0% found this document useful (0 votes)
14 views10 pages

Module 4

Corporate governance is a system that directs and controls a firm, balancing the interests of various stakeholders while ensuring transparency and accountability. The Sarbanes-Oxley Act of 2002 was enacted to protect investors from fraudulent financial reporting, mandating strict reforms in corporate governance practices. Key principles of corporate governance include fairness, transparency, risk management, responsibility, and accountability, with various models existing globally, such as the Anglo-American, Continental, and Japanese models.

Uploaded by

agarwalnaman445
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
0% found this document useful (0 votes)
14 views10 pages

Module 4

Corporate governance is a system that directs and controls a firm, balancing the interests of various stakeholders while ensuring transparency and accountability. The Sarbanes-Oxley Act of 2002 was enacted to protect investors from fraudulent financial reporting, mandating strict reforms in corporate governance practices. Key principles of corporate governance include fairness, transparency, risk management, responsibility, and accountability, with various models existing globally, such as the Anglo-American, Continental, and Japanese models.

Uploaded by

agarwalnaman445
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 10

Module 4– Business Ethics and Corporate Governance

What Is Corporate Governance?

Corporate governance is the system of rules, practices, and processes by which a


firm is directed and controlled. Corporate governance essentially involves
balancing the interests of a company's many stakeholders, such as shareholders,
senior management executives, customers, suppliers, financiers, the government,
and the community.

Since corporate governance provides the framework for attaining a company's


objectives, it encompasses practically every sphere of management, from action
plans and internal controls to performance measurement and corporate disclosure.

Governance refers specifically to the set of rules, controls, policies, and resolutions
put in place to direct corporate behavior. A board of directors is pivotal in
governance. Proxy advisors and shareholders are important stakeholders who can
affect governance.

Communicating a firm's corporate governance is a key component of community


and investor relations. For instance, Apple Inc.'s investor relations site outlines its
corporate leadership (its executive team and board of directors). It provides
corporate governance information including its committee charters and governance
documents, such as bylaws, stock ownership guidelines, and articles of
incorporation.1

Most companies strive to have exceptional corporate governance. For many


shareholders, it is not enough for a company merely to be profitable. It also must
demonstrate good corporate citizenship through environmental awareness, ethical
behavior, and sound corporate governance practices.

Benefits of Corporate Governance

 Good corporate governance creates transparent rules and controls, provides


guidance to leadership, and aligns the interests of shareholders, directors,
management, and employees.
 It helps build trust with investors, the community, and public officials.
 Corporate governance can provide investors and stakeholders with a clear
idea of a company's direction and business integrity.
 It promotes long-term financial viability, opportunity, and returns.
 It can facilitate the raising of capital.
 Good corporate governance can translate to rising share prices.
 It can lessen the potential for financial loss, waste, risks, and corruption.
 It is a game plan for resilience and long-term success.

The Principles of Corporate Governance

While there can be as many principles as a company believes make sense, some of
the more well-known include the following.

Fairness
The board of directors must treat shareholders, employees, vendors, and
communities fairly and with equal consideration.

Transparency
The board should provide timely, accurate, and clear information about such things
as financial performance, conflicts of interest, and risks to shareholders and other
stakeholders.

Risk Management
The board and management must determine risks of all kinds and how best to
control them. They must act on those recommendations to manage them. They must
inform all relevant parties about the existence and status of risks.

Responsibility
The board is responsible for the oversight of corporate matters and management
activities. It must be aware of and support the successful, ongoing performance of
the company. Part of its responsibility is to recruit and hire a CEO. It must act in
the best interests of a company and its investors.

Accountability
The board must explain the purpose of a company's activities and the results of its
conduct. It and company leadership are accountable for the assessment of a
company's capacity, potential, and performance. It must communicate issues of
importance to shareholders.
Corporate Governance Models

The Anglo-American Model


This model can take various forms, such as the Shareholder Model, the Stewardship
Model, and the Political Model. However, the Shareholder Model is the principal
model.

The Shareholder Model is designed so that the board of directors and shareholders
are in control. Stakeholders such as vendors and employees, though acknowledged,
lack control.

Management is tasked with running the company in a way that maximizes


shareholder interest. Importantly, proper incentives should be made available to
align management behavior with the goals of shareholders/owners.

The model accounts for the fact that shareholders provide the company with funds
and may withdraw that support if dissatisfied. This can keep management working
efficiently and effectively.

The board should consist of both insiders and independent members. Although
traditionally, the board chairman and the CEO can be the same person, this model
seeks to have two different people hold those roles.

The success of this corporate governance model depends on ongoing


communications between the board, company management, and the shareholders.
Important issues are brought to shareholders' attention. Important decisions to be
made are put to shareholders for a vote.

U.S. regulatory authorities tend to support shareholders over boards and executive
management.

The Continental Model


Two groups represent the controlling authority under the Continental Model. They
are the supervisory board and the management board.

In this two-tiered system, the management board is comprised of company insiders,


such as its executives. The supervisory board is made up of outsiders, such as
shareholders and union representatives. Banks with stakes in a company also could
have representatives on the supervisory board.

The two boards remain completely separate. The size of the supervisory board is
determined by a country's law. It can't be changed by shareholders.
National interests have a strong influence on corporations with this model of
corporate governance. Companies can be expected to align with government
objectives.

This model also considers stakeholder engagement of great value, as they can
support and strengthen a company’s continued operations.

The Japanese Model


The key players in the Japanese Model of corporate governance are banks, affiliated
entities, major shareholders called Keiretsu (who may be invested in common
companies or have trading relationships), management, and the government.
Smaller, independent, individual shareholders have no role or voice.

Together, these key players establish and control corporate governance.

The board of directors is usually comprised of insiders, including company


executives. Keiretsu may remove directors from the board if profits wane.

The government affects the activities of corporate management via its regulations
and policies.

In this model, corporate transparency is less likely due to the concentration of power
and the focus on interests of those with that power.

S.NO COMMITTEE COUNTRY DATE OF SUBMISSION

1 Cadbury England 1992

2 King committee South of africa 1994 & 2002

3 CII India 1996

4 Hampel England 1998

5 Kumar manglam India 2000

birla

6 Naresh chandra India 2002

7 N. R. Narayana India 2003

Murthy
What Is the Sarbanes-Oxley (SOX) Act of 2002?

The Sarbanes-Oxley Act of 2002 is a law the U.S. Congress passed on July 30 of
that year to help protect investors from fraudulent financial reporting by
corporations.1 Also known as the SOX Act of 2002, it mandated strict reforms to
existing securities regulations and imposed tough new penalties on lawbreakers.

The Sarbanes-Oxley Act of 2002 came in response to financial scandals in the early
2000s involving publicly traded companies such as Enron Corporation, Tyco
International plc, and WorldCom.2 The high-profile frauds shook investor
confidence in the trustworthiness of corporate financial statements and led many to
demand an overhaul of decades-old regulatory standards.

Understanding the Sarbanes-Oxley (SOX) Act

The rules and enforcement policies outlined in the Sarbanes-Oxley Act of 2002
amended or supplemented existing laws dealing with security regulation, including
the Securities Exchange Act of 1934 and other laws enforced by the Securities and
Exchange Commission (SEC).5 The new law set out reforms and additions in four
principal areas:

1. Corporate responsibility
2. Increased criminal punishment
3. Accounting regulation
4. New protections

 The report of various committees helped a lot to streamline the corporate


throughout the world. Some of the Committees with its formation is given
under the following table-

Major Provisions of the Sarbanes-Oxley (SOX) Act of 2002

The Sarbanes-Oxley Act of 2002 is a complex and lengthy piece of legislation.


Three of its key provisions are commonly referred to by their section numbers:
Section 302, Section 404, and Section 802.1

Section 302 of the SOX Act of 2002 mandates that senior corporate officers
personally certify in writing that the company's financial statements comply with
SEC disclosure requirements and "fairly present in all material respects the financial
condition and results of operations of the issuer" at the time of the financial report.
Officers who sign off on financial statements that they know to be inaccurate are
subject to criminal penalties, including prison terms.

Section 404 of the SOX Act of 2002 requires that management and auditors
establish internal controls and reporting methods to ensure the adequacy of those
controls. Some critics of the law have complained that the requirements in Section
404 can have a negative impact on publicly traded companies because it's often
expensive to establish and maintain the necessary internal controls.

Section 802 of the SOX Act of 2002 contains the three rules that affect
recordkeeping. The first deals with destruction and falsification of records. The
second strictly defines the retention period for storing records. The third rule
outlines the specific business records that companies need to store, which includes
electronic communications.

Besides the financial side of a business, such as audits, accuracy, and controls, the
SOX Act of 2002 also outlines requirements for information technology (IT)
departments regarding electronic records. The act does not specify a set of business
practices in this regard but instead defines which company records need to be kept
on file and for how long. The standards outlined in the SOX Act of 2002 do not
specify how a business should store its records, just that it's the company IT
department's responsibility to store them.

Cadbury Report
The Cadbury Committee was established in 1991 in the UK to address concerns over
corporate governance practices following several high-profile corporate scandals. Its
report, published in 1992, focused on the financial aspects of corporate governance
and aimed to improve transparency, accountability, and financial reporting in
companies. Some of the major recommendations from the Cadbury Committee
include:

 Board Structure: The report emphasized the need for a balanced board with a
mix of executive and non-executive directors. Non-executive directors, who
are independent, should play a significant role in ensuring objective decision-
making.
 Separation of Roles: The Cadbury Report recommended that the roles of the
Chairperson and the Chief Executive Officer (CEO) should be separated to
prevent concentration of power and ensure proper checks and balances.
 Audit Committees: Companies should establish audit committees composed
of independent non-executive directors. This committee would ensure the
integrity of financial statements and maintain transparency in financial
reporting.
 Financial Reporting: The report advocated for companies to present an
accurate and fair view of their financial performance. Internal controls should
be strengthened to prevent financial fraud or misrepresentation.
 Accountability of Directors: Directors should be accountable to shareholders
and other stakeholders, with clear responsibilities for monitoring performance
and making decisions in the best interest of the company.
 Regular Disclosure: The report recommended regular and timely disclosures
of financial information to ensure transparency and build shareholder
confidence.
 Shareholder Rights: The report also highlighted the importance of protecting
shareholder rights, ensuring that they have access to information and the
ability to participate in decision-making through voting on key corporate
matters.
The Cadbury Report laid the foundation for modern corporate governance codes
globally, influencing practices that ensure companies operate transparently and
responsibly.
Naresh Chandra Committee Report (2009)

 The Naresh Chandra committee was appointed in August 2002 by the


Department of Company Affairs (DCA) under the Ministry of Finance and
Company Affairs to examine various corporate governance issues.
 The Committee submitted its report in December 2002.
 It made recommendations in two key aspects of corporate governance:
financial and non-financial disclosures: and independent auditing and board
oversight of management.
 The salient recommendations are as follows:
 Creation of a new post of Intelligence Advisor to assist the NSA and the
National Intelligence Board on matters relating to coordination in the
functioning of intelligence committee.
 Amendment to Prevention of Corruption Act to reassure honest officers, who
take important decisions about defense equipment acquisition, so that they are
not harassed for errors of judgment or decision taken in good faith.
 A permanent Chairman of the Chiefs of Staff Committee .
 Expediting the creation of new instruments for counter-terrorism, such as the
National Intelligence Grid and National Counter Terrorism Centre.
 Deputation of officers from services up to director's level in Ministry of
Defense.
 Measures to augment the flow of foreign language experts into the intelligence
and security agencies, which face a severe shortage of trained linguists.

N. R. Narayana Murthy Committee Report (2003)


 With the belief that the efforts to improve corporate governance standards in
India must continue because these standards themselves were evolving in
keeping with the market dynamics, the Securities and Exchange Board of
India (SEBI) had constituted a Committee on Corporate Governance in 2002
, in order to evaluate the adequacy of existing corporate governance practices
and further improve these practices. It was set up to review Clause 49, and
suggest measures to improve corporate governance standards.
The SEBI Committee was constituted under the Chairmanship of Shri N. R.
Narayana Murthy, Chairman and Chief Mentor of Infosys Technologies Limited.
The Committee comprised members from various walks of public and professional
life. This included captains of industry, academicians, public accountants and people
from financial press and industry forums.
The issues discussed by the committee primarily related to audit committees, audit
reports:
 independent directors
 related parties
 risk management
 directorships and director compensation
 codes of conduct and financial disclosures.
 The committee's recommendations in the final report were selected based on
parameters including their relative importance, fairness, accountability and
transparency, ease of implementation, verifiability and enforceability
 Mandatory Recommendations-
Strengthening the responsibilities of audit committees.
Improving the quality of financial disclosures, including those related to related
party transactions and proceeds from initial public offerings.
Requiring corporate executive boards to assess and
disclose business risks in the annual reports of companies.
Introducing responsibilities on boards to adopt formal codes of conduct; the
position of nominee directors.
Stock holder approval and improved disclosures relating to compensation paid to
non-executive directors.
 Non-Mandatory recommendations-
Moving to a regime where corporate financial statements are not qualified.
Instituting a system of training of board members.
Evaluation of performance of board members.

The Organization for Economic Co-operation and Development (OECD)

The OECD Principles are as much trend-setters as the Codes of Best Practices
associated to the Cadbury Report. A useful first step in creating or reforming the
corporate governance system is to look at the principles laid out by the OECD and
adopted by its member governments. In summary, they include the following
elements:
1. The rights of shareholders: The rights of shareholders include a set of rights to
secure ownership of their shares, the right to full disclosure of information, voting
rights, participation in decisions on sale or modification of corporate assets, mergers
and new share issues. The guidelines go on to specify a host of other issues
connected to the basic concern of protecting the value of the corporation
2. Equitable treatment of shareholders: The OECD is concerned with protecting
minority shareholders' rights by setting up systems that keep insiders, including
managers and directors, from taking advantage of their roles. Insider trading, for
example, is explicitly prohibited and directors should disclose any material interest
regarding transactions.

3. The role of stakeholders in corporate governance: The OECD recognizes that there
are other stake holders in companies in addition to shareholders. Banks, bondholders
and workers, for example, are important stakeholders in the way in which companies
perform and make decisions. The OECD guide lines lay out several general
provisions for protecting stakeholder's interests,
4. Disclosure and transparency: The OECD lays down a number of provisions for
the disclosure and communication of key facts about the company ranging from
financial details to governance structures including the board of directors and their
remuneration. The guidelines also specify that independent auditors in accordance
with high quality standards should perform annual audits.
5. The responsibilities of the board: The OECD guidelines provide a great deal of
details about the functions of the board in protecting the company and its
shareholders. These include concerns about corporate strategy, risk management,
executive compensation and performance as well as accounting and reporting
systems.

You might also like