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Corporategovernance 100404044122-phpapp01

  1. 1. Corporate Governance: An UnderstandingCorporate Governance may be defined as a set of systems, processes andprinciples which ensure that a company is governed in the best interest ofall stakeholders. It is the system by which companies are directed andcontrolled. It is about promoting corporate fairness, transparency andaccountability. In other words, good corporate governance is simplygood business. It ensures adequate disclosures and effective decisionmaking to achieve corporate objectives, transparency in businesstransactions, Statutory and legal compliances, Protection of shareholderinterests, commitment to values and ethical conduct of business.Definitions of Corporate Governance:‘Corporate governance is concerned with ways of bringing theinterests of investors and manager into line and ensuring thatfirms are run for the benefit of investors’.1 Corporate governanceincludes ‘the structures, processes, cultures and systems thatengender the successful operation of organizations.2
  2. 2. Research methodology: Population: Primary research: Investors invest in stock market, Company secretaries Secondary research: The population of our research is companies listed under the companies act, 1956. Sample size: Primary analysis: companies and company secretaries Secondary analysis: BSE-30 companies. Sampling Method: Convenience SamplingData Sources:  Primary Data:  Questionnaire for teacher  Questionnaire for company secretary  Secondary Data:  Business Articles  Business Magazines  Library Research  Internet SurfingCorporate Governance Page 2
  3. 3. • Objective of Corporate Governance1. Transparency and Full Disclosure Good corporate governance aims at ensuring a higher degree of transparency in an organization by encouraging full disclosure of transactions in the company accounts. Full disclosure includes compliance with regulations and disclosing any information important to the shareholders. For example, if a manager has close ties with suppliers or has a vested interest in a contract, it must be disclosed. Also, directors should be independent so that the oversight of the company management is unbiased. Transparency involves disclosure of all forms of conflict of interest.2. Equitable Treatment of Shareholders A corporate governance structure ensures equitable treatment of all the shareholders of the company. In some organizations, a particular group of shareholders remains active due to their concentrated position and may be better able to guard their interests; such groups include high-net-worth individuals and institutions that have a substantial proportion of their portfolios invested in the company. However, all shareholders deserve equitable treatment, and this equity is ensured by a good corporate governance structure in any organization.Corporate Governance Page 3
  4. 4. 3. Self Evaluation Corporate governance allows firms to evaluate their behaviour before they are scrutinized by regulatory bodies. Firms with a strong corporate governance system are better able to limit their exposure to regulatory risks and fines. An active and independent board can successfully point out the loopholes in the company operations and help solve issues internally.4. Increasing Shareholders Wealth The main objective of corporate governance is to protect the long- term interests of the shareholders. Ira Millstein, in his book, "Corporate Governance: Improving Competitiveness and Access to Capital in Global Markets," mentions that firms with strong corporate governance structures are seen to have higher valuation premiums attached to their shares. This shows that good corporate governance is perceived by the market as an incentive for shareholders.Corporate Governance Page 4
  5. 5. Prerequisite and ConstituentsToday adoption of good Corporate Governance practices has emerged asan integral element for doing business. It is not only a pre-requisite forfacing intense competition for sustainable growth in the emerging globalmarket scenario but is also an embodiment of the parameters of fairness,accountability, disclosures and transparency to maximize value for thestakeholders.Corporate governance is beyond the realm of law. It cannot be regulatedby legislation alone. Legislation can only lay down a common framework –the "form" to ensure standards. The "substance" will ultimately determinethe credibility and integrity of the process. Substance is inexorably linkedto the mindset and ethical standards of management.Also, irrespective of the model, there are three different forms ofcorporate responsibilities which all models do respect:  Political Responsibilities: the basic political obligations are abiding by legitimate law; respect for the system of rights and the principles of constitutional state.  Social Responsibilities: the corporate ethical responsibilities, which the company understands and promotes either as a community with shared values or as a part of larger community with shared values.  Economic Responsibilities: acting in accordance with the logic of competitive markets to earn profits on the basis of innovation and respect for the rights/democracy of the shareholders which can be expressed in terms of managements obligation as maximizing shareholders value.The three key constituents of corporate governance are the Board ofDirectors, the Shareholders and the Management.Corporate Governance Page 5
  6. 6.  The pivotal role in any system of corporate governance is performed by the board of directors. It is accountable to the stakeholders and directs and controls the management. It stewards the company, sets its strategic aim and financial goals and oversees their implementation, puts in place adequate internal controls and periodically reports the activities and progress of the company in the company in a transparent manner to all the stakeholders.  The shareholders role in corporate governance is to appoint the directors and the auditors and to hold the board accountable for the proper governance of the company by requiring the board to provide them periodically with the requisite information in a transparent fashion, of the activities and progress of the company.  The responsibility of the management is to undertake the management of the company in terms of the direction provided by the board, to put in place adequate control systems and to ensure their operation and to provide information to the board on a timely basis and in a transparent manner to enable the board to monitor the accountability of management to it.The underlying principles of corporate governance revolve around threebasic inter-related segments. These are:  Integrity and Fairness  Transparency and Disclosures  Accountability and ResponsibilityThe Main Constituents of Good Corporate Governance are:  Role and powers of Board: the foremost requirement of good corporate governance is the clear identification of powers, roles, responsibilities and accountability of the Board, CEO and the Chairman of the board.Corporate Governance Page 6
  7. 7.  Legislation: a clear and unambiguous legislative and regulatory framework is fundamental to effective corporate governance.  Code of Conduct: it is essential that an organizations explicitly prescribed codes of conduct are communicated to all stakeholders and are clearly understood by them. There should be some system in place to periodically measure and evaluate the adherence to such code of conduct by each member of the organization.  Board Independence: an independent board is essential for sound corporate governance. It means that the board is capable of assessing the performance of managers with an objective perspective. Hence, the majority of board members should be independent of both the management team and any commercial dealings with the company. Such independence ensures the effectiveness of the board in supervising the activities of management as well as make sure that there are no actual or perceived conflicts of interests.  Board Skills: in order to be able to undertake its functions effectively, the board must possess the necessary blend of qualities, skills, knowledge and experience so as to make quality contribution. It includes operational or technical expertise, financial skills, legal skills as well as knowledge of government and regulatory requirements.  Management Environment: includes setting up of clear objectives and appropriate ethical framework, establishing due processes, providing for transparency and clear enunciation of responsibility and accountability, implementing sound business planning, encouraging business risk assessment, having right people and right skill for jobs, establishing clear boundaries for acceptable behaviour, establishing performance evaluation measures and evaluating performance and sufficiently recognizing individual and group contribution.Corporate Governance Page 7
  8. 8.  Board Appointments: to ensure that the most competent people are appointed in the board, the board positions must be filled through the process of extensive search. A well defined and open procedure must be in place for reappointments as well as for appointment of new directors.  Board Induction and Training: is essential to ensure that directors remain abreast of all development, which are or may impact corporate governance and other related issues.  Board Meetings: are the forums for board decision making. These meetings enable directors to discharge their responsibilities. The effectiveness of board meetings is dependent on carefully planned agendas and providing relevant papers and materials to directors sufficiently prior to board meetings.  Audit Committee: is inter alia responsible for liaison with management, internal and statutory auditors, reviewing the adequacy of internal control and compliance with significant policies and procedures, reporting to the board on the key issues.  Risk Management: risk is an important element of corporate functioning and governance. There should be a clearly established process of identifying, analyzing and treating risks, which could prevent the company from effectively achieving its objectives. The board has the ultimate responsibility for identifying major risks to the organization, setting acceptable levels of risks and ensuring that senior management takes steps to detect, monitor and control these risks.Good corporate governance recognizes the diverse interests ofshareholders, lenders, employees, government, etc. The new concept ofgovernance to bring about quality corporate governance is not only anecessity to serve the divergent corporate interests, but also is a keyrequirement in the best interests of the corporate themselves and theeconomy.Corporate Governance Page 8
  9. 9. Global Landmarks in the Emergence of Corporate GovernanceThere were several frauds and scams in the corporate history of theworld. It was felt that the system for regulation is not satisfactory and itwas felt that it needed substantial external regulations. These regulationsshould penalize the wrong doers while those who abide by rules andregulations, should be rewarded by the market forces. There were severalchanges brought out by governments, shareholder activism, insistence ofmutual funds and large institutional investors, that corporate theyinvested in adopt better governance practices and in formation of severalcommittees to study the issues in depth and make recommendations,codes and guidelines on Corporate Governance that are to be put inpractice. All these measures have brought about a metamorphosis incorporate that realized that investors and society are serious aboutcorporate governance.• Developments in USACorporate Governance gained importance with the occurrence of theWatergate scandal in United States. Thereafter, as a result of subsequentinvestigations, US regulatory and legislative bodies were able to highlightcontrol failures that had allowed several major corporations to makeillegal political contributions and to bribe government officials. This led tothe development of the Foreign and Corrupt Practices Act of 1977 thatcontained specific provisions regarding the establishment, maintenanceand review of systems of internal control. This was followed in 1979 bySecurities and Exchange Commission‘s proposals for mandatory reportingon internal financial controls. In 1985, following a series of high profilebusiness failures in the US, the most notable one of which being theCorporate Governance Page 9
  10. 10. savings and loan collapse, the Tradway Commission was formed toidentify the main cause of misrepresentation in financial reports and torecommend ways of reducing incidence thereof. The tradway Reportpublished in 1987 highlighted the need for a proper control environment,independent audit committees and an objective internal audit functionand called for published reports on the effectiveness of internal controlThe commission also requested the sponsoring organizations to developan integrated set of internal control criteria to enable companies to 3improve their control.• Developments in UKIn England, the seeds of modern corporate governance were sown by theBank of Credit and Commerce International (BCCI) Scandal. The BaringsBank was another landmark. It heightened people‘s awareness andsensitivity on the issue and resolve that something ought to be done tostem the rot of corporate misdeeds. These couple of examples ofcorporate failures indicated absence of proper structure and objectives oftop management. Corporate Governance assumed more importance inlight of these corporate failures, which was affecting the shareholders andother interested parties.As a result of these corporate failures and lack of regulatory measurersfrom authorities as an adequate response to check them in future, theCommittee of Sponsoring Organizations (COSO) was born. The reportproduced in 1992 suggested a control framework and was endorsed arefined in four subsequent UK reports: Cadbury, Ruthman, Hampel andTurbull.Corporate Governance Page 10
  11. 11. There were several other corporate failures in the companies like PollyPeck, British & Commonwealth and Robert Maxwell‘s Mirror Group NewsInternational were all victims of the boom-to-bust decade of the 1980s.Several companies, which saw explosive growth in earnings, ended thedecade in a memorably disastrous manner. Such spectacular corporatefailures arose primarily out of poorly managed business practices.Corporate Governance CommitteesThe main committees, known by the names of the individuals who chairedthem are discussed here under:a) Cadbury committee on Corporate Governance –19924The stated objectives of the Cadbury Committee5was ―To help raise thestandards of corporate governance and the level of confidence in financialreporting and auditing by setting out clearly what it sees as the respectiveresponsibilities of those involved and what it believes his expected ofthem. The committee investigated the accountability of the board ofdirectors to shareholders and to society. It submitted its report andassociated ―Code of Best Practices‖ in 1992 wherein it spelt out themethods of governance needed to achieve a balance between theessential power of the board of directors and their proper accountability.Its recommendations were not mandatory. TheCadbury code of best practices had 19 recommendations. Therecommendations are in the nature of guidelines relating to the board ofdirectors, non-executive directors, executive directors and those onreporting and control.Corporate Governance Page 11
  12. 12. b) The Paul Ruthman CommitteeThe committee was constituted later to deal with the said controversialpoint of Cadbury Report. It watered down the proposal on the grounds ofpracticality. It restricted the reporting requirement to internal financialscontrols only as against ―the effectiveness of the company‘s system ofinternal control‖ as stipulated by the Code of Best Practices contained inthe Cadbury Report. The final report submitted by the Committee chaired.c) OECD Principles5Organization for Economic Co-operation and Development (OECD) wasone of the earliest non-governmental organizations to work on and spellout principles and practices that should govern corporate in their goal toattain long-term shareholder value.The OECD was trend setters as the Code of Best practices are associatedwith Cadbury report. The OECD principles in summary include thefollowing elements.i) The rights of shareholdersii) Equitable treatment of shareholdersiii) Role of stakeholders in corporate governanceiv) Disclosure and Transparencyv) Responsibilities of the boardThe OECD guidelines are somewhat general and both the Anglo-Americansystem and Continental European (or German) system would be quiteconsistent with it.Corporate Governance Page 12
  13. 13. Corporate governance: History in IndiaThere have been several major corporate governance initiatives launchedin India since the mid-1990s. The first was by the Confederation of IndianIndustry (CII), India‘s largest industry and business association, whichcame up with the first voluntary code of corporate governance in 1998.The second was by the SEBI, now enshrined as Clause 49 of the listingagreement. The third was the Naresh Chandra Committee, whichsubmitted its report in 2002. The fourth was again by SEBI — theNarayana Murthy Committee, which also submitted its report in 2002.Based on some of the recommendation of this committee, SEBI revisedClause 49 of the listing agreement in August 2003.Subsequently, SEBI withdrew the revised Clause 49 in December 2003,and currently, the original Clause 49 is in force.• The CII Code6More than a year before the onset of the Asian crisis, CII set up acommittee to examine corporate governance issues, and recommend avoluntary code of best practices. The committee was driven by theconviction that good corporate governance was essential for Indiancompanies to access domestic as well as global capital at competitiverates. The first draft of the code was prepared by April 1997, and the finaldocument (Desirable Corporate Governance: A Code), was publiclyreleased in April 1998. The code was voluntary, contained detailedprovisions, and focused on listed companies.Corporate Governance Page 13
  14. 14. • Narayana Murthy Committee report on CorporateGovernance7The fourth initiative on corporate governance in India is in the form of therecommendations of the Narayana Murthy committee. The committee wasset up by SEBI, under the chairmanship of Mr. N. R. Narayana Murthy, toreview Clause 49, and suggest measures to improve corporategovernance standards. Some of the major recommendations of thecommittee primarily related to audit committees, audit reports,independent directors, related party transactions, risk management,directorships and director compensation, codes of conduct and financialdisclosuresCorporate governance: Recent Developments inIndiaIt is observed that the scale and scope of economic reform anddevelopment in India over the past 20 years has been impressive. Thecountry has opened up large parts of its economy and capital markets,and in the process has produced many highly regarded companies insectors such as information technology, banking, autos, steel and textilemanufacturing. These companies are now making their presence feltoutside India through global mergers and acquisitions. As mentionedabove, a lesser known fact remains about India is that in April 1998 thecountry produced one of the first substantial codes of best practice incorporate governance in Asia. It was published not by a governmentalbody, a securities regulator or a stock exchange, but by the Confederationof Indian Industries (CII), the country‘s peak industry body. The followingyear, the government appointed a committee under the leadership ofCorporate Governance Page 14
  15. 15. Kumar Mangalam Birla, Chairman, Aditya Birla Group, to draft India‘s firstnational code on corporate governance for listed companies. Many of thecommittee‘s recommendations were mandatory, closely aligned tointernational best practice at the time and set higher governancestandards for listed companies than most other jurisdictions in Asia. TheIndian Code of Corporate Governance, approved by the Securities andExchange Board of India (SEBI) in early 2000, was implemented in stagesover the following two years and led to changes in stock exchange listingrules, notably the new Clause 49 in the Listing Agreement. Furtherreforms have been made over the past decade to modernise bothcompany law and securities regulations. The Companies Act, 1956 hasbeen amended several times, in areas such as postal ballots and auditcommittees, while committees were appointed in 2002 and 2004 torecommend improvements. The latter committee, chaired by Dr J.J Irani,was charged with undertaking a comprehensive review of the 1956 Actand its recommendations led to a rewrite of the law and a new CompaniesBill, 2008. (This bill was resubmitted as the Companies Bill, 2009following national elections in 2009. It is still waiting to pass Parliament.)In the area of securities regulation, SEBI has made numerous changes inrecent years including: revising and strengthening Clause 49 in relation toindependent directors and audit committees; revising Clause 41 of theListing Agreement on interim and annual financial results; and amendingother listing rules to protect the interests of minority shareholders, forexample in mergers and acquisitions. Not surprisingly, the recent Satyamfraud of late 2008 led to renewed reform efforts by Indian authorities andregulators. SEBI brought out new rules in February 2009 requiring greaterdisclosure by promoters (i.e., controlling shareholders) of theirshareholdings and any pledging of shares to third parties.Corporate Governance Page 15
  16. 16. Confederation of Indian Industry (CII) Taskforce on Corporate Governance8History tells us that even the best standards cannot prevent instances ofmajor corporate misconduct. This has been true in the US - Enron,WorldCom, Tyco and, more recently gross miss-selling of collateralizeddebt obligations; in the UK; in France; in Germany; in Italy; in Japan; inSouth Korea; and many other OECD nations. The Satyam-Maytas Infra-Maytas Properties scandal that has rocked India since 16th December2008 is another example of a massive fraud. Satyam is a one-off incident- especially considering the size of the malfeasance. The overwhelmingmajority of corporate India is well run, well regulated and does businessin a sound and legal manner. However, the Satyam episode has prompteda relook at our corporate governance norms and how industry can go astep further through some voluntary measures. With this in mind, the CIIset up a Task Force under Mr. Naresh Chandra in February 2009 torecommend ways of further improving corporate governance standardsand practices both in letter and spirit. The recommendations of theNaresh Chandra Task Force evolved over a series of meetings. Theleitmotif of the report is to enunciate additional principles that canimprove corporate governance in spirit and in practice. The reportenumerates a set of voluntary recommendations with an objective toestablish higher standards of probity and corporate governance in thecountry. The recommendations outlined in this report are aimed at listedcompanies and wholly owned subsidiaries of listed companies.Corporate Governance Page 16
  17. 17. The recommendations in brief are as under:1. Appointment of Independent Directora. Nomination Committee2. Duties, liabilities and remuneration of independent directorsa. Letter of Appointment to Directorsb. Fixed Contractual Remunerationc. Structure of Compensation to NEDs3. Remuneration Committee of Board4. Audit Committee of Board5. Separation of the offices of the Chairman and the Chief ExecutiveOfficer6. Attending Board and Committee Meetings through Tele-conferencingand video conferencing7. Executive Sessions of Independent Director8. Role of board in shareholders and related party transactions9. Auditor – Company Relationship10. Independence to Auditors11. Certificate of Independence12. Auditor Partner Rotation13. Auditor Liability14. Appointment of Auditors15. Qualifications of Auditors Report16. Whistle Blowing PolicyCorporate Governance Page 17
  18. 18. 17. Risk Management Framework18. The legal and regulatory standards19. Capability of Regulatory Agencies - Ensuring Quality in Audit Process20. Effective and Credible Enforcement21. Confiscation of Shares22. Personal Liability23. Liability of Directors and Employees24. Institutional Activism25. Media as a stakeholderAccording to the report, much of best-in-class corporate governance isvoluntary – of companies taking conscious decisions of going beyond themere letter of law. The spirit of this Task Force Report is to encouragebetter practices through voluntary adoption - based on a firm convictionthat good corporate governance not only comes from within but alsogenerates significantly greater reputational and stakeholder value whenperceived to go beyond the rubric of law.Corporate Governance Page 18
  19. 19. • Corporate Governance voluntary guidelines 20099More recently, in December 2009, the Ministry of Corporate Affairs (MCA)published a new set of ―Corporate Governance Voluntary Guidelines2009‖, designed to encourage companies to adopt better practices in therunning of boards and board committees, the appointment and rotation ofexternal auditors, and creating a whistle blowing mechanism.The guidelines are divided into the following six parts:i) Board of Directorsii) Responsibilities of the Boardiii) Audit Committee of the Boardiv) Auditorsv) Secretarial Auditvi) Institution of mechanism for Whistle BlowingThese guidelines provide for a set of good practices which may bevoluntarily adopted by the Public companies. Private companies,particularly the bigger ones, may also like to adopt these guidelines. Theguidelines are not intended to be a substitute for or addition to theexisting laws but is recommendatory in nature.Corporate Governance Page 19
  20. 20. CONCLUSIONCorporations are the prominent players in the global markets. They aremainly responsible for generating majority of economic activities in theworld, ranging from goods and services to capital and resources. Theessence of corporate governance is in promoting and maintainingintegrity, transparency and accountability in the management of thecompany as well as in manifestation of the values, principles and policiesof a corporation.Many efforts are being made, both at the Centre and the State level, topromote adoption of good corporate governance practices, which are theintegral element for doing and managing business.Hence, there is a greater need to increase awareness amongentrepreneurs about the various aspects of corporate governance. Thereare some of the areas that need special attention, namely:-  Quality of audit, which is at the root of effective corporate governance;  Role of Board of Directors as well as accountability of the CEOs and CFOs;  Quality and effectiveness of the legal, administrative and regulatory framework; etc.That is, it is necessary to provide the corporate desired level of comfort incompliance with the code, principles and requirements of corporategovernance; as well as provide relevant information to all stakeholdersregarding the performance, policies and procedures of the company in atransparent manner. There should be proper financial and non-financialdisclosures by the companies, such as, about remuneration package,financial reporting, auditing, internal controls, etc.Corporate Governance Page 20
  21. 21. References …1. F. Mayer (1997), ‗Corporate governance, competition, andperformance‘, In Enterprise and Community: New Directions in CorporateGovernance, S. Deakin and A. Hughes (Eds), Blackwell Publishers:Oxford.2. K. Keasey, S. Thompson and M. Wright (1997), ‗Introduction: Thecorporate governance problem - competing diagnoses and solutions,‘ InK. Keasey, S. Thompson and M. Wright, Corporate Governance:Economic, Management, and Financial Issues. Oxford University Press:Oxford.3. A.C.Fernando (2006), Corporate Governance, Principles, Policies andPractices. pp 76, Pearson.4. Cadbury Committee Report: A report by the committee on the financialaspects of corporate governance. The committee was chaired by Sir AdrianCadbury and issued for comment on (27 may 1992)5. Principles of Corporate Governance: A report by OECD Task Force onCorporate Governance. (1999)6. Confederation of Indian Industry, (March 1998) Desirable corporateGovernance: A Code (Based on recommendations of the national taskforce on corporate governance, chaired by Shri Rahul Bajaj).7. Securities and Exchange Board of India (2002) Report on SEBI Committeeon Corporate Governance (under the chairmanship of Shri N R Narayanamurthy)Corporate Governance Page 21
  22. 22. 8. Report of the CII Taskforce on Corporate Governance Chaired by Mr.Naresh Chandra (November 2009)9. Ministry of Corporate Affairs, Government of India. CorporateGovernance Voluntary Guidelines 2009.Corporate Governance Page 22