Corporate Governance and Ethics

Dr. Rajesh Vaidya

 Course Details
• Course Name: Corporate Governance and Ethics
• Course Code: T2236 (UG/PG): PG
• Number of Credits: 2
• Course Code : GM – P – 1
• Level: 5
 Learning Objectives
• 1. To understand, analyze, and review the larger theoretical and empirical
aspects of corporate governance, and ethics.
• 2. To equip managers of today’s world with emerging opportunities and
challenges in the domain of governance within corporate context by linking
the micro context (corporate governance) to that of macro context in a state
and global context.
 Expected Outcomes:
• At the end of the course students will have a broad perspective on
governance and ethics related aspects within a corporate atmosphere.
 Contents
• Corporate Governance
• 1. Introduction to Governance
• a. Governance in General and Governance of an enterprise;
• Models of corporate governance-western vs. Indian
• b. History of Corporate Governance
• c. Emergence of Institutions: State, Legal frameworks, courts, law of conduct, and Regulation
of behavior
• d. Linking Governance to performance of an enterprise; accountability, and transparency
 Background
• Why Corporate Governance is important?
• Fallout of financial Crises 2007-08
• The Asian Financial Crises
• Failure of major companies and financial institutions.
• In many cases failures is attributed to bad CG.
• System of managing risks were not in place
• Accounting standards and regulatory requirements were insufficient.
• Governance has gathered importance and govt. has realized as development of
economy depends on the success of the companies.
 Concept of Corporation
• History
• Concept of Limited Liability (Salmon Vs Salmon & Co, 1897)
• Corporate Veil.
• What is an Corporation?
 Concept of Corporation
• History-
• In order to give impetus to business, many family run businesses were converted to
limited companies and corporations in the 17th centaury in England.
• Corporations became popular vehicle for carrying out business as compared to sole
proprietorship as they were able to put large amount of money and take risks.
• Ownership was divided among a few individual who participated in the management
of the company.
• The people who formed the company agreed upon certain norms and these were
written down in the form of charter( East India Co.)
 Concept of Limited Liability

• A limited liability company (LLC) is a corporate structure that protects its

Investors from personal responsibility for its debts or liabilities.
• A limited liability company (LLC) is a business entity that prevents
individuals from being liable for the company's financial losses and
debt liabilities.
• In the event of legal action or business failure, liability is assumed by the
company rather than its constituent partners or shareholders.
Characteristics of limited liability company

• Separate legal existence

• Limited liability
• Flexibility in taxation.
• Simplicity in operation.
• Management Flexibility.
• Flexible Profit Distributions.
 Corporate Veil

• It is a legal concept which separates the actions of an organization to the

actions of the shareholder.
• It protects the shareholders from being liable for the company's
actions.
• Courts are empowered to lift the veil and personally hold such persons
liable who are guilty of the act.
• To protect public policy is a just ground for lifting the corporate
personality.
 Concept of Corporation
• “A corporation is an artificial being, invisible, intangible, and existing
only in the contemplation of the law.
• Being the mere creature of the law, it possesses only those properties which
the charter of its creation confers on it, either expressly or as incidental to
its very existence.
• A body of persons granted a charter legally recognizing them as a separate
entity having its own rights, privileges, and liabilities distinct from those
of its members.” American Heritage Dictionary
 Concept of Corporation
• Corporation’s key feature –
• Its ability to draw its resources from a variety of groups.
• Establish and maintain its own persona separate from all of them.
• It limits the liability of all shareholders.
• Business becomes a separate legal person, the only one responsible for its
own debts and liabilities.
 Concept of Corporation
• Implications-
• Family owned business were transformed to unlimited private organizations
with limited responsibility and limited accountability.
• Ownership of the companies became dispersed with many shareholders
holding stakes in the company.
• Shareholders became capital providers and no longer shareholding was
limited to family and friends.
 Purpose of Corporation
• Production of various types of goods and Services
• Human Satisfaction- Basic Needs
• Efficiency and efficacy- Quality of work
• Flexibility to perform better
• Identity
 Introduction to Governance
• What is Governance?
Introduction to Governance
 Governance as a concept
• Governance is a multifaceted compound situation of institutions, systems,
structures, processes, procedures, practices, relationships, and leadership
behaviour in the exercise of social, political, economic, and managerial/
administrative authority in the running of public or private affairs.

• Governance means and includes the process of decision making, and

the processes and steps by which those decisions are implemented.
 Governance as a concept
• Governance is omnipresent and is encountered by one and all in the form of
national governance, state governance, local governance and corporate governance.
• Types Of Governance
• Democratic Governance.
• Economic And Financial Governance.
• e-Governance Services.
• Corporate Governance.
• Environmental Governance and Natural Resources.
 Governance as a concept
• Governance as a process is fluid, challenging and complex, as it involves
multiple actors called as stakeholders.
• The stake holders articulate their interests and influence in decision making
process.
 Why Governance?
• The need for governance exists any time when a group of people come
together to accomplish any task or objective.
• Whenever a group of people come together for accomplishing any task ,
they need certain rules or basic norms according to which they should
work.
• Governance is the art of steering and making larger decisions in the
interest of societies and organizations.
 Corporate governance – History and
conceptual review.
• The start of industrialization in the 18th centaury brought many changes in
the business landscape in England.
• Corporations were allowed to write brooder and less restrictive charters as
the doctrine of limited lability allowed corporations to take huge risks and at
the same time avoid responsibility for the harm and loses caused by the
corporations.
 Corporate governance – History and
conceptual review.
• As the companies became more complex there was a greater need for
accountability and transparency in the working of the companies.
• MOU and article of association in the modern time under the companies act.
• This is to ensure that those who have invested in the business stay
informed about various transactions and how the funds of the
company are being managed.
• However it also provided room to the owners to take huge risks and leading
to inefficient use of resources giving rise to governance issues.
Governance of an enterprise/Corporate
Governance
 Governance of an enterprise/Corporate
Governance
• Corporate Governance may be defined as “a set of systems, processes and
principles which ensure that a company is governed in the best interest of
all stakeholders”.
• It involves regulatory and market mechanisms, and the roles and
relationships between a company’s management, its board, its
shareholders and other stakeholders, and the goals for which the
corporation is governed.
 Corporate Governance(CG)
• Corporate governance is concerned with the way in which corporate entities
are governed,
The Board
• It addresses various issues facing the-
• Boards of directors (BOD)
• Interaction with top management,
• Relationship with the owners,
• Other stakeholders and society at large. Share
Management holders
 Corporate governance
• Corporate governance is a system that guides the conduct of the people
within an organization, as well as the direction of the organization itself.
• Corporate governance is altogether different from the daily operational
decisions and activities that are executed by the management of an
organization.
• Corporate governance is the domain of the Board of Directors, as opposed
to its management team (such as the CEO and other C-suite executives e.g.,
CIO, CFO, COO etc.
Organizational Hierarchy
 Corporate governance
• Some of the many domains for which the corporate governance
function is responsible include-
• Risk management
• Strategic planning
• Accounting & Disclosures
• Talent management
• Succession planning.
 Corporate Governance(CG
• Five basic pillars-
• Accountability-.Accountability means to be answerable and be obligated to
take responsibility for one's actions.
• Fairness.
• Transparency.
• Independence
• Social Responsibility/ SDG
 Corporate Governance(CG)
Corporate governance addresses three basic issues:
• Ethical issues
• Efficiency issues
• Accountability issues
 Ethical issues
• Ethical issues are concerned with the problem of fraud, which is
becoming widespread in capitalist economies.
• Corporations often employ fraudulent means to achieve their goals.
• They form cartels to exert tremendous pressure on the government to
formulate public policy which may sometimes go against the interests of
individuals and society at large.
 Efficiency issues
• Efficiency issues are concerned with the performance of management.
• Management is responsible for ensuring reasonable returns on
investment made by shareholders.
 Accountability issues
• Accountability issues emerge as out of the stakeholders’ need for
transparency of-
• Management, customers and society at large
• Social responsibility that a corporation must shoulder
 CG-Objectives
Major Objectives
1. Adequate disclosures and effective decision making to achieve corporate objectives;
2. Transparency in business transactions
3. Statutory and legal compliances;
4. Protection of shareholder interests;
5. Commitment to values and ethical conduct of business
6. Attracting, motivating and retaining talents
7. Managing risk and protecting and enhancing the company’s reputation
 How these objectives can be achieved?
Mechanism of CG
• Internal Mechanism-
• Set of controls are exercised by the company within.
• Management plays crucial role in monitoring the progress and activities of the
company.
• Management take corrective actions, when the company drifts from its usual course.
• Internal mechanism maintains internal orders and helps achieving its objectives
smoothly.
• Follow Code of Ethics
 How these objectives can be achieved?
Mechanism of CG
• External Mechanism:
• Statutory compliances- Legal or regulatory mechanism
• Compliances from financial Institutions- includes checks on legal
compliances and debt management- Ex.Banks, SEBI etc.
• External Stakeholders- Trade unions, regulatory guidelines.
• External organizations- Industry associations, CII etc.
 Outcome of Corporate Governance.
a) Increase the access to external financing, which can encourage greater
investments, growth and the creation of more job positions.
• b) Reduce capital costs and increase company price by making
investments more attractive and, consequently, lead to more growth and job
positions;
• c) Produce better operational performance through the best allocation of
resources and management practices, which reduces the risk of financial
crises and provides better relationships with all Stakeholders.
 Why Corporate Governance?
Issues and fraud of CG
How does promoters cheat investor ? How fraud happen in the company ?
Promoter can cheat investor in number of ways.
1. Manipulated Profit:- Company is showing good growth in Profit without actual cash
generated by the company.
Symptoms :- We can identify this type of fraud by analyzing cash flow statement along with
P&L statement .
2.Non existing cash :- Value investor should be more careful before investing . Company shows
lot of cash in the balance sheet but in reality that does not exists. Satyam fraud is example of
this.
Symptoms :- Very hard to determine if auditor is unaware or involved in the fraud .
 Issues and fraud of CG
3. Operator Driven Stock :- This type of category is dangerous when promoter is also involved in it.
Many times stocks operators could have been involved for price manipulation even without
knowledge of promoter .
Symptoms :- Complete mismatch in stock valuation and fundamental.
4. Money Laundering :- This type of companies are only use to convert black money to white
money.
Symptoms Many of these so-called small & mid cap software/IT companies were known to be
using the Hawala route in order to show income from software exports.
 Models of corporate governance-
western vs. Indian
• Traditional Corporate models focused on family owned governance
approach.
• Advances in economy, management, technology paved the way for
professional managers and new models of corporate governance.

• Corporate governance models are influenced by country specific factor

and conditions and legal and regulatory framework.
 Models of corporate governance
• Anglo-American Model
• The German Model.
• The Japanese Model.
• Indian Model.
 Introduction-Anglo-American Model
• Also called as Anglo Saxon model-
• The model is developed in the context of free economy and creation of wealth
and profit.
• It assumes separation of ownership and control.
• A well defined legal model, which defines the rights and responsibilities of share
holders, BOD and managers(Corporate governance Triangle).
• The focus is increased profits would maximize not only shareholders wealth
but social welfare at large.
 Introduction-Anglo-American Model
• Board Composition-
• Board Insiders- Executive directors (ED), employee, executive member etc. mainly
responsible for increasing the share holders wealth.
• Board Outsiders- Non executive directors- They are independent of the company
and are responsible for monitoring and balancing the interests of shareholders and
ED
• Regulatory framework-
• Defines the rights and responsibilities and relationship of key stake holders
• Communication between various stake holders
 Anglo-American Model
• Share holding pattern-
• Institutional investors (61%)
• Individual share holders-38%
• Key Players- CG triangle
 Mandatory disclosures requirements- As per
Securities and exchange commission (SEC)
• Corporate financial data on quarterly basis
• Breakdown of Corporation capital structure- Ratio of Debt and equity
• Substantial Background information of each nominees to the BOD.
• All shareholders information holding more then 5% stocks out of total stocks.
• Information on any proposed mergers and acquisitions
• Any Proposed amendments in the articles of association
• Names of Individuals or companies proposed as auditiors.
 Corporate Actions requiring shareholders
approval
• Routine Corporate actions requiring shareholders approval under Anglo-American model are-
• Appointment of Directors on the Board
• Appointment of auditors.
• Non-Routine Corporate actions requiring shareholders approval under Anglo-American model
are-
• Establishment or amendment in stock option plans
• Restructuring, mergers and takeovers
• Amendments on article of incorporations.
• Proposed dividend by the BOD
( In U.S shareholders do not have right to vote but in U.K they have right to vote on proposed dividend.
 German Model
• Also known as continental model and is practiced in Austria, Netherlands and
Scandinavian countries.
• Banks hold long term stake in German corporations.
• The key players are German Banks and Corporate share holders.
• Banks play a multiple role as share holders, lenders and issuer of both equity
and debt.
• In this system the enterprise is seen as the combination of various interest
groups aimed to coordinate the national interest.
 German Model
• Board Composition-
• Two tier board structure- Supervisory Board and management Board
• Supervisory Board( Aufsichsrat) comprises of shareholders, employee unions
and employees.
• Supervisory board has the power to appoint/dismiss the management board
• Supervisory board advises and directs the management board.
• The management board( Vorstand) runs the daily affairs of the company and
comprises of executives of the company.
 German Model
• Share holding pattern-
• Corporations-41%
• Banks-27%
• Pension funds-3%
• Individual owners-4%
• Forigners-19%
 German Model
• Regulatory Requirements
• German has a strong federal tradition, both federal and state laws influence
Corporate governance. Federal Laws include-
• The stock corporation law
• The stock exchange law
• The Commercial Laws.
• The above laws are applicable to supervisory board. Regulations of German stock
exchange is however governed by the states.
 German Model
• Disclosure requirements-
• The following is required to disclose in Annual general report or AGM.
• Corporate financial data on half yearly basis
• Data on Capital structure.( Debt & Equity)
• Information of each nominee on the supervisory board.
• Aggregate data on compensation paid to supervisory and management board members.
• Information on any shareholder holding more then 5% of the total share capital
• Information on new businesses, mergers and acquisitions or restructuring.
• Information on appointment of auditors.
 German Model
• Corporate actions requiring shareholders approval
• The routine actions are-
• Allocation of Net income( Dividends and reserves)
• Ratification of acts of both Supervisory and management boards in the previous year.
• Election of Supervisory board
• Appointment of Auditors.
• Non routine actions involve mergers, restructuring , changes in article of association
etc.
 German Model
• Interaction among players-
• The German model is designed to include interests of Labors,
Corporations, banks and share holders in the corporate governance
system.
• Overall the system is geared to safeguard the interests of all key players.
 Japanese model
• The Japanese model is characterized by high level of stock ownership by
affiliate banks and companies.
• The banks have a strong and a long term relationship with the companies.
• A legal public policy and industrial policy designed to support Keiretsu
• Keiretsu- Many Japanese corporations have a strong relationship with network of
companies. This network is characterized by cross holding of debt or equities, trading of
goods and services and informal business relationship
 Japanese model
Equity Financing is important for Japanese corporations hence insiders and
their affiliates are the major share holders in Japanese corporations.
 Japanese model
• Key Players-
• 1) Main Bank ( Major insider share holder)
• 2) Affiliate Company or Keiretsu.
• 3) Management
• 4) Government- provides assistance in some conditions
 Japanese model
• Share ownership pattern-
• Shares held by financial institutions( Banks and Insurance co,)-43%
• Shares held by Corporations( Excluding financial institutions)-25%
• Shares held by forigners-3%
• In Japan financial institutions and corporations firmly hold ownership
of the equity markets
 Japanese model
• Board Composition-
• The Board of directors comprises solely of insiders.
• Comprising of Executive managers and heads of various divisions of the co.
• Almost nil or very low participation of outsiders
• In special cases if the profits of the company fall for a extended period of time
then the main bank and members of Keiretsu may remove or appoint new BOD or
appoint any retired govt. official on the board.
• Japanese boards are larger then boards of U.K and U.S.A. The average board comprises of 50 or
more members.
 Japanese model
• Regulatory Framework
• The securities bureau of Ministry of Finance
• The security exchange surveillance committee.
• The above bodies ensure compliances of code of conduct and also
undertake investigations in case of any violation of code of conduct.
 Japanese model
• Disclosure Requirements-
• Not as stringent as in Anglo-U.S model.
• Disclosure is made on semi annual basis as compared to quarterly basis in Anglo-
U.S model.
• Aggregate disclosure of board compensation as compared to individual disclosure
in Anglo-U.S model.
• Disclosure of companies 10 largest share holders as compared to disclosures of
share holders having more then 5% of share capital.
 Japanese model
• Corporate Actions requiring shareholders approval – Routine and non routine
• Appointment of Directors on the Board
• Appointment of auditors.
• Establishment or amendment in stock option plans
• Restructuring, mergers and takeovers
• Amendments on article of incorporations.
• Proposed dividend by the BOD
• Shareholders holding more then 10% of the total shares can propose agenda point to be
included in AGM
 Japanese model
• Interaction among players-
• The objective is to strengthen the relationship as Japanese prefer long
term relationship with their share holders.
• Annual reports and material is available to all shareholders
• Shareholders may vote by proxy or by mail.
 Indian Model of Corporate Governance
• The Indian model of Corporate Governance is both the combination of Anglo-U.S model
and German models.
• This is because India has three types of companies with different shareholding pattern-
• Private Sector companies- Mostly family owned and family has huge shareholding.
• Public companies- Corporates having large shareholders and Institutional Investors.
• Public Sector Undertakings- Statutory companies, PSUs, Banks and financial Institutions.
• Promoters of private companies have their personal investments in the company and do not
borrow much and therefore are better managed and controlled. They generally follow
German Model of Governance.
 Indian Model of Corporate Governance
• Corporate Governance structure differ in every company, however they have
to follow certain guidelines under-
• Companies Act 2013
• SEBI Guidelines
• Duties-Legal and Ethical
 Indian Model of Corporate Governance
• Board Composition-
• At least 1 resident Director
• At least 1 women Director
• At least 1/3 Independent directors- Roles are defined in Companies Act
2013
• Max.15 Directors, the numbers can be increased by special resolution in
AGM.
 Indian Model of Corporate Governance
• Role of Board of directors-
• To act according to the companies article of association
• To act in the best interest of the company and the shareholders
• To perform the duties with care and diligence.
• Should not indulge in activities where there is a conflict of interest
• Should not attempt to achieve any unfair advantage to them or their family
 Indian Model of Corporate Governance
• Role of Independent Directors
• They should offer independent judgement on issues and strategies
• Objectively evaluate the performance of the company and the board.
• Give unbiased advice and opinion
 Indian Model of Corporate Governance
• Code of Conduct
• Formal written code of conduct
• Honesty and ethical business conduct
• Equal opportunity at workplace
• Safety at workplace
• Written code as per law or policy
• Written policy to prevent insider trading
• Prevention against short selling of the companies securities
• Free and fair competition
• Financial reporting and accounting requirements
 Indian Model of Corporate Governance
• Board Committees under Companies Act 2013
• Audit Committee
• Nomination and remuneration committee
• Stakeholders relationship committee.
• CSR Committee.
Indian Model of Corporate Governance
Public Sector Enterprises-
• In the case of public enterprises, the central and state governments
choose the members of the board.
• Even after the disinvestment of some public sector companies, the
government continues to have a considerable hold over the activities of
the company.
• Here the interests of the stakeholders are given low priority
 Emergence of Institutions
for CORPROATE GOVERNANCE
• State Institutions
• Legal frameworks
• Conduct for Regulation of behavior
 Reports of Committees on Corporate
Governance

Some of the important reports on corporate governance published in India and

abroad are:
• Cadbury Committee Report
• CII Committee Report
• Kumara Mangalam Birla Committee
• N.R Narayan Murthy Committee
• OECD Report
• The Cadbury Committee was set up in May 1991 in the United Kingdom.
• The objective of the committee was “to help raise the standards of
corporate governance and the level of confidence in financial
reporting and auditing.
• The Cadbury Committee on corporate governance had made nineteen
recommendations.
 Cadbury Committee Report

The recommendations made by the Adrin Cadbury Committee are as

follows:
• Decision-making power should not be vested in a single person. i.e. there
should be a separation of the roles of chairman and chief executive.
• Non-executive directors should act independently while giving their
judgment on issues of strategy, performance, allocation of resources
and designing codes of conduct.
 Cadbury Committee Report

A majority of directors should be independent non-executive

directors, i.e. they should not have any financial interests in the
company.
The term of a director should not exceed three years. This can be
extended only with the prior approval of the shareholder.
There should be full transparency in matters relating to directors’
emoluments. There should be a judicious mix of salary and
performance related pay.
 Cadbury Committee Report

A Remuneration committee made up wholly or largely of non-executive

directors, should decide on the pay of the executive directors.
Balance sheet information should be reviewed by the auditor.
Information regarding the audit fee should be made public and there
should be regular rotation of auditors.
 CII Report

The full board should meet a minimum of six times a year, preferably at an
interval of two months, and each meeting should have agenda items that
require at least half a day’s discussion.
Any listed company with a turnover of Rs. 100 crore and higher should have
professionally competent, independent, non-executive directors, who
should constitute at least 30% of the board .
They need to become active participants on the board and not passive
advisors
 CII Report

To secure better effort from non-executive directors, companies should pay a
commission over and above the sitting fees for the use of professional
inputs.
 Listed Companies with either a turnover of over Rs.100 crore or a paid-up
capital or Rs.20 crore should set up audit committees within two years.
 While re-appointing members of the board, companies should give the
attendance record of the concerned directors.
 Kumaramangalam Birla Committee Report

The objective of this committee was to

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 the listed Companies, in areas such as-
continuous disclosure of material information, both financial and non-
financial,
 manner and frequency of such disclosures
 responsibilities of independent and outside directors.
 Kumaramangalam Birla Committee Report

Draft a code of corporate best practices.

Suggest safeguards to be instituted within the Companies to deal with insider
information and insider trading.
Some of the recommendations made by Kumara Mangalam Birla committee
are as follows:
The Board should have an optimum combination of executive and non-
executive directors and at least 50% of the Board should comprise of non-
executive directors.
 Kumaramangalam Birla Committee Report

 A qualified and an independent “Audit Committee” should be set up by

the Board of the Company.
 The Board should set up a “Remuneration Committee” to determine
on their behalf and on behalf of the shareholders with agreed terms of
reference.
 the company’s policy on specific remuneration packages for executive
directors including pension rights and any compensation payment.
 Kumaramangalam Birla Committee Report

The Board should set up a Committee under the chairmanship of a non-

executive/independent director to specifically look into shareholder
issues including share transfer and redressal of shareholder
complaints.
The Corporate Governance section of the Annual Report should make
disclosures on the remuneration paid to directors.
The Board meetings should be held at least four times in a year, with a
maximum time gap of four months.
Kumaramangalam Birla Committee Report

• Management Discussion and Analysis Report should form part of the

Annual Report to the shareholders.
 There should be a separate section on Corporate Governance in the
Annual Report with details on the level of compliance by the Company.
 No Director should be a member in more than 10 committees or act as
chairman of more than five committees across all Companies in
which he is a Director.
 Kumaramangalam Birla Committee Report

The company should provide a brief resume, expertise in specific

functional areas and names of Companies in which the person also holds
the directorship and the membership of committees of the board.

The half yearly declaration of financial performance including

summary of the significant events in the last six months, should be
sent to each household of shareholders
 Kumaramangalam Birla Committee Report

.
 The financial institutions should under normal circumstances have no
direct role in the decision making of the board of the company.
 A certificate from the auditors on compliance should form part of the
Annual Report and Annual Return and a copy has to be sent to the Stock
Exchanges.
 N.R Narayana Murthy committee Report
• Recommendations of the committee
• 1. Audit Committee.
• To examine the Financial statements and draft audit reports
• To hold discussions with the management on Financial condition and results
of operations.
• To seek compliance report on adherence to law.
• To Verify noting's and letters issued by the auditors.
 N.R Narayana Murthy committee Report
• Risk Management
• The Murthy committee believed that it is important for corporate board to be fully
aware of the risks facing the business.
• It is important for the shareholders to know how the company is managing the
risk.
• Board has to take proper care in the risk assessment and minimization procedures.
• They also suggested that board members should be trained in business model of the
company and risk profile of the business.
 N.R Narayana Murthy committee Report
• Initial Public offer(IPO)
• Significant disclosures are expected to be made by the company
• IPOs is an avenue to test the adequacy of the disclosure practices being
followed by a company.
• Code Of Conduct for BOD
• It should be obligatory for the board of a company to lay down code of
conduct for all board members and senior management of the company
 N.R Narayana Murthy committee Report
• Other Recommendations-
• Role of Nominee, non-executive directors, and independent directors.
• Whistle Blowing- To provide safeguard for Employees, directors etc.
• Disclosure by investments made by the company
• Review of compensation being paid the BOD
• Review of financial statements of subsidiary companies.
 OECD Report

The principles by OECD fall into five broad areas:

 The rights of shareholders
 The equitable treatment of shareholders
 The role of stakeholders
 Disclosure and transparency
 The responsibilities of the board
 Emergence of Institutions
For CORPROATE GOVERNANCE-

• Legal Bodies-
• A new development of Framework of CG is the setting up of various
monitoring bodies having specific functions for effective CG
• National Financial reporting Authority (NFRA)
• A Quasi judicial authority which has investigating power in cases of
professional misconduct by Chartered accounts/firms.
 Emergence of Institutions
For CORPROATE GOVERNANCE

• National foundation for Corporate Governance(NFCG)

• To nurture a culture for promoting good governance, voluntary compliance, and
facilitate effective participation of different stakeholders.
• To create a framework of best practices, structure , processes and ethics
• To make significant difference to Indian corporate sector by raising the standards of
CG in In India towards achieving growth.
• To provide training to directors, conduct research and build capability in the area of
CG
 Emergence of Institutions
For CORPROATE GOVERNANCE
• National Advisory committee of Accounting Standards.(NACAS)
• Setup under Companies act 1956 by GOI
• The main function is to advice Central government on formulation and
laying down of accounting policy and accounting standards.
• Serious Frauds Investigation office(SFIO)
• Formed under ministry of corporate affairs to detect the cases of fraud and
recommend prosecution of those involved
 Corporate Governance-Companies Act, 1956

 The Companies Act, 1956 provides a broad legal framework for

the operation of companies registered under this act.
 The Indian version of the Companies Act is the result of the
recommendations of the company Law committee, constituted
in 1950 under the chairmanship of Mr.H.C.Bhaba.
 Regulation of Behavior
Codes
• A code is a set of rules, which are accepted as general
principles, or a set of written rules, which state how people
in a particular organization or country should behave.
• Thus, it is a set of standards agreed on by a group of people who
do a particular job.
 Self-Regulatory Codes

Codes are generally self-regulatory rules for guiding conduct or

behavior.
International Capital Markets Group (1992) listed the following benefits
of self-regulation:
In “self-regulation” it is possible to impose ethical standards, which
go beyond those, which can be imposed by statutory legislation.
 Self-Regulatory Codes

“Self-regulation” is directly accountable to the members of their

group.
 Self-regulatory systems have built in motivation to regulate for
effectiveness and least interference.
Self-regulation operates in an environment where there is a willingness to
accept regulations formulated from within for the common good of the
needs of the entire group.
 Self-Regulatory Codes

Self-regulators, being “part” of the group understand the issues facing the
group more intimately and are therefore more sensitive to the needs of the
entire group.
The “regulated” have an opportunity to participate at all levels of the self-
regulatory process.
This makes it easier for them to appreciate and accept new regulations.
 Self-Regulatory Codes

Self-regulation has a built-in system of checks and balances as the regulated

see it as their duty to expose non-compliance.
Self-regulators can identify complex regulatory problems at an early stage
and develop suitable solutions before these problems reach a stage where
they can disrupt group operations.
Self-regulators are more comprehensive than official regulations and are
easier to operate and implement.
 CONCLUSION

• Effective corporate governance is key to the long-term success of the

company in an ever more competitive business landscape.

• It is a way of gaining an advantage over competitors through creating

leaner processes, as well as entering into an honest and open dialogue with
shareholders, suppliers, employees and all other stakeholders.
 Good Governance- Some Examples.
Company Good Governance Examples

The drinks company is renowned for its good governance, including:

•A comprehensive board diversity policy
Diageo
•Clear presentation of remuneration policy
•Promotion of a Code of Business Conduct

The insurance company’s governance efforts include:

Aviva •Transparent reporting of board evaluations
•Clear process for onboarding new directors

The aerospace business shows strong governance performance, including:

GKN •Codes of Ethics for employees, contractors and the supply chain
•Promoting a culture of fair competition
 CONCLUSION
• When it comes to how to ensure good corporate governance-
• An annual board evaluation that asks the right questions, and discusses issues.
• Delves deep into data and make sound analysis
• Highlights weaknesses and acts on them
• Tracks progress
• Follows Regulatory Compliances.
• Have a sound regulatory mechanism in place.
• Thank you