CORPORATE GOVERNANCE

Ch-1- Conceptual Framework of

Corporate Governance
MBA SEM III
2021-23 Batch
 Corporate
 Governance
 Definition of corporate governance
 Objectives
 Aim, Purpose, Scope
 Importance
 Reasons for growing need and demand
 History of CG in India
 Framework
 Principles
 Board responsibilities
 Conclusion.
 A corporation is an organization
created (incorporated) by a
group of shareholders who have
ownership of the corporation.
 The elected board of directors
appoint and oversee
management of the corporation .
 Oxford English dictionary defines “governance "as the
act, manner , fact or function of governing sway control.
 The word has Latin origins that suggest the notion of
“steering". it deals with the processes and systems by
which an organization or society operates.
 Governance can be used with reference to all kind of
organizational structure .
 “A system of law and sound
approaches by which
corporations are directed and
controlled focusing on the
internal and external
corporate structures with the
intention of monitoring the
actions of management and
directors and thereby
mitigating agency risks which
may stem from the misdeeds
of corporate officers”.
 Strengthen management oversight functions and
accountability.
 Balance skills, experience and independence on the
board appropriate to the nature and extent of company
operations.
 Establish a code to ensure integrity.
 Safeguard the integrity of company reporting.
 Risk management and internal control.
 Disclosure of all relevant and material matters.
 Recognition and preservation of needs of shareholders.
 The governance framework is there to encourage the
efficient use of resources and equally to require
accountability for the stewardship of those resources.
The aim is to align as nearly as possible the interests of
individuals, corporations, and society.
The incentive to corporations and to those who own and
manage them to adopt internationally accepted
governance standards is that these standards will help
them to achieve their corporate aims and to attract
investment.
The incentive for their adoption by states is that these
standards will strengthen the economy and discourage
fraud and mismanagement.
 Shapes the growth and future of capital market &
economy.
 Instrument of investor’s protection.
 Protecting the interest of Shareholders and all other
stakeholder.
 Contributes to the efficiency of the business
enterprise.
 Creation of wealth.
 Enables firm to compete internationally in sustained
way.
 Keeps an eye on the issues of insider training.
 BRIEF HISTORY OF CORPORATE
GOVERNANCE IN INDIA

 The Securities and Exchange Board of India (SEBI)

set up a committee under Kumar Mangalam Birla to
design a mandatory-cum-recommendatory code for
listed companies
 The Birla Committee Report was approved by SEBI
in December 2000
 Became mandatory for listed companies through
the listing agreement, and implemented according
to a rollout plan.
 Following CII (Confederation of Indian
Industry) and SEBI, the Department of Company
Affairs (DCA) modified the Companies Act, 1956
to incorporate specific corporate governance
provisions regarding independent directors and
audit committees.

 In 2001-02, certain accounting standards were

modified to further improve financial disclosures.
These were:
• Disclosure of related party transactions.
• Disclosure of segment income: revenues,
profits and capital employed.
• Deferred tax liabilities or assets.
• Consolidation of accounts.
 Supervisory board/committee/team
 Audit committee
 Internal audit
 Statutory audit
 Disclosure of information
 Risk management framework
 Internal control framework
 Board of directors
 Managers
 Workers
 Shareholders or owners
 Regulators
 Customers
 Suppliers
 Community.
 Rights and equitable treatment of share holders.
 Interests of other stakeholders.
 Role and responsibilities of the board.
 Integrity and ethical behavior.
 Disclosure and transparency.
 Every listed company should be headed by an effective
board which should lead and control the company.
 There should be board balance of executive & non
executive directors such that no individual can dominate
the board decision making.
 The board should be supplied with timely information to
enable it to discharge its duties.
 There should be formal and transparent procedure for
the appointment of new directors to the board.
 All directors should be required to submit themselves for
re-election at regular intervals and at least every three
years.
 Demand for greater transparency and accountability
 Written job descriptions detailing roles and responsibilities
of chairman and board members.
 Development of performance criteria and annual
evaluations of the board.
 Orientation for new members.
 Ongoing training
 Succession planning
 Corporate
Governance
Accountability

Responsibility
Transparency

Fairness
Elements of Good Corporate
Governance
ACCOUNTABILITY
Clarifying governance roles & responsibilities, and
supporting voluntary efforts to ensure the alignment of
managerial and shareholder interests and monitoring by
the board of directors capable of objectivity and sound
judgment.

TRANSPARENCY
Requiring timely disclosure of adequate information
concerning corporate financial performance
RESPONSIBILITY
Ensuring that corporations comply with relevant laws and
regulations that reflect the society’s values

FAIRNESS
Ensuring the protection of shareholders’ rights and the
enforceability of contracts with service/resource providers
Best Governed Companies
 Agency theory in corporate governance is an extension of
the agency theory discussed above. It relates to a specific
type of agency relationship that exists between the
shareholders and directors/management of a company. The
shareholders, true owners of the corporation, as principals,
elect the executives to act and take decisions on their
behalf. The aim is to represent the views of the owners and
conduct operations in their interest. Despite this clear
rationale of electing the board of directors, there are a lot of
instances when complicated issues come up and the
executives, knowingly or unknowingly, take decisions that
do not reflect shareholders’ best interest. In the dynamic
business environment, the agency theory of corporate
governance has garnered a lot of attention and is seen and
evaluated from different points of view.
 The steward theory states that a steward protects
and maximises shareholders wealth through firm
Performance. Stewards are company executives
and managers working for the shareholders,
protects and make profits for the shareholders.
The stewards are satisfied and motivated when
organizational success is attained. It stresses on
the position of employees or executives to act
more autonomously so that the shareholders’
returns are maximized. The employees take
ownership of their jobs and work at them
diligently.
 Corporate form of business is generally
managed by the Board of Directors and
the board members are elected by
shareholders. The board in turn appoints
the professional managers to manage the
business. Different countries have
different regulations and corporate
governance models differ based on
these differences.
 Anglo-American Model
 Under the Anglo-American Model of corporate governance, the
shareholder rights are recognised and given importance. They
have the right to elect all the members of the Board and the Board
directs the management of the company. It is the basis of
corporate governance in Britain, Canada, America, Australia and
Common Wealth Countries including India
 Directors are rarely independent of management
 Companies are run by professional managers who have
negligible ownership stake. There is clear separation of ownership
and management.
 Institution investors like banks and mutual funds are portfolio
investors. When they are not satisfied with the company’s
performance they simple sell their shares in market and quit.
 The disclosure norms are comprehensive and rules against the
insider trading are tight
 The small investors are protected and large investors are
discouraged to take active role in corporate governance.
 This is also called European Model. It is believed that
workers are one of the key stakeholders in the company and
they should have the right to participate in the management
of the company. The corporate governance is carried out
through two boards, therefore it is also known as two-tier
board model. These two boards are:
 Supervisory Board: The shareholders elect the members of
Supervisory Board. Employees also elect their
representative for Supervisory Board which are generally
one-third or half of the Board.
 Board of Management or Management Board: The
Supervisory Board appoints and monitors the Management
Board. The Supervisory Board has the right to dismiss the
Management Board and re-constitute the same.
 Japanese companies raise significant part of
capital through banking and other financial
institutions. Since the banks and other
institutions stakes are very high in
businesses, they also work closely with the
management of the company. The
shareholders and main banks together
appoint the Board of Directors and the
President. In this model, along with the
shareholders, the interest of lenders is
recognised.
 Committee # . N.R. Narayana Murthy Committee (2003):
 SEBI constituted this Committee under the chairmanship of N.R. Narayana Murthy,
chairman and mentor of Infosys, and mandated the Committee to review the
performance of corporate governance in India and make appropriate recommendations.
The Committee submitted its report in February 2003.
 The main items of Committee recommendations are as follows:
 (a) Persons should be eligible for the office of non-executive director so long as the term
of office did not exceed nine years (in three terms of three years each, running
continuously).
 (b) The age limit for directors to retire should be decided by companies themselves.
 (c) All audit committee members shall be non-executive directors. They should be
financially literate and at least one member should have accounting or related financial
management expertise.
 (d) Audit committee of listed companies shall review mandatorily the information, viz.:
 (i) Financial statements and draft audit reports,
 (ii) Management discussion and analysis of financial condition and operating results,
 (iii) Risk management reports,
 (iv) Statutory auditors’ letter to management regarding internal control weaknesses, and
 (v) Related party transactions.
 Committee # . J.J. Irani Committee (2005)
 The J.J. Irani Committee was constituted by the Government of India in December, 2004 to evaluate the
comments and suggestions received on ‘concept paper’ and provide recommendations to the
Government in making a simplified modern law. The Committee submitted its report to the
Government in May 2005, which is under consideration till date.
 The main features of its recommendations pertaining to corporate governance are as follows:
 (a) The (new) company law should provide for minimum number of directors necessary for various
classes of companies. There need not be any limit to the maximum numbers of directors in a company.
This should be decided by the companies or by its Articles of Association. Every company should
have at least one director resident in India to ensure availability in case of any issue regarding
accountability of the board.
 (b) Both the managing director as also the whole time directors should not be appointed for more than
five years at a time.
 (c) No age limit may be prescribed in the law. There should be adequate disclosure of age of the
directors in the company’s document. In case of a public company, appointment of directors beyond a
prescribed age (say) seventy years should be subject to a special resolution passed by the
shareholders.
 (d) A minimum of one-third of the total strength of the board as independent directors should be
adequate, irrespective of whether the chairman is executive or non-executive, independent or not. A
director to be independent should satisfy certain conditions laid down by the Committee.
 (e) The total number of directorships, any one individual may hold, should be limited to a maximum of
fifteen.