CORPORATE GOVERNANCE 2.

Interests of other stakeholders: Organisations should

recognise that they have legal and other obligations to all
"Corporate governance is the system by which business legitimate, stakeholders.
corporations are directed and controlled. The corporate
3. Role and responsibilities of the board: The board needs a
governance structure specifies the distribution of rights
range of skills and understanding - to be able to deal with
and responsibilities among different participants in the
various business issues and have the ability to review and
corporation, such as, the board, managers, shareholders
challenge management performance. It needs to be of
and other stakeholders, and spells out the rules and
sufficient size and have an appropriate level of
procedures for making decisions on corporate affairs.
commitment to fulfill its responsibilities and duties.
The Cadbury Committee on to a formula for governance There are issues about the appropriate mix of executive
progress that has become the industry standards- it and non-executive directors.
developed a list of ‘best practices’ standards to which 4. Integrity and ethical behaviour: Organisations should
companies should aspire. Among other recommendations, develop a code of conduct for their directors and
the committee opined that: executives that promotes ethical and responsible decision
 It is board’s duty to present a balanced and making.
understandable assessment of a company’s position, 5. Disclosure and transparency: Organisations should
 An objective and professional relationship with auditors clarify the role of board and management and it should be
must be ensured, convey to public. They should also implement procedures
to independently verify and safeguard the integrity of the
 An audit committee of at least three non-executive company's financial reporting. Disclosure of material
directors with written terms of reference should be matters concerning the organisation should be timely and
established, balanced to ensure that all investors have access to clear,
 It must be reported that a business is going concern. factual information. Transparency is the best principle of
corporate governance.

7.0.1 Scope of Corporate Governance 7.0.4 Role/Importance of Corporate Governance

Corporate Governance covers the following functional The role of effective corporate governance is of immense
area of governance: significance to society as a whole it can be summarized
1. Preparation of the entity's (Company) financial as follows:
statements 1. Corporate Governance ensures efficient use of resources
2. Internal controls and the independence of the entity's 2. It makes the resources flow to those sectors or entities
auditors where there are efficient production of goods and services
3. Review of the compensation arrangements for the and the return is adequate enough to satisfy the demands
chief executive officer and other senior executives of stakeholders.
4. The way in which individuals are nominated for positions 3. It provides for choosing the best managers to administer
on the board the scarce resources.
5. The resources made available to directors in carrying out 4. It helps the managers to remain focused on improving
their duties performance, making sure that they are replaced when
6. Oversight and management of risk. they fail to do so.
7.0.2 Participants to Corporate Governance 5. It pressurizes the organization to comply with the laws,
regulations and expectations of society.
Corporate Governance is concerned with governing or
regulatory body (e.g. the SEBI), the CEO, the board of 6. It assist the supervisor in regulating the entire economic
directors and management. Other stakeholders who take sector without partiality and nepotism.
part include suppliers, employees, creditors, customers 7. It increases the shareholders value which attract more
and the community at large. investors, thus Corporate Governance ensures easy access
7.0.3 Principles of Corporate Governance to capital.
Commonly accepted principles of corporate governance 8. As corporate governance leads to higher consumers
include: satisfaction thus it helps in increasing market share and
sales. Thus it also reduces the advertising and promotion
1. Rights of, and equitable treatment of, shareholders: cost.
Organisations should respect the rights of shareholders
and help shareholders to exercise those rights.
9. Employees are more satisfied in the organizations which Setting up and enforcing a clear line of authority and
follows corporate governance policies thus it reduces the responsibility:
employee turnover which results in the reduction in the
1. Ensuring that the board members are well qualified and
human resource management cost. A satisfied employee
not subject to pressure.
can only create a satisfied customer.
2. Ensuring that the board has a clear understanding of their
10. Corporate Governance reduces the procurement and
role in corporate governance
inventory cost. As it helps in maintaining good rapport
with suppliers, which results in better and economical 3. Ensuring that there is appropriate overseeing by the
inventory management system. senior management.
11. Corporate Governance helps in establishing good rapport 4. Effectively utilizing the work done by internal and
with distributors thus gives not only better access to the external auditors, in recognition of the important control
market but also reduces the distribution cost. function they provide.
So in zest we can say that on the one hand it increase the 5. Ensuring that the compensation approaches are
revenue by fetching more sales on the other hand it consistent with the bank’s ethical values, objectives,
reduces the cost in every field, so the ultimate impact will strategy and control environment.
be a big leap in bottom line.
7.3 CORPORATE GOVERNANCE IN
7.1 MECHANISM AND CONTROL INDIA
Internal corporate governance controls monitor activities In India, Corporate Governance has matured well and
and then take corrective action to accomplish today’s we have the proud privilege of New York Stock
organisational goals. Examples includes: Exchange citing Infosys Technologies, an Indian
1. Monitoring by the board of directors: The board of company, as a role model regarding disclosure of
directors, with its legal authority to hire, fire and information to shareholders. Good corporate governance
compensate top management, safeguards invested capital. is good business because it inspires investor’s
Regular board meetings allow potential problems to be confidence, which is essential in attracting capital.
identified, discussed and avoided. In India corporate governance is not a new thing, the
2. Audit committees: There should be an Audit Committee, roots of Indian working ethos is in values. Indians have
which shall have access to all financial information. never ranked the person according to wealth and power
Major role of Audit Committee is to have an oversight of but in fact they have praised standard of learning, virtue
the company’s financial reporting process and the and character which he had attained.
disclosure of its financial information to ensure that the Corporate governance initiatives in India began in
financial statement is correct, sufficient and credible. 1998 with the Desirable Code of Corporate Governance
3. Financial Reporting: Financial reporting is a crucial – a voluntary code published by the CII, and the first
element necessary for the corporate governance system to formal regulatory framework for listed companies
function effectively. Accountants and auditors are the specifically for corporate governance, established by the
primary providers of information to capital market SEBI. Which resulted in the amendment in the
participants. The directors of the company should be Companies Act to introduce effective Corporate
entitled to expect that management prepare the financial Governance in India.
information in compliance with statutory and ethical SEBI constituted a committee on corporate governance
obligations, and rely on auditors' competence. under the chairmanship of Sri
4. N.R. Narayana Murthi. The committee included
representatives from the stock exchange, chamber of
7.2 CORPORATE GOVERNANCE AND commerce and industry, investor associations and
FIRM PERFORMANCE professional bodies; debated on key issues and made
Basel Committee has issued several papers on corporate recommendations as under:
governance, where the importance of corporate 1. All audit committee member should be ‘financially
governance is emphasized. These papers suggested the literate’ at least one member should have accounting or
following practices to be avoid governance problems in related financial management expertise.
banking organization though which is applicable to all
2. Mere explanation as to why a company has followed a
organization:
different accounting standard from the prescribed
Establishing strategic objectives and setting up corporate standards will not be sufficient.
values and communicating them across the banking
3. Board members should be informed about risk
organization.
assessment and minimization procedures.
4. Board members should be trained in the business model 3. Following board committees are recommended:
of the company as well as the risk profile of the business
(a) Audit
parameters, their responsibilities as directors and the best
way to discharge them. (b) Remuneration
5. Use of proceeds of IPO should be disclosed to the audit (c) Shareholders
committee. (d) General Body
6. There shall be no nominee directors when a directors is to (e) Disclosures
be appointed on the board and such appointment shall be
made by shareholders. (f) Means of Communication.
7. Compensation paid to non-executive directors may be The Birla Committee also took note of various steps
fixed by Board of Directors, limiting the maximum taken by SEBI for strengthening corporate governance,
number of stock options that can be granted to non- some of which are:
executive directors in any financial year. 1. Stringent disclosure norms for initial Public Offers
8. performance evaluation of non-executive board 2. Providing information in directors’ reports for utilization
members should be made by a peer group comprising the of funds and variation between projected and actual use
entire board of director, excluding the director being of funds as per the requirement of the Companies Act.
evaluated.
3. Declaration of Quarterly results.
Number of provisions regarding Corporate Governance
have been inserted in Companies Act through Companies 4. Mandatory appointment of compliance officer for
(Amendment) Act, 2000. Important changes to improve monitoring share transfer process.
Corporate Governance are: 5. Timely disclosure of material and price sensitive
1. Providing for Director’s responsibility statement.[Section information having a bearing on the performance of a
217 (2AA)] company.
2. Board to report in cases where buyback was not 6. Dispatching one copy of complete balance sheet to every
completed within the time specified in sub-section (4) of household and abridged balance sheet to all shareholders,
section 77. 7. Issues of guidelines for preferential allotment at market
3. Small shareholders to get a representation through a related process, and
Director (Section 252) 8. Issue of regulations providing for a fair and transparent
4. Limitations in Directorships in companies (Section 274 & framework for takeovers and substantial acquisitions.
275)
5. Constitutions of Audit Committees. 7.4 CODE OF CONDUCT FOR
6. Providing for higher penalties (tenfold increase) for CORPORATE GOVERNANCE
offences provided in various sections of the Companies
Revised clause 49 of SEBI proscribes that there should be
Act.
a code of conduct for BOD. Part E of this clause reads as
Recommendations of the Birla Committee under:
1. ll be obligatory for the Board of a company to lay down
KM Birla Committee was a 19 member committee
the code of conduct for all board members and senior
appointed by SEBI on 7th May 1999. It submitted its
management of a company. This code of conduct should
report in 1999/2000. On the basis of this report, clause 49
be posted o the website of the company.
of the Listing Agreement was issued by the SEBI..
Clause 49 of Listing Agreement calls for the following: 2. All Board members and senior management personal
shall affirm compliance with the code on an annual basis.
1. Attendance of Each Director at the Board Meetings and
The annual report of the company shall contain a
AGM
declaration to this effect signed by the CEO and COO.
2. Appropriate mix of executive and Independent Directors
To safeguard the interest of small shareholders and
to maintain the independence of the Board: - Board of
stakeholders clause 49 has many tight provision for the
Directors should consist of a combination of executive
appointment of independent directors. Appointment of
and non- executive directors. At least 30% of the
independent director will certainly change the face of
board should consist of non executive directors if one of
Indian Corporate. To follow and implement the new law
them is chairman. The non- executive member should
Indian Corporate need huge number of independent
comprise at least 50% of the board if the chairman and
directors.
the managing director is the same member.
 To ensure corporate governance the securities and  Should not have been auditors, internal auditors, legal
Exchange Board of India (SEBI) has stipulated that advisors or consultants to the company during any of the
effective from January 2006 at least one-third of the preceding three financial years
directors on the board of a company should comprise
 Should not have been suppliers, vendors or customers of
"independent directors". Known as 'revised clause 49',
the company
SEBI has fixed the December 31, 2005 as the date by
which all the listed that all listed entities would have to  Should not hold below two per cent of the shares of the
comply with clause 49. company, presently or in past
The revised clause 49 stipulates that in companies which  Should not have held any position in the company
have executive chairmen, 50% of board should constitute  Should not have been a director for a continuous period
independent directors. For companies with non- of nine years
executive chairmen one-third of the board must comprise
independent directors.  Nominee directors of banks or FIs cannot be
The companies which will not be ensure it may have to considered independent directors Independent directors
face penalties such as suspension of trading and delisting according to SEBI's clause 49 of the listing agreement:
from the stock exchange. While SEBI can delist a
company for non-compliance, even individual stock  Should not be related to promoters or the management at
exchanges have been empowered to suspend the trading the board level or at one level below the board
of shares of defaulting companies. Acoording the clause  Should not have been a partner or an executive of the
the functions of the board of the directors now includes: statutory audit firm or an internal audit firm or legal and
 The corporate as well as the operational strategy consultancy firm, during the last three years
 Policies determining the terms of employment of the  Should not have been suppliers, service providers or
top management; its performance evaluation, customers of the company
compensation and succession, etc.
 Should hold below two per cent of the shares of the
 Determining and propagating the right values and culture company
in the organisation.
 Should not have been an executive of the company in the
 Ensuring healthy governance practices within the immediately preceeding three financial years
organisation
 Appointment of non executive director a beyond
 Ensuring co-ordination between the CEO and the top continuous period of nine years not permissible
management and balancing the relationship with various
 Nominee directors of banks or FIs will be considered as
stakeholders
independent directors
 Statutory Responsibilities
 Ensuring legal compliance with 'clause 49' of SEBI's
Table 7.1: Instructions Organization have to Follow to have
'listing agreement'
Corporate Governance
Now companies are to form various committees like a
'nomination committee', 'compensation committee',
'governance committee' and other committees like to
adhere to corporate governance.
The function of the 'compensation committee' for
instance, is to ensure credible and transparent policy in
determining and accounting for specific remuneration
packages for executive directors including pension rights
and any compensation payment. According to the new
law the nomination committee of the board to be
composed entirely of independent directors, who will be
responsible for the evaluation and nomination of board
members.
Companies Act defined the Independent Director in
following manner:
 Are not relatives of the chairman, managing director,
whole time director, or the company secretary
 88 50% of the board should comprise of non-executive
Business Environment and Ethics
directors
 If Chairman is Executive, 50% of Board consisting of
Independent Directors
 Else 1/3 of BoD should be independent
 Nominee Directors
 Information to be made available
Management Discussion and Analysis report to be attached
with annual report. The following should be covered:
 Opportunities and Threats
 Segment-wise or product-wise performance
 Outlook
 Risks and concerns
 Internal control systems and their adequacy
 Discussion on financial performance with respect to
operational performance
 Material developments in Human Resources
/Industrial Relations front, including number of people
employed

Corporate governance improves the economic efficiency

of a firm. Corporate Governance emerges from the
culture and mindset of management and cannot be
regulated legislation alone. Corporate Governance
ensures that organization works in the interest of all the
stakeholders, it ensures that corporate doesn’t work in the
favor of majority shareholders. It is about openness,
integrity and accountability. It take cares of that
management act as trustees of the shareholders at large
and prevent asymmetry of benefits between various
sections of shareholders, especially between the owner-
managers and the rest of the shareholders.