UNIT 5

Unit 5 – Corporate Governance 1

 UNIT 5: CORPORATE
GOVERNANCE
Meaning and importance,
Composition of BODs, Role of
independent directors, Benefits of
good corporate governance, Present
scenario in India, reforming Board
of Directors, Birla Committee,
Naresh Chandra Committee,
Narayana Murthy Committee,
Corporate Governance code,
Future scenario.
Unit 5 – Corporate Governance 2
 MEANING OF CORPORATE
GOVERNANCE
Meaning:
“Corporate Governance is a set of processes, customs,
policies, laws and institutions affecting the way a
corporation is directed, administered or controlled.”
 It includes relationship among stakeholders involved and
goals for which corporation is governed.
 The principal stakeholders are:
• Shareholders * Employees * Suppliers
• Management * Customers * Regulations
• Board of Directors * Creditors * Community at
large.
 It is to ensure accountability of individuals in organization
through mechanisms to eliminate problem. 3
 The term “governance” means control i.e. controlling a
company, an organization etc or a company & corporate
governance is governing or controlling the corporate bodies i.e.
ethics, values, principles, morals.
Definition:
“Corporate governance is the system by which companies are
directed and controlled. It encompasses the entire mechanics of
the functioning of a company and attempts to put in place a
system of checks and balances between the shareholders,
directors, employees, auditor and the management.”
“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”.

Unit 5 – Corporate Governance 4

 NATURE OF CORPORATE
GOVERNANCE
The three theories involved are:
1. The Property Rights and Social Institution Theories:
- earlier there was joint stock company, where a small
group of locally people pooled their money for some
venture that they could not finance individually.
- the corporate form of business organization is justified on
the grounds that it represents an extension of property
rights and right of contract enjoyed by everyone.
- the social institution theory emphasizes that a corporation
is not merely a private association created for purpose of
personal enrichment but also a public enterprise to serve
some large social good.
Unit 5 – Corporate Governance 5
 2. The Contractual Theory (Nexus of Contracts Theory):
- dominates thinking in financial economics and corporate
law.
- firms exist as less costly alternatives to market transactions.
- coordination can be achieved more cheaply by organizing
economic activity in firms; two forms of economic
coordination are firms and markets – choice between them is
determined by transaction costs.
- the firm is a market where parties with economic assets
contract with the firm to deploy these assets in productive
activity.
- individuals will choose to deploy their assets in a firm
instead of the market, when the lower transaction costs of
firm combined with benefits of team production yield them a
higher return.
Unit 5 – Corporate Governance 6
 3. Stakeholder Theory:
- the contractual theory supports a stockholder centered
conception of the corporation. Alternative view is
stakeholder theory.
- corporations are operated or ought to be operated in this
theory is for the benefit of all those who have a stake in
enterprise like employees, customers, suppliers and local
community.
- two models involved here are:
i) Input – Output Model.
ii) Stakeholder Model.
- the firm results from property rights and right of contract
of every constituency and not from those of shareholders
alone.
Unit 5 – Corporate Governance 7
 Corporate Governance Issues:
“Corporate means legally united into a body so as to act as
an individual.”
“Governance is control or direction.”
- the both out together brings many different groups for the
purpose of conducting business. Managers

Employees
Brings Different For
Corporation together Groups conducting
Business
Suppliers
Companies develop formal systems of
Customers
 Accountability.
 Oversight. Investors
 Control, etc.
Unit 5 – Corporate Governance 8
 Perceptions and Elements of Corporate Governance
pertaining to Ethical Decision Making:
[Stakeholder Model]
This adopts a broader view of the purpose of
Perceptions business that includes satisfying the concerns of
of Corporate other stakeholders/employees, suppliers, government
Governance regulators to communities, special interest groups.
[Shareholder Model]
Found in classic economic percepts (maximization of
wealth for investors and owners)
Role of BODs
Members of a public corporation BODs assume legal
responsibility for the firm’s resources and decisions.
Elements of CG Important issues related are accountability,
pertaining to transparency, independence.
Executive compensation
ethical decision Responsible for appointing and setting the
making compensation for top executive officers, a controversial
topic, Executive pay may centre on often
disproportionate relationship between highest paid
Unit 5 – Corporate Governance executive and median employee wages in company. 9
Definition of Stakeholders:
“Stakeholders are groups who are vital to the survival and
success of the corporation; or groups or individual who can
affect or are affected by the achievements of the
organization objectives.”
- relation of each stakeholder group is different; each of
these constituencies is integral to operation of a
corporation. Input I
Input – Output Model: Investors

Input 2 Output to
Suppliers Company customers
 Goods & Services
 Information
As a source of Input 3  What customers give and
labour Employees receive is result of market
Unit 5 – Corporate Governance exchange. 10
 Uses of the Stakeholder Model:
Governments Investors Political group

Suppliers Company Customers

Trade Employees Communities

Associations
 Descriptive – instrumental and normative.
 This model can be used as description of corporation to
understand corporation by all concerned.
 It is a tool for managers and to handle stakeholder
relations in right way and that may lead to ultimate goals.
 This model can be used as normative account of how
corporations to break their various stakeholders groups.
Unit 5 – Corporate Governance 11
 Corporation attempt to achieve ends: Many individuals

As an organizational Attempt to achieve

Corporation Entity through which their ends

Principles of Corporate Governance: Many groups

1. Rights and equitable treatment of shareholders –

organization should respect rights of shareholder and to
exercise those rights.
2. Interests of other stakeholders – should recognize that
they have legal, contractual, social and market driven
obligations to non – shareholder or stakeholders like
employees, investors, creditors, suppliers, customers and
policy makers.

Unit 5 – Corporate Governance 12

 3. Role and responsibilities of the board – it need sufficient
relevant skills and understanding to review and challenge
management performance.
4. Integrity and ethical behaviour – it should be fundamental
requirement in choosing corporate officers and board
members. It should develop a code of conduct for their
directors and executives that promotes ethical and
responsible decision making.
5. Disclosure and transparency – it should clarify and make
publicly known the roles and responsibilities of board and
management to provide stakeholders with level of
accountability.
- disclosure of materials matter concerning the organization
should be timely and balanced to ensure that all investors
have access to clear, factual information.
Unit 5 – Corporate Governance 13
 SCOPE OF CORPORATE
GOVERNANCE For firm’s resources and
Elements of Corporate Governance:
Role of Assumes legal
BODs responsibility Decisions
Elements Highly paid
of CG executives
relating
Executive
to Ethical
Compensation
Centers on often Medium
disproportionate employees
relationship between holders
Important issues related to corporate board of directors are:
 Accountability.
 Transparency.
 Independence.
Unit 5 – Corporate Governance 14
Ethical Decision making:
The structure of decision making involve the determination
and weighing of four factors:
a) The end – outcome sought.
b) The means – the methods employed.
c) The motive – the urge makes the decision necessary in the
first place.
d) The foreseeable consequences.
Some of the industry in India doesn’t have improvement in
place based on –
 Bringing higher standard of living to the local people.
 Providing opportunities.
 Providing skill.
 Producing quality products at a competitive price.
 Products used by local people also to meet requirements. 15
Components of Decision Making:
“Ethical issues intensity is defined as the importance of the
ethical issue in the eyes of the individual, work group,
organization.”
- it reflects the ethical sensitivity of the latter that faces the
ethical decision making process.
Some of the components are:
1. Ethical issues – individuals or work group choose among
several actions that will be evaluated as ethical or unethical.
2. Individual factors – ethical issues are perceived differently
by every individuals. It is based on their own values and
principles of right or wrong.
3. Organizational factors – organization value have greater
influence on individuals decisions than person’s own value.
Organizational culture and structure operate through
individual relationships of organization. 16
 4. Ethical opportunity – it results from certain conditions
like, i) provide rewards (internal or external) and ii) limit
barriers to ethical or unethical behaviour.
- it include person’s immediate job context (i.e.)
motivational techniques to influence employee behaviour).
Moral philosophy:
“It is a set of principles setting forth what is believed to be
the right way to behave.”
“Role is moral conforms to a standard of acceptability.”
“Philosophy is a study of general principles of a subject
such as morality.” Believers in
Utilitarian philosophy seeks the
greatest satisfaction
Moral for largest no. of
Philosophy individuals
Humanistic
Unit 5 – Corporate Governance 17
 Suggestions for Ethical Decision Making:
i) Top management can improve behaviour:
- it is necessary to set standards and establish ethical
principles to be implemented within the organization.
- the reason behind slow process in decision making is lack
of understanding of developing the moral philosophies.
ii) Codes of Ethics improves decision making:
- establishing code of ethics and corporate policies will
foster ethical decision making by reducing opportunity for
unethical activity.
- establishment of corporate policies and code of ethics
helps employees understand what is expected of them.
- sometime what a prompt a person to engage in unethical
behaviour may reverse the current trend towards unethical
activity in business.
Unit 5 – Corporate Governance 18
 iii) Interaction with peers and other colleagues:
- people learn ethical behaviour from interacting with
individuals in social, business and other groups.
- it examine the structure to see how policies, rewards and
punishments affect ethical behaviour.
* Code of ethics – formal statement of what company
expects from its employees to encourage ethical behaviour,
to eliminate opportunities for unethical behaviour.
iv) Control System:
- it is to maintain ethical behaviour, its policies, rules and
standards must be worked into its control system.
No. of not making Ethical then company
to Why?
Employees Decisions investigate
Take
Strengthen the Corrective
Unit 5 – Corporate Governance standards and policies Action 19
 Ethical Issues that arise for Managers and
Difficulties in Decision making:
It arises for managers are indeed of all people,
including employees, customers, consumers and
members of the public.
It affects all and so conduct of business is matter
for concern for everyone in ethical manner.
Ethical issues will be examining are those
considered by managers in ordinary course of their
work.
Sometime ethical issues in business are closely tied
to important matters of public policy and judicial
process of government.
Unit 5 – Corporate Governance 20
 How to use Ethical reasoning and levels of decision making
and Business decision making?
The guidelines should help corporate managers and
employees –
- identify the nature of ethical problem.
- decide which course of action is likely to produce the
most ethical results.
Three methods of ethical reasoning are:
a) utilitarian. b) rights. c) justice.
 Ethical issues involves strategic level decisions and actions
taken by BOD, owners, top executives and other higher
level authority.
 It involve shareholder rights, executive compensation,
BOD composition and structure, CEO selection, financial
reporting, board elections, organization ethics program, etc.21
Unit 5 – Corporate Governance
 Issues in Corporate Governance:
Auditing of Corporate Governance.
Controlling of Corporate Governance.
Rights of Shareholders.
Compensation to the executives.
Integrity in Financial reports.
Input to decisions and participations of stakeholders.
Ethical programs in organization.
Board decisions and the role of CEO.
Risk management.
Corporate Governance reforms with compliance.
Decisions on selection and termination of CEO.
Structure of BODs.
Composition of BODs.
Unit 5 – Corporate Governance 22
  Corporate Governance relatively free from scrutiny, risk, strategic
direction, rights of shareholders, change in technology brought
new attention to issues like transparency and other decision
making.
 It has two perception – i) include wealth maximization of both
investors and owners and ii) satisfying the employees,
stakeholders, special interest groups and government regulators.
 It has two major elements – a) ethical decision making are role of
executive compensation and ii) BOD and their responsibility.
 Some of the pressures on accountant due to fraud issues on
financial position are: Time, Reduced fees, Client request to alter
options and Increased Competition.
 Code of ethics defines the responsibilities of clients and public
interest are –
* concepts of integrity. * objectivity.
* independence. * due care.
Unit 5 – Corporate Governance 23
 FACTORS INFLUENCING CORPORATE
GOVERNANCE
1. Ownership Structure:
- it is to determine how a corporation is managed and
controlled.
- it is characterized by co-existence of state owned, private and
multinational enterprises.
- large shareholders are active in this CG structure.
2. Structure of Company Boards:
- structure of company boards influence on the way the
companies are managed and controlled.
- BOD are responsible for corporate objectives, developing
policies and selecting top level executives.
- this board ensure that company and shareholder’s interest are
protected.
- this is vary in size, composition and structure to serve the
interest of corporation and shareholders. 24
 3. Financial Structure:
- structure of ownership matters in CG is notion of
financial structure of company. (i.e.) proportion
between debt and equity has implications for quality
of governance.
- financial structure of firm has no relationship to
the value of the firm.
- it has no significant influence on way a company
is managed and controlled.
- it can perform the function of screening and
monitoring companies than other investors.
- it is most favourable role than other investors in
reducing the costs of financial distress.
Unit 5 – Corporate Governance 25
 CORPORATE GOVERNANCE
MODELS
1. Continental Europe:
- it requires two – tiered BOD as a means of improving
corporate governance.
- Executive board runs day – to – day operations while
supervisory board made up entirely non – executive directors
who represent shareholders and employees, determines their
compensation and reviews major business decisions.
2. India:
- SEBI committee on CG defines “as the acceptance by
management of inalienable rights of shareholders as true
owners of corporation and their own role as trustees on behalf of
shareholders.
- it is commitment to values, business conduct and distinction
between personal and corporate funds in management of
company. Unit 5 – Corporate Governance 26
 3. Unites States, United Kingdom:
- “Anglo – American model” of CG emphasizes interests of
shareholders.
- it relies on single – tiered BOD that is normally dominated
by non – executive directors.
- it include some executives from company, non –
executives expected to hold key posts like audit and
compensation committees.
- corporations are directly governed by state laws, while
exchange of securities in corporations is governed by
federal legislation.
- US States adopted Model Business Corporation Act,
dominant state law for publicly traded corporations, which
continues to be place of incorporation for majority of
traded corporations.
Unit 5 – Corporate Governance 27
 COMPOSITION OF BOARD OF
DIRECTORS
Board managers manage the corporation’s business and
meet few times in a year which precludes them managing
the business effectively.
BOD are to monitor decisions made by executives on
behalf of company.
They should have sufficient qualification, experience and
knowledge.
Individual directors can represent multiple companies
because of their reputation earned for going with top
management at many places.
They provide opportunity to address issues before they are
converted as problems.
Unit 5 – Corporate Governance 28
 Some of the issues are:
 The kind of accounting information that is collected.
 The use to which the accounting information is put.
 The persons within a company who have access to
accounting information.
 The disclosure of accounting information to persons
outside the company.
 The means used to gain the accounting information.
 The steps taken to ensure the accuracy and
completeness of the accounting information.
 The access that employees have to information about
themselves.

Unit 5 – Corporate Governance 29

 Board of Directors (BODs):
 In management, Managing Director or General Manager, an
integrated and balanced view point taking whole scene at
once.
 Top or General management are considered as being one
and same thing which includes BODs, managing director,
general manager with similar rank and responsibilities.
 To become a director, BODs being in key position to guide
the activities of business enterprise towards certain
objectives.
 Public company offers its shares or debentures to general
public, whereas private company can’t.
 BODs given some title in other companies like board of
governors, councils or committee of management.
Unit 5 – Corporate Governance 30
  Directors are elected by shareholders to run the business
on behalf to achieve profits.
 It is usual for board to be dominated by one or more
proprietary families which control the capital.
 First election of director is normally carried out at
company’s formation meeting, a personal selection from
among entrepreneurs and their supporters.
Board Objectives:
a) It can’t expected to perform all fractions of top
management though board is important part of top
management and composed of executive directors.
b) Initiative and business vitality should come from MD &
its team for day – to – day activities.
c) If non – executive board which of necessity has to leave
most of administrative duties to executives.
Unit 5 – Corporate Governance 31
Director’s Role:
i) Approving or initiating the objectives, major policies, long
range planning and strategies in light of overall total
environment.
ii) Complying with all legal requirements.
iii) Ensuring that sufficient capital is always available for
effective operations.
iv) Authorizing large capital expenditures, including major
contract and other commitment, granting mandates,
maintaining physical assets.
v) Engaging and selecting top executives, managing director
and approving promotions of key managers and salary scales,
ensuring management succession and effective executive
development.
vi) Maintaining a suitable organizational structure and
satisfactory relationships from managing director downwards.32
 vii) Providing leadership to the company as a whole. (e.g.)
through chairman, in liaison with managing director.
viii) Ensuring that the shareholders, represent are dealt with
fairly with regard to dividend policy, changes in capital
structure and other matters affecting financial interests.
ix) Evaluating results achieved and maintaining control
with special reference to regular reports and statements
from managing director.
x) Initiating, depending or encouraging merger’s and
acquisition including takeover bids made or received,
keeping shareholders adequately advised for
developments.
xi) Giving professional advice to executives, when
consulted formally or informally.
Unit 5 – Corporate Governance 33
 Director’s Responsibilities:
1. Responsibilities towards Governing body:
a) BOD, although elected by shareholders, is self – perpetuating.
b) Familiarity with companies acts and articles of association is
important.
c) Shareholders can’t easily control a board.
d) A public company must have at least two directors.
e) The board should be well balanced.
f) The board may be organized as a two – tier structure.
g) There may be divisional boards interlocking with the main
board.
2. Responsibilities towards Types of board:
a) Full time directors are familiar with detailed operations.
b) Part time directors bring in outside experience.
c) A mixture of a) and b) provides best of both.
Unit 5 – Corporate Governance 34
3. Responsibilities towards The Chairman:
a) The chairman must provide positive leadership.
b) He must get on with the managing director.
c) He takes the chair at meetings and is responsible for board’s
inaction.
4. Responsibilities towards Duties of the board:
a) The board is concerned with objectives, major policies, long
range planning and strategies.
b) Board members must see that they are kept informed.
5. Responsibilities towards Boardroom Procedure:
a) Board papers should be well prepared and circulated in
advance.
b) Agenda order is significant.
c) Chairman allows full discussion but no time wasting.
d) Managing director has important role to play.
e) Minutes of meeting should be translated into executive action. 35
 In the large company, there will be many boards such as:
• Divisional and regional boards (broken into self contained
division).
• Secondary boards (subsidiary operates on power generated
by main board).
• Interlocking boards.
Training and Development of Directors:
 Boardroom meetings is essential and it should be planned
and conducted about the duties of directors.
 Organized meetings with full discussion are needed for
growth.
 Chairman ensure about the importance of meeting,
stimulate creative thought, new ideas and refrain from
importing prejudice by own opinions before all present have
has a chance to speak.
Unit 5 – Corporate Governance 36
 Managing Director acts as a Focal Point:
The important responsibilities of MD are:
a) Objectives laid down by board are kept well in mind by whole
organization, recommending board to keep changes in objectives.
b) Actively concerned with long range planning and strategies
based on understanding the dynamic environment of firm.
c) Ensuring the financial soundness of the company as a whole.
d) Maintaining an effective organizational structure, with practical
effects of growth.
e) Coordinating all activities.
f) Being available, wherever possible to all important connections of
the company.
g) Keeping control over the business so that it conforms to plans laid
down.
h) Providing a high standard of personal leadership and motivating
all.
Unit 5 – Corporate Governance 37
Making the best use of Executive time:
This is possible with the following:
a) The executive must find out in detail how his day is spent.
b) He can then attempt to regain initiative.
c) It is necessary to have the time available for constructive
thought.
Executive team in action:
a) Sole command is fundamental.
b) The team must have a strong second line in support.
c) Regular meetings of top personnel help coordination.
d) An ‘Open door’ philosophy leads to good relationships
with subordinates.
Board Structure:
 A public company must have at least two directors.
 A private company should have at least one. 38
  The leading companies tend on average to have about
twelve.
 Less no. of directors on board place is burden on individual,
sometimes fail to provide for emergencies and denies
company wide range of experience and wisdom.
 Too many directors, tends to slowdown decisions through
over – much debate.
 Each company must work out its optimum size for their
growth.
 Overall quality of board is important with mixture of
subjective enterprise and objective wisdom.
 With too many internal directors results in managing
director dictatorship.
 If non executive are more, then it separates policy making
from policy execution.
Unit 5 – Corporate Governance 39
 Ethics plays a vital role in above situations.
Controversial Bullock Committee’s Report on
Industrial Democracy, 1977 recommended that, two
groups along with smaller group of independent
directors by both sides. They are:
a) Supervisory Board:
- concerned with general policy and forward planning,
but with power to appoint and dismiss executive
directors, control on behalf of shareholders.
b) Executive Board:
- with delegated authority to manage current
performance within that general policy and planning
laid down by the supervisory board.
Unit 5 – Corporate Governance 40
 Performance Evaluation of Board:
 Boards have right balance of ability, experience and range
of view point, contributing both wisdom and basic common
sense to boardroom discussion.
 All directors should be ethical in taking decisions and have
same fiduciary responsibilities.
 There should be valuable control element in appointment
of outside directors.
 Apart from acting as check on executive directors, there
should be complementary check on individuals.
 Some attention given at various times, participation
increase in industrial efficiency.
 It becomes continual presence of higher authority than
executive directors, if they have no powers.
Unit 5 – Corporate Governance 41
 INDEPENDENT DIRECTORS
Definition:
“Independent director means a director who is not
connected or associated with the company in any manner
and works only to safeguard the interest of members who
individually cannot look after their interest”.
Corporate Governance 2012 defines an “independent”
director to be:
a) one who has no relationship with the company, its related
corporations, its 10% shareholders or its officers.
b) that could interfere.
c) with the exercise of the director’s independent business
judgement and
d) with a view to the best interests of the company.
Unit 5 – Corporate Governance 42
 POSITION OF INDEPENDENT
DIRECTOR
Executive Owner Independent
Director Director Director

Board of
Primary Directors
Duty
Interest of Company

Enhanced
Interest of Interest of Responsibilit
Shareholder Stakeholders y

Balancing of Interests
Unit 5 – Corporate Governance 43
 RIGHTS & AUTHORITIES
 Right to attend and vote in every Board Meeting.
 Right to be appointed on various committees.
 Right to demand information on every business matter.
 Right to seek clarifications/justifications.
 Right to dissent.
Duties and Responsibilities:
Primary Duties:
• Act in the best interests of the company.
• Safeguard the interests of the stakeholders.
• Attend Board Meetings and participate in decisions.
• Avoid conflict situations. * Not seek personal gains.
• Maintain confidentiality. * Fiduciary duty.
• Discharge duties required in specific committees of the
Board. Unit 5 – Corporate Governance 44
Enhanced Responsibilities:
 To compel directors to act in accordance with the strict terms of
their mandate
 To compel them to exercise care and skill in carrying out their
various functions
 To compel them to use their wide discretionary powers in good
faith and proper purpose, &
 Finally, to compel them to act loyally in advancing the interest
of their company.
Regulator Perspective:
 Independence director has primary duty towards the Company
and enhanced responsibility towards stakeholders.
 Reduce conflict of interests of management.
 Ensures protection of wider interest of Company and
stakeholders, transparency of information.
 Provides independent Assessment while evaluating business
45
 Current Role of Independent Directors:
To analyze the independent director’s role, it is necessary
to identify -
i) the major responsibilities of all directors.
ii) the independent director’s relationship to broader
societal objectives. (i.e.) responsiveness, integrity,
democracy and productivity.
Some of the four responsibilities of all directors of
corporations stand out:
1. authorizing major corporate actions.
2. delegating board authority.
3. monitoring corporate conduct.
4. advising and counseling top management.
Unit 5 – Corporate Governance 46
 INDEPENDENT DIRECTOR IN A JOINT
VENTURE FIRM
JV Company

Partner A Partner B

Interest of Interest of
Reconciliation
Partner A of Interest Partner B

Interest of
Company &
Stakeholders
Unit 5 – Corporate Governance 47
 In this way
INDEPENDENT DIRECTOR
Ensures
Application of best Compliance of law in
management practices true letter and spirit
Adherence to ethical Distribution of wealth
standards And
Discharge of social responsibility for sustainable
development of all stakeholders
In other words,
CORPORATE GOVERNANCE
Unit 5 – Corporate Governance 48
 CORPORATE GOVERNANCE AT
INFOSYS

Unit 5 – Corporate Governance 49

 BENEFITS AND LIMITATIONS OF
CORPORATE GOVERNANCE
Benefits:
A corporation brings together different groups for the
purposes of doing business –
* Managers * Customers
* Employees * Investors * Suppliers
It prevents ethical misconduct by employees which is
benefits to the company.
Companies also faces nationwide over allegations.
Trust of consumers that enable company to enter
competitive markets.
Ethics program provide a managerial tool for adapting
organizations to rapid change.
Unit 5 – Corporate Governance 50
 Some of the factors that led to corporations to adopt ethics
program are:
Increased competition * Recent mergers & acquisitions
Development of new technologies
Globalization of business * Increased regulation
Mergers & acquisitions create the need to develop new ones.
Managing relations with external constituents to reassure
customers, suppliers, investors and general public to set high
ethical standards.
Ethical programs prevent or detect instance of wrongdoing
but organization practiced due diligence under following
steps –
i) organization establish compliance standards and
procedures that are capable of reducing misconduct.

Unit 5 – Corporate Governance 51

ii) specific high level of personnel must be assigned
responsibility for compliance with standards and procedures.
iii) organization take care to assign standard discretionary
authority to individuals.
iv) standards and procedures communicated to call employees
and agents through publications and training programs.
v) organization take reasonable steps to ensure compliance by
assigning monitoring and auditing system.
vi) standards entered through appropriate disciplinary
measures including appropriate, punishment of employees to
detect offence.
vii) specific action on offences depend on several factors like
organization size, nature of industry and organization
history, etc.

Unit 5 – Corporate Governance 52

Limitations (issues):
 Predominant form of corporate governance closer to
different models.
 Concept of industrial controls several companies.
 Few companies practices of corporate governance based
on –
i) Dilution of accounting.
ii) Reporting standards allowed corporations from
manipulating resources for company.
iii) Suffering by investors on account of unscrupulous
management of companies which raise capital from market.
iii) At time of raising money – bad governance.
iv) At time of allotment or promoters shares on preferential
basis.
v) Lead to dilution of wealth of minority shareholders. 53
  Certain companies not paying adequate attention to basic
procedures for shareholders services.
 Do not pay sufficient attention to time dissemination of
information to investors as also be quality of such
information.
 Implementation and inadequacy of penal provisions have
left lot to be desired due to investor grievances.
 US and UK model are integral part of market – oriented
economies.
 Developments like integration of financial markets,
requirement of foreign institutional investors and listing
securities on international stock exchange makes it
imperative for companies to be transparent.

Unit 5 – Corporate Governance 54

 CORPORATE GOVERNANCE IN INDIA –
PAST, PRESENT & FUTURE SCENARIO
 Good corporate governance in the changing business
environment has emerged as powerful tool of
competitiveness and sustainability.
 It is maximization of the stakeholders’ value and also for
maximization of pleasure and minimization of pain for the
long term business.
 Global competitions in the market need best planning,
management, innovative ideas, compliance with laws, good
relation between directors, shareholders, employees and
customers of companies.
 It is reliable, innovative and prompt service provider to
their customers and should also become reliable business
partners in order to prosper and to have all round growth. 55
Unit 5 – Corporate Governance
 It is a set of ideas, innovation, creativity, thinking having
certain ethics, values, principles etc which gives direction
and shape to its people, employees and owners of companies
and help them to flourish in global market.
 It lays down ethics, values, and principles, management
policies of a corporation which are inculcated and brought
into practice.
 It lies in promoting and maintains integrity, transparency
and accountability throughout the organization.
 Corporate governance having same rules, laws, ethics, values,
and morals etc which helps in running corporate bodies in
the more effective ways.
 Today, also helped in great way by solving the corporate
disputes in speedy way.
 Corporate bodies have their aim, values, motto, ethics and
principles etc which guide them to the ladder of success. 56
  Few companies have also shown awareness of environment
protection, social responsibilities and the cause of
upliftment and social development and they have deeply
committed themselves to it.
 Under present scenario, stakeholders are given more
importance as to shareholders to attend, vote at general
meetings, make observations and comments on the
performance of the company.
 They have vision for their company, on which they work for
the future success. They take risk and adopt innovative
ideas, have futuristic goals, motto, and future objectives to
achieve.
 The companies should always keep improving, enhancing
and upgrading themselves by bringing more reliable
integrated product and service quality.
Unit 5 – Corporate Governance 57
 Corporate governance should also have
approach of holistic view, value based
governance, should be committed towards
corporate social upliftment and social
responsibility and environment protection.
It also involves creative, generative and
positive things that add value to the various
stakeholders that are served as customers.
Finance, taxation, banking or legal
framework each and every place requires good
corporate governance.
Unit 5 – Corporate Governance 58
 VARIOUS COMMITTEES
Kumar Mangalam Birla Committee:
In early 1999, Securities and Exchange Board of India
(SEBI) had set up a committee under Shri Kumar
Mangalam Birla, member SEBI Board, to promote and
raise the standards of good corporate governance.
The Committee's terms of the reference were to:
i) suggest suitable amendments to the listing agreement
executed by the stock exchanges with the companies and
any other measures to improve the standards of corporate
governance (in terms of information, both financial and
non-financial, responsibilities of independent and outside
directors.)
ii) draft a code of corporate best practices; and
Unit 5 – Corporate Governance 59
 iii) suggest safeguards to be instituted within the companies
to deal with insider information and insider trading.
 The primary objective of the committee was to view
corporate governance from the perspective of the investors
and shareholders and to prepare a ‘Code' to suit the Indian
corporate environment.
 The committee had identified the Shareholders, the Board
of Directors and the Management as the three key
constituents of corporate governance.
 Corporate governance has several claimants –shareholders
and other stakeholders – which include suppliers,
customers, creditors, and the bankers, the employees of the
company, the government and the society at large.

Unit 5 – Corporate Governance 60

 A. Mandatory Recommendations:
 Applies to Listed Companies with Paid Up Capital Of Rs. 3
Crore and above.
 Composition Of Board Of Directors – Optimum
Combination Of Executive & Non- Executive Directors
 Audit Committee – With 3 Independent Directors With One
Having Financial And Accounting Knowledge.
 Remuneration Committee
 Board Procedures – At least 4 Meetings of the Board in a
Year with Maximum Gap of 4 Months between 2 Meetings.
To Review Operational Plans, Capital Budgets, Quarterly
Results, Minutes Of Committee's Meeting. Director Shall
Not Be A Member Of More Than 10 Committee And Shall
Not Act As Chairman Of More Than 5 Committees Across
All Companies.
Unit 5 – Corporate Governance 61
  Management Discussion And Analysis Report Covering
Industry Structure, Opportunities, Threats, Risks, Outlook,
Internal Control System.
 Information Sharing With Shareholders.
B. Non-Mandatory Recommendations:
 Role Of Chairman.
 Remuneration Committee Of Board.
 Shareholders' Right For Receiving Half Yearly Financial
Performance Postal Ballot Covering Critical Matters Like
Alteration In Memorandum Etc.
 Sale Of Whole Or Substantial Part Of The Undertaking.
 Corporate Restructuring.
 Further Issue Of Capital.
 Venturing Into New Businesses.

Unit 5 – Corporate Governance 62

Kumar Mangalam Birla:
 Born on 14th June 1967.
 Indian Industrialist and the Chairman of Aditya Birla
Group.
 Companies in India include Ultra Tech Cement, Hindalco,
Aditya Birla Nuvo, Idea Cellular, Aditya Birla Retail.
 Chancellor of Birla Institute of Technology and Science,
Pilani (BITS, Pilani).
 Continuous to hold several key and responsible position on
various regulatory and professional boards.
 Net worth: US$ 7.9 billion in 2010.
 Born into a Marwari Business Birla family in State of
Rajasthan.
 Chartered Accountant, MBA from London Business
School, got an Honorary fellow. 63
  Several awards received from Ernst & Young World
Entrepreneur Award in 2006.
 Young super performer in the CEO category by Business
Today.
 PHD Chamber of Commerce and Industry Udyog Ratna.
 Chosen by World Economic Forum (Davos) as one of the
young Global leaders.
 D-Litt from Banaras Hindu University as an exemplary
contribution to Business.
 Honorary Fellowship from AIMA plus many more hundreds
of awards and awarded Business Leader of the year 2010
Award.
 He is a winner of ‘JRD Tata Corporate Leadership’ award in
2008, Business Leader of the year 2003 by Economic Times
and Business man of the year 2003 by Business India.
Unit 5 – Corporate Governance 64
 Naresh Chandra Committee Report on Corporate Audit
and Governance (2002)
The Ministry of Corporate Affairs had appointed a high
level committee in August 2002 to examine various
corporate governance issues. The committee had been
entrusted to analyze and recommend changes, if necessary,
in diverse areas such as:
i) The statutory auditor-company relationship so as to further
strengthen the professional nature of this interface;
ii) The need, if any, for rotation of statutory audit firms or
partners;
iii) The procedure for appointment of auditors and
determination of audit fees;
iv) Restrictions, if necessary, on non-audit fees;
v) Independence of auditing functions;
Unit 5 – Corporate Governance 65
 vi) Measures required to ensure that the management and
companies actually present 'true and fair' statement of the
financial affairs of companies;
vii) The need to consider measures such as certification of
accounts and financial statements by the management and
directors;
viii) The necessity of having a transparent system of random
scrutiny of audited accounts;
ix) Adequacy of regulation of chartered accountants,
company secretaries and other similar statutory oversight
functionaries;
x) Role of independent directors, and how their independence
and effectiveness can be ensured.

Unit 5 – Corporate Governance 66

 The Committee’s recommendations relate to –
 Disqualifications for audit assignments.
 List of prohibited non-audit services.
 Independence standards for consulting.
 Compulsory audit partner rotation.
 Auditor’s disclosure of contingent liabilities, qualification
and consequent action.
 Management’s certification in event of auditor’s
replacement.
 Auditor’s annual certification of independence.
 Appointment of auditors.
 Setting up of independent quality review board.
 Proposed disciplinary mechanism for auditors.
 Defining an independent director.
Unit 5 – Corporate Governance 67
  Percentage of independent directors;
 Minimum board size of listed companies;
 Disclosure on duration of board meetings/committee
meetings;
 Additional disclosure to directors;
 Independent directors on Audit Committees of listed
companies;
 Audit Committee charter;
 Remuneration of non-executive directors;
 Exempting non-executive directors from certain liabilities;
 Training of independent directors;
 SEBI and Subordinate Legislation;
 Corporate Serious Fraud Office; etc.

Unit 5 – Corporate Governance 68

 National Foundation for Corporate Governance (NFCG):
 NFCG was established by Ministry of Corporate Affairs in
association with CII, ICAI and ICSI.
 It provides platform to deliberate issue relating to good
corporate governance and its importance, facilitate exchange
of ideas and among corporate leaders, policy makers.
It has three tier structure for management like –
* Governing Council under Chairmanship of Minister of
Corporate Affairs.
* Board of Trustees and Executive Directorate.
It has action plan for development of good corporate
governance –
i) corporate governance norms for institutional investors.
ii) corporate governance norms for independent directors.
iii) corporate governance norms for audit.
Unit 5 – Corporate Governance 69
 N R Narayana Murthy Committee Report (2003):
 SEBI had constituted a Committee on Corporate
Governance in 2002 to evaluate adequacy of existing CG
practices and further improvement.
 This committee is under chairmanship of N R Narayana
Murthy, Chairman and Chief Mentor of Infosys
Technologies Ltd.
The terms of reference to committee were –
i) Review the performance of corporate governance.
ii) Determine the role of companies in responding to rumour
and other price sensitive information circulating in market.
- the issues discussed by committee is related to audit
committees, audit reports, risk management, director
compensation, code of conduct and financial disclosures.
Unit 5 – Corporate Governance 70
 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; and
 Stock holder approval and improved disclosures
relating to compensation paid to non-executive
directors.
Unit 5 – Corporate Governance 71
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 implementation through SEBI’s regulatory framework
will strengthen existing governance practices.
- it provide a strong incentive to avoid corporate failures.
Audit Committee:
a) It should have minimum 3 members. (non executive,
majority of independent, one director).
b) Chairman of committee shall be independent director.
c) Chairman shall present at Annual general meeting.
d) It should invite executive to present at meetings.
e) Company secretary act as secretary to committee. 72
 Power of Audit Committees:
1. Investigate any activity within its terms of reference.
2. Seek information from any employee.
3. Obtain outside legal or other professional advice.
4. Secure attendance of outsiders with relevant expertise, if it
considers necessary.
Role of Audit Committee:
1. Ensure that the financial statement is correct and sufficient.
2. Recommending the appointment and removal of external
auditor, approval of payment.
3. Reviewing with management the annual financial
statements which focus on – accounting policies & practices,
qualifications, audit report, significant adjustments,
compliance with standards, stock exchange, party
transactions.
Unit 5 – Corporate Governance 73
 4. Reviewing with management, external and internal
auditors about internal control systems.
5. Reviewing the adequacy of internal audit function.
6. Discussion with internal auditors about findings and
follow up.
7. Reviewing the findings of any internal investigations by
internal auditors.
8. Discussion with external auditors before audit commences
the audit.
9. Reviewing the company’s financial and risk management
policies.
10. To look into reasons for substantial defaults in payment
to depositors, shareholders and creditors.

Unit 5 – Corporate Governance 74

 CODE OF CORPORATE
GOVERNANCE
Desirable Code of Corporate Governance:
1. In case of listed company with turnover exceeding Rs.100
crores, independent directors should consist of: (a). 30% if
Chairman is non-executive director, (b).50% if Chairman
& MD is the same person.
2. No single person should hold directorships in more than 10
listed companies.
3. Non-executive directors should be competent and active.
4. Commission not exceeding 1% (3%) of net profits for a
company with (out) a MD.
5. Attendance record of directors should be made explicit at
the time of reappointment, less than 50% no re-
appointment. 75
 6. Key information that must be reported to and placed before
the board.
7. Listed companies with turnover over Rs. 100 crores or
paid-up capital of Rs. 20 crores should have an audit
committee.
8. Additional Shareholders’ Information of Listed
Companies.
9. Compliance certificate signed by CEO or CFO.
10. Credit Rating.
11. Companies that default on fixed deposits should not
permitted to –
- accept further deposits and make inter – corporate loans
or investments until the default is made good.
- declare dividends until the default is made good.
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