Ethics - Unit 4

Corporate Governance – Models:

vary globally, influenced by cultural, legal, and economic factors

1. Anglo-American Model:
Characteristics: Focuses on maximizing shareholder wealth, with a clear separation of
ownership and control. Independent boards and shareholder activism are
emphasized, with less government regulation.
Examples: United States, United Kingdom.
2. Continental European Model:
Characteristics: A stakeholder-oriented model, balancing the interests of
shareholders, customers, employees, and the community. Features a dual-board
system with a supervisory board and a management board. Emphasizes long-term
stability and social responsibility, with employee representation.
Examples: Germany, France.
3. Scandinavian Model:
Characteristics: Similar to the Continental European model but with a stronger focus
on employee rights and welfare. Features dual-board systems and codetermination
laws, promoting consensus-building, social welfare, and sustainability.
Examples: Sweden, Denmark.
4. Asian Model:
Characteristics: A hybrid model influenced by both Anglo-American and Continental
systems. It emphasizes long-term relationships, family-owned businesses, and strong
government oversight for economic growth.
Examples: Japan, South Korea.
5. Emerging Market Model:
Characteristics: Focuses on improving transparency, accountability, and investor
protection to attract foreign investment. It combines regulatory reforms, market
mechanisms, and cultural norms.
Examples: India, China, Brazil.
6. Global Convergence Model:
Characteristics: Reflects the global trend towards adopting best practices across
different models due to globalization and international investments. Emphasizes
transparency, accountability, and investor confidence.
Examples: Multinational corporations operating globally.

Corporate Governance – Committees:

1. Cadbury Committee – UK (1991):

Purpose: Formed to address corporate misconduct and restore investor confidence in
the UK.
Key Recommendations:
Board Composition and Independence: Advocated for a majority of independent
non-executive directors (NEDs) and separation of the chairman and CEO roles.
 Role of Directors: Emphasized fiduciary responsibility, accountability, and strategic
oversight.
Board Committees: Suggested audit, nomination, and remuneration committees,
primarily consisting of independent directors.
Financial Reporting: Encouraged clear financial reporting, adherence to accounting
standards, and robust internal controls.
Shareholder Rights: Stressed protection of shareholder rights, including voting and
participation in meetings.
Ethical Standards: Called for ethics policies, whistleblowing systems, and
measures to handle violations.
Impact: Led to the creation of the "Code of Best Practice" in 1992, influencing future
corporate governance reforms in the UK and globally.
2. Sarbanes-Oxley Act (2002) – USA:
Purpose: Enacted to address corporate scandals like Enron and WorldCom by
enhancing financial transparency and accountability.
Key Provisions:
PCAOB: Established the Public Company Accounting Oversight Board to regulate
auditors.
Auditor Independence: Restricted auditors from providing non-audit services to
their clients.
Corporate Responsibility: Required CEOs and CFOs to certify the accuracy of
financial statements, with penalties for misconduct.
Financial Disclosure: Mandated disclosure of material weaknesses in internal
controls.
Whistleblower Protection: Provided legal protection for whistleblowers reporting
fraud.
Criminal Penalties: Imposed severe penalties for corporate fraud and misconduct.
Impact: Enhanced corporate transparency, investor confidence, and global
governance reforms, though it increased compliance costs.
3. OECD Principles of Corporate Governance:
Purpose: Serve as a global reference for corporate governance practices and investor
protection.
Key Features:
Foundation for Governance: Stressed the importance of rule of law, fair
shareholder treatment, and stakeholder rights.
Shareholder Rights: Ensured shareholders' right to vote, access information, and
participate in decision-making.
Equitable Treatment: Emphasized fair treatment for all shareholders, preventing
abuse by majority shareholders.
Stakeholder Role: Acknowledged the importance of stakeholders like employees,
creditors, and customers.
Disclosure and Transparency: Advocated for accurate, timely disclosure of
financial and governance information.
Board Responsibilities: Highlighted the importance of the board in overseeing
management and ensuring ethical governance.
 Objectives: Promoted transparency, accountability, and sustainable value creation,
while guiding policymakers in governance reforms.

An Overview of Recommendations of Corporate Governance Committees in India:

1. Confederation of Indian Industry (CII) Code of Best Practices (1998)

Objective: raise the standards of corporate governance in India, promoting ethical
practices and improving transparency in corporate affairs. This would help foster
investor confidence and improve corporate performance across India.
Board Composition: The CII recommended that boards should have a mix of executive
and non-executive directors, with independent directors making up at least one-third
of the board to ensure objective decision-making.
Audit Committee: This committee should only consist of independent directors,
ensuring unbiased oversight of financial reporting and internal controls.
Remuneration Committee: A committee composed of non-executive directors should
determine the pay packages of executive directors, focusing on fairness and aligning
with the company’s performance.
Shareholder Rights: Shareholders must have the right to vote on important matters
like changes to the board and the company’s financial strategies.
Internal Controls and Risk Management: The code emphasized implementing internal
controls to safeguard against fraud and ensure operational efficiency, alongside a
comprehensive risk management framework.
Disclosure: Timely, accurate disclosure of financial and non-financial data is crucial
for maintaining transparency and informing shareholders and the public.
2. Kumar Mangalam Birla Committee on Corporate Governance (1999)
Objective: improve transparency, accountability, and disclosure practices in Indian
corporations, particularly in the wake of financial scandals and to align Indian
companies with international governance standards.
Separation of CEO and Chairman Roles: This was aimed at preventing too much power
being concentrated in one individual, ensuring better oversight of management.
Independent Directors: The committee stressed the importance of independent
directors, giving them a more active role in board decisions to bring objectivity.
Audit Committees: It was essential for audit committees to be independent and
involved in supervising the financial reporting process and internal controls.
Financial Reporting: The committee recommended improving transparency and
accuracy in financial reporting to build investor confidence and ensure regulatory
compliance.
3. Naresh Chandra Committee (2002)
Objective: improving corporate governance and financial reporting standards in India,
particularly in response to global corporate scandals, the committee focused on
bolstering accountability and enhancing transparency within Indian corporate boards.
Independent Directors: Strengthening the role of independent directors was critical
to promoting accountability and impartial decision-making in corporate governance.
Financial Reporting: The committee called for stricter requirements for financial
disclosures, ensuring that financial statements accurately reflect the company’s
performance and that external audits were rigorous.
 Audit Committees: The committee recommended enhanced functions for audit
committees to focus more on internal controls and risk management processes.
Promoting CSR: The committee encouraged companies to be more socially
responsible, urging them to disclose their social and environmental impacts as part of
their governance responsibilities.
4. Narayana Murthy Committee on Corporate Governance (2003)
Objective: restore investor confidence following a series of corporate scandals by
improving corporate governance practices. The focus was on enhancing transparency,
accountability, and board effectiveness to protect shareholder interests.
Board Composition: Recommended that at least half of a company's board members
be independent to avoid conflicts of interest and ensure that decisions are made
impartially.
Audit Committees: Suggested that audit committees should have a majority of
independent directors to ensure unbiased oversight of financial reporting and
auditing.
Transparency: The committee encouraged companies to disclose material information
quickly and comprehensively, creating trust among investors and the public.
Shareholder Engagement: Proposed mechanisms to increase shareholder
participation, especially for related-party transactions, which could potentially
benefit insiders at the expense of other shareholders.
Whistleblowing Mechanisms: Established the need for formal channels to report
unethical behavior within companies, promoting transparency and accountability.
5. Uday Kotak Committee on Corporate Governance (2017)
Objective: align Indian corporate governance practices with global standards and
emerging market dynamics. It aimed to improve governance structures, with a focus
on board composition, transparency, and risk management.
Board Composition: Suggested that top 1000 listed companies should include at
least six directors, with a mandatory one woman director and at least one
independent woman director. This was aimed at improving gender diversity and
bringing fresh perspectives to the board.
Independent Directors: The committee proposed that independent directors should
serve a five-year term with annual evaluations to ensure their independence and
effectiveness. It also suggested more active participation of independent directors in
strategic decision-making.
Related Party Transactions (RPTs): All related party transactions should be approved
by the board, with certain high-value transactions requiring shareholder approval to
prevent conflicts of interest.
Transparency: Advocated for detailed disclosures on executive remuneration, risk
management practices, and any related party transactions, aiming to increase
transparency and build trust.
Risk Management: Recommended that companies either set up dedicated risk
management committees or entrust audit committees with overseeing risk
management practices.
6. Securities and Exchange Board of India (SEBI) Committee on Corporate Governance
(2017)
 Objective: review and update corporate governance norms to reflect global best
practices and address emerging governance challenges, particularly in light of the
evolving corporate landscape and market dynamics.
Expanded Committees: SEBI's review expanded the scope of board committees to
include those focused on emerging issues like risk management, cybersecurity, and
stakeholder relations.
Quarterly Results Disclosure: To enhance transparency and help investors make more
informed decisions, the committee mandated the disclosure of consolidated
quarterly financial results.
Independent Directors: Focused on strengthening the role of independent directors,
including regular performance evaluations, training, and ensuring that directors were
held accountable for their actions.

SEBI Regulations, 2015 with Reference to Composition and Role of BOD, and Role of
Independent Directors:

play a pivotal role in shaping corporate governance in India

focus on promoting transparency, accountability, and effective governance by outlining
the composition and roles of the Board of Directors (BOD) and Independent Directors
1. Composition and Role of Board of Directors (BOD)
a. Board Composition:
Gender Diversity: All listed companies must have at least one woman director on their
board. For the top 500 listed entities, there must be at least one independent woman
director.
Mix of Executive and Non-Executive Directors: The regulations emphasize a balanced
mix, with a specified proportion of non-executive directors to ensure effective
oversight and governance.
Chairperson: The Chairperson of the Board must be non-executive to ensure a clear
separation of roles between the Chairperson and CEO, promoting better checks and
balances.
b. Minimum Number of Directors:
The SEBI (LODR) (Amendment) Regulations, 2018, increased the minimum number of
directors for the top 1000 listed entities to six (up from three), effective from April 1,
2019. This was further extended to the top 2000 listed entities by April 1, 2020.
c. Frequency of Meetings:
The Board must meet at least four times annually, with no more than 120 days
between consecutive meetings, ensuring regular oversight and timely decision-
making.
d. Compliance and Risk Management:
The Board is responsible for conducting regular reviews of compliance reports
concerning all relevant laws and regulations and addressing instances of non-
compliance.
The Board must establish risk management procedures to inform its members about
risk estimation and minimization strategies, ensuring the company's protection
against potential risks.
e. Succession Planning:
 The Board must ensure that comprehensive succession plans exist for the
appointment of new directors and senior management, promoting continuity and
stability in leadership transitions.
f. Code of Conduct:
A robust code of conduct for all Board members and senior management is
mandatory, aligning with ethical duties and fostering integrity within the company.
g. Director Compensation:
The Board is responsible for recommending the fees/compensation for non-executive
directors (including independent directors), subject to shareholder approval, ensuring
fairness and transparency.
h. Compliance Certification:
The CEO and CFO must submit compliance certificates to the Board (as per Schedule
II, Part B), ensuring that the company adheres to all regulatory requirements.
2. Role of Independent Directors
a. Objective Oversight:
Independent directors are crucial for providing impartial and objective perspectives
during the Board’s deliberations. They act as a check on the management to ensure
unbiased decision-making.
b. Balance of Power:
Independent directors help balance power on the Board by reducing the dominance
of executive directors, thus fostering a more equitable decision-making process.
c. Qualifications and Eligibility:
Independent directors must meet specific qualifications and eligibility criteria,
ensuring they are capable of fulfilling their roles effectively, free from conflicts of
interest.
d. Declaration of Independence:
Independent directors are required to provide a declaration of independence at the
time of their appointment and annually thereafter, affirming their autonomy from
management.
e. Active Participation:
Independent directors must actively participate in Board meetings and are
encouraged to convene separate meetings among themselves to discuss issues of
governance and management performance.
f. Oversight of Committees:
Independent directors play a critical role in audit committees and other Board
committees, ensuring accurate financial reporting, disclosures, and management
accountability. They are expected to safeguard the integrity of the company's
financial statements and ensure compliance with financial regulations.