A corporation is an organization created (incorporated)
by a group of shareholders who have ownership of the
The elected board of directors appoint and oversee
management of the corporation .
Oxford English dictionary defines “governance "as the
act, manner , fact or function of governing sway control.
The word has Latin origins that suggest the notion of
“steering". it deals with the processes and systems by
which an organization or society operates.
Governance can be used with reference to all kind of
organizational structure e.g.
Ngo –not for profit organization
Municipal corporation /gram panchyat
It is generally understood as the framework of rules,
relationships, systems and processes within and by
which authority is exercised and controlled in
“A system of law and sound approaches by which
corporations are directed and controlled focusing on
the internal and external corporate structures with
the intention of monitoring the actions of
management and directors and thereby mitigating
agency risks which may stem from the misdeeds of
OBJECTIVES OF GOOD CORPORATE
Strengthen management oversight functions and
Balance skills, experience and independence on
the board appropriate to the nature and extent of
Establish a code to ensure integrity.
Safeguard the integrity of company reporting.
Risk management and internal control.
Disclosure of all relevant and material matters.
Recognition and preservation of needs of
The Aim And Purpose Of Corporate Governance
Corporate governance is concerned with holding the balance between
economic and social goals and between individual and communal
goals. The governance framework is there to encourage the efficient
use of resources and equally to require accountability for the
stewardship of those resources. The aim is to align as nearly as possible
the interests of individuals, corporations, and society. The incentive to
corporations and to those who own and manage them to adopt
internationally accepted governance standards is that these standards
will help them to achieve their corporate aims and to attract
investment. The incentive for their adoption by states is that these
standards will strengthen the economy and discourage fraud and
The foundation of any structure of corporate governance is disclosure.
Openness is the basis of public confidence in the corporate system,
and funds will flow to the centers of economic activity that inspire
Importance of Corporate Governance
• Shapes the growth and future of capital market &
• Instrument of investor’s protection.
• Protecting the interest of Shareholders and all other
• Contributes to the efficiency of the business enterprise.
• Creation of wealth.
• Enables firm to compete internationally in sustained
• Keeps an eye on the issues of insider training.
Reasons for the Growing Demand
for Corporate Governance
• Inadequacies and failures of an existing system often bring to the
fore the need for norms and codes to remedy them. This is true of
corporate governance too. Deficiencies in the Accounting
Standards became more evident after many companies, in their
eagerness to increase earnings and accelerate growth, exploited
the weaknesses in the accounting standards to show inflated
profits and understate liabilities.
• There has been renewed interest in the corporate governance
practices of modern corporations, particularly in relation to
accountability, since the high-profile collapses of a number of large
corporations during 2001-2002, most of which involved accounting
Reasons for growing demand for
• The growing awareness of investors and investors
group of their rights.
• Economic reforms that allowed the growth of
free enterprise and freed private investment
• Exposures of domestic private and public sector
companies to greater domestic and foreign
competition ,which has multiplied choices for
consumers and compelled increases in efficiency.
• The consequential changes in the shareholding
pattern of private and public sector companies.
• The growing importance of institutional
investors and public financial institutions,
gradually asserting and transforming
themselves in their new role as active
shareholders rather than as lenders.
• The stock exchanges becoming increasingly
conscious of their roles as self regulatory
organizations and exploring the possibility of
using the listing agreement as a tool for raising
the standard of corporate governance
• . Corporate scandals of various forms have maintained
public and political interest in the regulation of
corporate governance. In the U.S., these include Enron
Corporation and MCI Inc. (formerly WorldCom). Their
demise is associated with the U.S. federal government
passing the Sarbanes-Oxley Act in 2002, intending to
restore public confidence in corporate governance.
• Comparable failures in Australia (HIH, One.Tel) are
associated with the eventual passage of the CLERP 9
• Similar corporate failures in other countries stimulated
increased regulatory interest (e.g., Parmalat in Italy).
Brief history of corporate governance
Unlike South-East and East Asia, the corporate governance initiative
in India was not triggered by any serious nationwide financial,
banking and economic collapse
The initiative in India was initially driven by an industry association,
the Confederation of Indian Industry
– In December 1995, CII set up a task force to design a voluntary
code of corporate governance.
– The final draft of this code was widely circulated in 1997.
– In April 1998, the code was released. It was called Desirable
Corporate Governance: A Code.
– Between 1998 and 2000, over 25 leading companies voluntarily
followed the code: Bajaj Auto, Hindalco, Infosys, Dr. Reddy’s
Laboratories, Nicholas Piramal, Bharat Forge, BSES, HDFC, ICICI
and many others
Brief history of corporate governance
Following CII’s initiative, the Securities and Exchange Board of India
(SEBI) set up a committee under Kumar Mangalam Birla to design a
mandatory-cum-recommendatory code for listed companies
The Birla Committee Report was approved by SEBI in December 2000
Became mandatory for listed companies through the listing
agreement, and implemented according to a rollout plan:
– 2000-01: All Group A companies of the BSE or those in the S&P
CNX Nifty index… 80% of market cap.
– 2001-02: All companies with paid-up capital of Rs.100 million or
more or net worth of Rs.250 million or more.
– 2002-03: All companies with paid-up capital of Rs.30 million or
Brief history of corporate governance
Following CII and SEBI, the Department of Company Affairs (DCA)
modified the Companies Act, 1956 to incorporate specific
corporate governance provisions regarding independent directors
and audit committees.
In 2001-02, certain accounting standards were modified to further
improve financial disclosures. These were:
– Disclosure of related party transactions.
– Disclosure of segment income: revenues, profits and capital
– Deferred tax liabilities or assets.
– Consolidation of accounts.
Initiatives are being taken to (i) account for ESOPs, (ii) further
increase disclosures, and (iii) put in place systems that can further
strengthen auditors’ independence.
Disclosure of information
Risk management framework
Internal control framework
Board of directors
Shareholders or owners
Community(people affected by the actions of the
Principles of corporate governance
Rights and equitable treatment of share holders: Organizations should respect the rights
of shareholders and help shareholders to exercise those rights.
Interests of other stakeholders: Organizations should recognize that they have legal,
contractual, social, and market driven obligations to non-shareholder stakeholders,
including employees, investors, creditors, suppliers, local communities, customers, and
Role and responsibilities of the board: The board needs sufficient relevant skills and
understanding to review and challenge management performance. It also needs adequate
size and appropriate levels of independence and commitment
Integrity and ethical behavior: Integrity should be a fundamental requirement in choosing
corporate officers and board members.
Disclosure and transparency: Organizations should clarify and make publicly known the
roles and responsibilities of board and management to provide stakeholders with a level
of accountability. They should also implement procedures to independently verify and
safeguard the integrity of the company's financial reporting. Disclosure of material
matters concerning the organization should be timely and balanced to ensure that all
investors have access to clear, factual information.
Every listed company should be headed by an effective
board which should lead and control the company.
There should be board balance of executive & non
executive directors such that no individual can dominate
the board decision making.
The board should be supplied with timely information to
enable it to discharge its duties.
There should be formal and transparent procedure for
the appointment of new directors to the board.
All directors should be required to submit themselves for
re-election at regular intervals and at least every three
Integrity of the management
Ability of the board
Adequacy of the process
Commitment level of individual board members
Quality of corporate reporting
Participation of stakeholders in the management
Demand for greater transparency and accountability
Written job descriptions detailing roles and responsibilities
of chairman and board members.
Core competencies for board members are defined and
those without skills or expertise not invited.
evaluations of the board.
Orientation for new members.
Overseeing strategic development & planning
Management selection, supervision and upgrading.
Maintenance of good member relations.
Protecting and optimizing the organization’s assets.
Fulfilling legal requirements.
Fundamental Pillars of Corporate
Clarifying governance roles & responsibilities, and
supporting voluntary efforts to ensure the alignment of
managerial and shareholder interests and monitoring by
the board of directors capable of objectivity and sound
Requiring timely disclosure of adequate information
concerning corporate financial performance
Ensuring that corporations comply with relevant laws and
regulations that reflect the society’s values
Ensuring the protection of shareholders’ rights and the
enforceability of contracts with service/resource providers
Investors are Willing to Pay More For a Company With
Good Board Governance Practices
Companies are willing to pay 18 % to 28% more for better
Code of CG should be redesigned to reflect international best
Stringent enforcement of Law
More effective coordination and cooperation between SEBI, DCA
CG mechanism should be flexible and suitable
Overall ethical values in all segments should be promoted for
effective accounting, auditing, disclosure and transparent system.
Board of Directors: information that must be supplied
Annual, quarter, half year operating plans, budgets and
Quarterly results of company and its business segments.
Minutes of the audit committee and other board
Recruitment and remuneration of senior officers.
Materially important legal notices and claims, as well as
any accidents, hazards, pollution issues and labor
Any actual or expected default in financial obligations.
Details of joint ventures and collaborations.
Transactions involving payment towards goodwill, brand
equity and intellectual property.
Foreign currency and other risks and risk management.
Any regulatory non-compliance.
• Report of the Kumar
Committee on Corporate
Recommendations of Birla Committee
• The Birla Committee Report is the first formal and
comprehensive attempt to evolve a Code of
Corporate Governance, in the context of prevailing
conditions of governance in Indian companies, as
well as the state of capital markets.
• The Committee, felt that the recommendations
should be divided into mandatory and nonmandatory categories.
IMPLEMENTATION OF CORPORATE GOVERNANCE IN
• SHRI KUMAR MANGALAM COMMITTEE – CONSTITUTED IN
MAY 1999 TO PROMOTE AND RAISE THE STANDARD OF
CORPORATE GOVERNANCE IN INDIA
• MANDATORY RECOMMENDATIONS OF BIRLA
• 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
• AUDIT COMMITTEE – WITH 3 INDEPENDENT DIRECTORS
WITH ONE HAVING FINANCIAL AND ACCOUNTING
MANDATORY RECOMMENDATIONS OF BIRLA COMMITTEE
• REMUNERATION COMMITTEE
• BOARD PROCEDURES – ATLEAST 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
• 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
• MANAGEMENT DISCUSSION AND ANALYSIS REPORT
COVERING INDUSTRY STRUCTURE, OPPORTUNITIES,
THREATS, RISKS, OUTLOOK, INTERNAL CONTROL SYSTEM
• INFORMATION SHARING WITH SHAREHOLDERS
NON-MANDATORY RECOMMENDATIONS OF BIRLA
• ROLE OF CHAIRMAN
• REMUNERATION COMMITTEE OF BOARD
• SHAREHOLDERS’ RIGHT FOR RECEIVING HALF YEARLY
• POSTAL BALLOT COVERING CRITICAL MATTERS LIKE
ALTERATION IN MEMORANDUM ETC
• SALE OF WHOLE OR SUBSTANTIAL PART OF THE
• CORPORATE RESTRUCTURING
• FURTHER ISSUE OF CAPITAL
• VENTURING INTO NEW BUSINESSES
IMPLEMENTATION OF RECOMMENDATIONS OF BIRLA
• BY INTRODUCTION OF CLAUSE 49 IN THE LISTING AGREEMENT WITH
• PROVISIONS OF CLAUSE 49
• COMPOSITION OF BOARD –
IN CASE OF FULL TIME CHAIRMAN, 50% NON-EXECUTIVE DIRECTORS AND
50% EXECUTIVE DIRECTORS
• CONSTITUTION OF AUDIT COMMITTEE –
WITH 3 INDEPENDENT DIRECTORS WITH CHAIRMAN HAVING SOUND
FINANCIAL BACKGROUND. FINANCE DIRECTOR AND INTERNAL AUDIT
HEAD TO BE SPECIAL INVITEES AND MINIMUM 3 MEETINGS TO BE
CONVENED. RESPONSIBLE FOR REVIEW OF FINANCIAL PERFORMANCE 0N
HALF YEARLY/ANNUALLY BASIS; APPOINTMENT/
REMOVAL/REMUNERATION OF AUDITORS; REVIEW OF INTERNAL
CONTROL SYSTEMS AND ITS ADEQUACY
• CLAUSE 49 REQUIREMENTS
• REMUNERATION OF DIRECTORS –
REMUNERATION OF NON-EXECUTIVE DIRECTORS TO BE DECIDED BY THE
BOARD. DETAILS OF REMUNERATION PACKAGE, STOCK OPTIONS,
PERFORMANCE INCENTIVES OF DIRECTORS TO BE DISCLOSED
• BOARD PROCEDURES –
ATLEAST 4 MEETINGS IN A YEAR. DIRECTOR NOT TO BE MEMBER OF MORE
THAN 10 COMMITTEES AND CHAIRMAN OF MORE THAN 5 COMMITTEES
ACROSS ALL COMPANIES
• MANAGEMENT DISCUSSION & ANALYSIS REPORT –
• INDUSTRY STRUCTURE & DEVELOPMENTS
• OPPORTUNITIES & THREATS
• SEGMENT WISE OR PRODUCT WISE PERFORMANCE
• CLAUSE 49 REQUIREMENTS MANAGEMENT DISCUSSION &
ANALYSIS REPORT –
• TO INCLUDE:
• RISKS & CONCERNS
• INTERNAL CONTROL SYSTEMS & ITS ADEQUACY
• DISCUSSION ON FINANCIAL PERFORMANCE
• DISCLOSURE BY DIRECTORS ON MATERIAL FINANCIAL AND
COMMERCIAL TRANSACTIONS WITH THE COMPANY
• SHAREHOLDERS INFORMATION –
• BRIEF RESUME OF NEW/RE-APPOINTED DIRECTORS, QUARTERLY
RESULTS TO BE SUBMITTED TO STOCK EXCHANGES AND TO BE
PLACED ON WEB-SITE, PRESENTATION TO ANALYSTS
• CLAUSE 49 REQUIREMENTS
COMMITTEE UNDER THE CHAIRMANSHIP OF
INDEPENDENT DIRECTOR. MINIMUM 2
MEETINGS IN A YEAR
• REPORT ON CORPORATE GOVERNANCE AND
CERTIFICATE FROM AUDITORS ON COMPLIANCE
OF PROVISIONS OF CORPORATE GOVERNANCE AS
PER CLAUSE 49 IN THE LISTING AGREEMENT
Names of the Members of the committee Shri Kumar
Mangalam Birla, Chairman, Aditya Birla group
Chairman of the Committee
1. Shri Rohit Bhagat, Country Head, Boston Consulting Group
2. Dr. J Bhagwati, Jt. Secretary, Ministry of Finance.
3. Shri Samir Biswas, Regional Director, Western Region, Department of
Company Affairs, Government of India
4. Shri S.P. Chhajed, President of Institute of Chartered Accountants of India
5. Shri Virender Ganda, Ex-President of Institute of Company Secretaries of
6. Dr. Sumantra Ghoshal, Professor of Strategic Management, London
7. Shri Vijay Kalantri, President, All India Association of Industries
8. Shri Pratip Kar, Executive Director, SEBI — Member Secretary
9.Shri Y. H. Malegam, Managing Partner, S.B. Billimoria & Co
10.Shri N. R. Narayana Murthy, Chairman and Managing Director, Infosys
11.Shri A K Narayanan, President of Tamil Nadu Investor Association
12.Shri Kamal Parekh, Ex-President, Calcutta Stock Exchange (Shri J M
Chaudhary – President Calcutta Stock Exchange
13.Dr. R. H. Patil, Managing Director, National Stock Exchange Ltd.
14.Shri Anand Rathi, President of the Stock Exchange, Mumbai
15.Ms D.N. Raval, Executive Director, SEBI
16.Shri Rajesh Shah, Former President of Confederation of Indian Industries.
17.Shri L K Singhvi, Sr. Executive Director, SEBI
18.Shri S. S. Sodhi, Executive Director, Delhi Stock Exchange
• RECENT DEVELOPMENTS COMMITTEE HEADED BY SHRI NARESH
CHANDRA CONSTITUTED IN AUGUST 2002 TO EXAMINE
CORPORATE AUDIT, ROLE OF AUDITORS, RELATIONSHIP OF
COMPANY & AUDITOR
• RECOMMENDATION OF NARESH CHANDRA COMMITTEE:
• RECOMMENDED A LIST OF DISQUALIFICATIONS FOR AUDIT
ASSIGNMENTS LIKE DIRECT RELATIONSHIP WITH COMPANY, ANY
BUSINESS RELATIONSHIP WITH CLIENT, PERSONAL RELATIONSHIP
• AUDIT FIRMS NOT TO PROVIDE SERVICES SUCH AS ACCOUNTING,
INTERNAL AUDIT ASSIGNMENTS ETC. TO AUDIT CLIENTS
• AUDITOR TO DISCLOSE CONTINGENT LIABILITIES & HIGHLIGHT
SIGNIFICANT ACCOUNTING POLICIES
• RECENT DEVELOPMENTS RECOMMENDATION OF NARESH CHANDRA
• AUDIT COMMITTEE TO BE FIRST POINT OF REFERENCE FOR APPOINTMENT
• CEO & CFO OF LISTED COMPANY TO CERTIFY ON FAIRNESS, CORRECTNESS
OF ANNUAL AUDITED ACCOUNTS
• REDEFINITION OF INDEPENDENT DIRECTORS – DOES NOT HAVE ANY
MATERIAL, PECUNIARY RELATIONSHIP OR TRANSACTION WITH THE
• COMPOSITION OF BOARD OF DIRECTORS
• STATUTORY LIMIT ON THE SITTING FEE TO NON-EXECUTIVE DIRECTORS TO
BE REVIEWED RECOMMENDATIONS HAVE
• FORMED PART OF COMPANIES (AMENDMENT) BILL, 2003 (YET TO BE
RECENT DEVELOPMENTS SEBI CONSTITUTED A COMMITTEE
HEADED BY SHRI N. R. NARAYANA MURTHY
• TO REVIEW EXISTING CODE OF CORPORATE GOVERNANCE
• CORPORATE GOVERNANCE - ULTIMATE OBJECTIVE
• TO ATTAIN HIGHEST STANDARD OF PROCEDURES AND PRACTICES
FOLLOWED BY THE CORPORATE WORLD SO AS TO HAVE TRANSPARENCY IN
ITS FUNCTIONING WITH AN ULTIMATE AIM TO MAXIMISE THE VALUE OF
Narayana Murthy Committee on
Corporate Governance in 2002
• 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 terms of reference of the
committee were to:
• review the performance of corporate governance; and
• determine the role of companies in responding to rumor and other
price sensitive information circulating in the market, in order to
enhance the transparency and integrity of the market.
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, transparency, ease of implementation, verifiability
The key 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
• 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.
• WHISTLE BLOWER POLICY TO BE PALCE IN A COMPANY PROVIDING
FREEDOM TO APPROACH THE AUDIT COMMITTEE
• SUBSIDIARIES TO BE REVIEWED BY AUDIT COMMITTEE OF HOLDING
• moving to a regime where corporate financial
statements are not qualified;
• instituting a system of training of board
• evaluation of performance of board members.
• As per the committee, these recommendations codify
certain standards of 'good governance' into specific
requirements, since certain corporate responsibilities
are too important to be left to loose concepts of
fiduciary responsibility. Their implementation through
SEBI's regulatory framework will strengthen existing
governance practices and also provide a strong
incentive to avoid corporate failures. The Committee
noted that the recommendations contained in their
report can be implemented by means of an
amendment to the Listing Agreement, with changes
made to the existing clause 49.
There are several corporate governance structures available
in the developed world but there is no one structure, which
can be singled out as being better than the others. There is
no "one size fits all" structure for corporate governance. The
Committee’s recommendations are not therefore based on
any one model but are designed for the Indian environment.
Corporate governance extends beyond corporate law.
The Committee believes that its recommendations will go a
long way in raising the standards of corporate governance in
Indian firms and make them attractive destinations for local
and global capital. These recommendations will also form
the base for further evolution of the structure of corporate
governance in consonance with the rapidly changing
economic and industrial environment of the country in the