Independence:

For ethical reasons, corporate governance seems to be independent, strong

and non-participatory body where all decision-making is based on business and

not personal biases.

4. Reporting:

Good corporate governance involves adequate reporting to shareholders and

other stakeholders, for example, a company should publish quarterly, half yearly

and yearly performance and operating results in newspapers. It should also

report the functioning of various committees set by the board of directors for
efficient administration. It is important on ethical grounds of the society.

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8. True Spirit of Corporate Governance:

Although Indian corporates have been focused on revisiting and updating

board-level policies and procedures by implementing the revised Clause 49 of
the listing agreement, this has been a mechanical exercise for most companies.

Specifically, the focus of most organisations has been on achieving legal

compliance, for instance, introducing the appropriate mix of executive and
non-executive directors on their boards. But beyond this, not much has been
done substantively. Most listed companies continue to view corporate
governance as a compliance- driven exercise — an effort to ensure that they
implement the “bare minimum” that can keep them out of legal trouble. This,
however, is a mistake.

The true value of corporate governance is much more than just ensuring
compliance with regulations. In fact, our policy makers, through the design of
the revised Clause 49, require company to review and manage the totality of
risks facing it. This is because the spirit of corporate governance is about putting
in place safeguards around any eventuality that could have serious negative
impact on a company and its stakeholders.

In other words, while a CEO with questionable integrity and the wrong tone can
seriously affect a company, it is also important to recognise that other risks such
as poor controls around financial processes, operational inefficiencies, and the
inability to compete effectively in the global marketplace can also produce
disastrous results.

Every business faces risks in the areas of strategy, operations, financial reporting
and compliance. Companies that manage these risks by establishing a system
of internal controls provide reasonable assurance to stakeholders along several
key dimensions. These include the effectiveness and efficiency of operations,
compliance with laws and regulations, and reliability of financial reports that are
provided to the public. These constitute fundamental elements of good
corporate governance.

Good corporate governance practices— for instance, implementation of

Clause 49 requirements—require that a company incorporates such elements
into its operational network. While most listed Indian companies have not
reaped the benefits of true corporate governance, several high-performance
organisations have implemented initiatives that are noteworthy.

In an effort to create a positive corporate governance environment, a leading

software company focused on revising its code-of-conduct. It conducted a
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bench-marking study to examine the codes-of-conduct of other software
companies. Gaps in the current code of conduct were identified and leading
practices from other companies were incorporated to develop a revised code
of conduct.

At every step of this effort, the CEO ensured that all elements of the new policy
were well-aligned with the core values of the organisation. This enabled the new
policy to gain quick acceptance from the rank and file.

Corporate governance improvements took a different form at a US-listed

manufacturing company. This organisation embarked on an enterprise-wide
initiative to assess the design and operating effectiveness of its financial control
systems. It inspected its key business processes, such as those related to taking
customer orders, purchasing raw materials, selling and collecting payments.

Financial controls to prevent revenue leakage, fraud and misstatements due to

human or information technology errors were implemented. In the process,
various financial and operational processes were streamlined.

While the above examples are noteworthy, good corporate governance

practices are tedious to implement because they require people across the
enterprise, from the boardroom to the shop floor. Nor do these practices
guarantee that business mishaps, such as fraud, will not occur.

However, the implementation of such practices does provide reasonable

assurance that the interests of stakeholders will be protected by management
on a proactive basis. This is the true spirit of corporate governance.

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9. Code of Corporate Governance:

SEBI code on corporate governance:

SEBI had constituted a Committee on Corporate Governance under the
Chairmanship of Shri Kumar Mangalam Birla, Member, and SEBI Board to
promote and raise the standard of Corporate Governance of listed companies.

The SEBI Board in its meeting held on January 25, 2000 considered the
recommendation of the Committee and decided to make the amendments to
the listing agreement in pursuance of the decision of the Board. It is advised that
a new clause, namely clause 49, be incorporated in the listing agreement.

CM code on corporate governance:

In 1996, CII took a special initiative on Corporate Governance-the first
institutional initiative in Indian industry. The objective was to develop and
promote a code for Corporate Governance to be adopted and followed by
Indian companies, be those in the Private Sector, the Public Sector, Banks or
Financial Institutions, all of which are corporate entities.

This initiative by CII flowed from public concerns regarding the protection of
investor interest, especially the small investor; the promotion of transparency
within business and industry; the need to move towards international standards
in terms of disclosure of information by the corporate sector and, through all this,
to develop a high level of public confidence in business and industry.

A National Task Force was set up with Mr. Rahul Bajaj, past President, CII and
Chairman & Managing Director, Bajaj Auto Limited. This Task Force presented
the draft guidelines and the code of Corporate Governance in April 1997 at the
National Conference and Annual Session of CII.

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10.Provisions relating to Corporate Governance under new Companies Act 2013

The word Governance is derived from the Latin Word Gubernare which means
to steer usually applying to the steering of a ship. Similarly the application of
Governance in Corporate Houses is known as Corporate Governance. The term
Governance refers to a set of systems, by which an organization is run.
Corporate Governance under the new companies act 2013 have broadened its
meaning. They are a complete module for fixing a liability on the corporate
entity. It is a landmark piece of legislation and likely to have far reaching
consequences on all companies incorporated in India. The repealed act
Companies Act, 1956 was in existence for well over fifty years and was lately
seeming quite ineffective at handling present day challenges of a growing
industry and the complexities related with the growing stakeholders’ interests
and segregation of ownership from management. These parameters relates to:

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 i. Composition of the Board/Non-Executive Directors
ii. Admitting of Woman Director
iii. Admitting of Independent Directors
iv. Directors Training and Evaluation
v. Constitution of Audit Committee
vi. Nomination and Remuneration Committee
vii. Subsidiary Companies Management
viii. Internal Audit
ix. SFIO purview
x. Risk Management Committee
xi. Compliance centre

The provisions of Companies Act with regards to Corporate Governance,

prescribe certain practices that go into building a robust corporate governance
structure. Some such provisions (sections) of the Companies Act, 2013 are
indicated below:

Section 134 (corresponds to Section 217 of Companies Act, 1956)

Section 134 provides that a report by the Board of Directors containing details
on the matters specified including directors responsibility statement shall be
attached to every financial statement laid before a company. The responsibility
statement includes that the applicable Accounting Standards have been
followed in preparing the financial statements and reporting the material
departures therefrom, that the companies follow their accounting policies
consistently, the accounts have been prepared on a going concern basis and
compliance of all applicable laws.

Section 177 (corresponds to section 292 A of Companies Act, 1956)

Section 177 provides the requirements and manner of constituting the Audit
Committee. The Audit Committee shall consist of minimum three directors with
Independent Directors forming a majority and majority members must have
ability to read and understand financial statements. The Section also provides
for a vigil mechanism in every listed and prescribed class of companies and
such mechanism shall be disclosed at the website of the company and should
be mentioned in Board’s report.

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Section 184 ( corresponds to section 299 of the Companies Act, 1956)

Section 184 provides the manner and periodicity in which the every director
shall made disclosure of his concerns or interest in any company, body
corporate, firms and parties to the contract. He concerned director should not
participate in the meeting taking the decision in such cases. The contract or
agreement entered in to by the company without disclosure shall be voidable
at the option of the company.

The 2013 Companies Act also intends to improve corporate governance by

requiring disclosure of nature of concern or interest of every director, manager,
any other key managerial personnel and relatives of such a director, manager
or any other key managerial personnel and reduction in threshold of disclosure
from 20% to 2%. The term ‘key managerial personnel’ has now been defined in
the 2013 Act and means the chief executive officer, managing director,
manager, company secretary, whole-time director, chief financial officer and
any such other officer as may be prescribed.

1. Annual return under companies act 2013

The 2013 Act states that requirement of certification by a company secretary in
practice of annual return will be extended to companies having paid up capital
of five crore INR or more and turnover of 25 crore INR or more* (section 92(2) of
2013 Act and the 1956 Act requires certification only for listed companies).

The information that needs to be included in the annual return has been
increased. The additional information required, includes particulars of holding,
subsidiary and associate companies, remuneration of directors and key
managerial personnel, penalty or punishment imposed on the company, its
directors or officers [section 92(1) of 2013 Act].

2. Place of keeping registers and returns

The 2013 Act allows registers of members, debenture-holders, any other security
holders or copies of return, to be kept at any other place in India in which more
than one-tenth of members reside [section 94(1) of 2013 Act]. The flexibility in

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the 1956 Act is limited to a place within the city, town or village in which the
registered office is situated.

3. General meetings
The 2013 Act states that the first annual general meeting should be held within
nine months from the date of closing of the first financial year of the company
[section 96(1) of 2013 Act], whereas the 1956 Act requires the first annual
general meeting to be held within 18 months from the date of incorporation.

Currently, the 1956 Act does not define business hours, which the 2013 Act now
defines as between 9 am and 6 pm. The 2013 Act states that annual general
meeting cannot be held on a national holiday whereas the annual general
meeting cannot be held on a public holiday as per the existing provisions of
section 166(2) of the 1956 Act [section 96(2) of 2013 Act].

In order to call an annual general meeting at shorter notice, the 2013 Act
requires consent of 95% of the members as against the current requirement in
the 1956 Act which requires consent of all the members [section 101(1) of 2013
Act].

The 2013 Act states that besides director and manager, the nature of concern
or interest of every director, manager, any other key managerial personnel and
relatives of such director, manager or any other key managerial personnel in
each item of special business will also need to be mentioned in the notice of the
meeting [section 102 (1) of 2013 Act]. Also, the threshold of disclosure of
shareholding interest in the company to which the business relates of every
promoter, director, manager and key managerial personnel has been reduced
from 20% to 2% [section 102 (2) of 2013 Act].

The 2013 Act states that in case of a public company, the quorum will depend
on number of members as on the date of meeting. The required quorum is as
follows:

• Five members if number of members is not more than one thousand

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• Fifteen members if number of members is more than one thousand but up
to five thousand

• Thirty members if number of members is more than five thousand

[section 103 (1) of 2013 Act]

A limit has been introduced on the number of members which a proxy can
represent. The 2013 Act has introduced a dual limit in terms of number of
members, which is prescribed as 50 members and also sets a limit in terms of
number of shares holding in the aggregate not more than 10 % of the total share
capital of the company carrying voting rights* [section 105 (1) of 2013 Act].

Further, it is relevant to note that private companies cannot impose restrictions

on voting rights of members other than due to unpaid calls or sums or lien
[section 106 (1) of 2013 Act].

Listed companies will be required to file with the ROC a report in the manner
prescribed in the rules on each annual general meeting including a
confirmation that the meeting was convened, held and conducted as per the
provisions of the 2013 Act and the relevant rules [section 121 of 2013 Act].

4. Other matters
Listed companies will be required to file a return with the ROC with respect to
the change in the number of shares held by promoters and top ten
shareholders within 15 days of such a change[section 93 of 2013 Act]. This
requirement again demonstrates the effort made towards synchronising the
requirements under the 2013 Act and the requirements under SEBI.
Additionally, on an annual basis, companies are also currently required to make
the disclosures with respect to top shareholders under the Revised Schedule VI
the 1956 Act.

The 2013 Act requires every company to observe secretarial standards specified
by the Institute of Company Secretaries of India with respect to general and
board meetings [section 118 (10) of 2013 Act], which were hitherto not given
cognisance under the 1956 Act.

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CONCULSION:

In conclusion, we can say that corporate governance is a way of life and not a
set of rules, a way of life that necessitates taking into account the stakeholders
interest in every business decision.

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