Module 1

Introduction to corporate governance

Meaning of corporate governance:
Corporate governance refers to the system of rules, practices and processes, by which a
company is directed, controlled, and managed. It involves the relationships between a
company's management, its board of directors, shareholders, and other stakeholders. It sets
the framework for making decisions that affect the company's performance and long-term
sustainability
Definition of corporate governance:
According to j Wolfensohn, “corporate governance is about promoting corporate fairness,
transparency and accountability”
Importance of corporate governance:
1.Enhances Transparency and Accountability:
Corporate governance ensures that companies provide clear, accurate, and timely
information about their financial performance and operations. This transparency
increases trust among investors, customers, and other stakeholders.
2. Protects Shareholder and Stakeholder Interests:
Shareholders are inactive in the management of their companies. postal ballets are still
absent in India. Proxies are not allowed to speak in the meetings. so, there is need for
corporate governance to protect stakeholders including employees, customers, and the
broader community.
3. growing number of scams:
Exploitation and misappropriation of public money is happening every day in the stock
markets banks, financial institutions, companies. To avoid these scams and financial
irregularities companies have started corporate governance.
4.globalisation:
In order to attract foreign investors and foreign customers requires corporate
governance. It is impossible to enter, survive and succeed global market without
corporate governance.
5. Supports Long-Term Sustainability
Companies with good corporate governance are more likely to make strategic decisions
that contribute to long-term growth and sustainability, rather than focusing solely on
short-term profits.
6. Improves Company Performance
A well-structured board with diverse skills and experience (corporate governance) can
provide valuable insights, better decision-making, operational efficiency, strategic
execution and challenge management when necessary, and steer the company in the right
direction.
7. Reduces Risk of Mismanagement and Fraud:
Governance mechanisms like internal controls, audits, and independent oversight help
detect and prevent mismanagement or fraudulent activities. This reduces the risk of
financial loss, legal issues, and other negative consequences.
8. Regulatory Compliance:
Good governance ensures that companies comply with applicable laws, regulations, and
industry standards. It helps avoid legal penalties and preserves the company’s reputation.
9. Strengthens Reputation:
Companies known for good corporate governance tend to build stronger reputations in
the market. It leads to greater market share, customer loyalty, and access to new
opportunities.
10. Encourages Sustainable Business Practices:
Corporate governance frameworks often incorporate sustainability principles, ensuring
that companies are not only focusing on profit but also on the impact of their operations
on the environment and society.
Principles of corporate governance:
1. Transparency:
Financial records, earning reports should be clearly stated without exaggeration.
Companies should operate in a transparent manner, providing accurate and timely
information to stakeholders, including shareholders, employees, and the public.
2. Accountability:
Management and the board of directors are accountable to the shareholders and other
stakeholders for their actions and decisions.
3. Fairness:
All stakeholders, particularly minority shareholders, should be treated fairly and
equitably, with equal opportunity to influence the company’s decisions.
4.Stakeholder Engagement:
The company should consider the interests of various stakeholders, such as employees,
customers, suppliers, and communities, and not just focus on maximizing shareholder
profits.
Engaging with stakeholders helps build stronger relationships, improve business
performance, and support sustainable growth.
7. Ethical Conduct
Companies should ensure that their business practices are ethical, respecting the law and
human rights while avoiding corruption, fraud, underpaying and abusing outsourced
employees and any actions that could harm people or the environment.
8. Integrity of Financial Reporting:
Financial reports should be accurate, reliable, and prepared according to established
accounting principles, providing stakeholders with a true representation of the
company’s financial health. It prevents fraud and supports market efficiency.
9. Sustainability:
Corporate governance should promote sustainable business practices that contribute to
long-term value creation, considering environmental, social, and governance (ESG)
factors. Sustainability ensures that businesses are not only profitable in the short term
but also contribute to the well-being of society.
10. Board responsibilities must be clearly outlined:
The board of directors should have the necessary skills, experience, and share similar
vision for the future of the company.

OECD principles of corporate governance:

The OECD Principles of Corporate Governance provide a globally recognized
framework for best practices in corporate governance. They were first issued in 1999 and
have since been revised, with the latest update in 2023.
1.Ensuring the Basis for an Effective Corporate Governance Framework
Corporate governance should be transparent, consistent, and adaptable to
changing circumstances. It must align with legal, regulatory, and ethical standards while
supporting economic efficiency and financial stability.
2.Shareholders’ Rights and Key Ownership Functions
Shareholders should have clear and enforceable rights, including voting rights,
participation in major corporate decisions, and access to timely and accurate information.
3.Institutional Investors, Stock Markets, and Other Intermediaries
• Institutional investors should act transparently and responsibly.
• Stock market regulations should protect investors and ensure fair trading.
• Intermediaries such as auditors and rating agencies must be independent and
competent.
4.Stakeholder Rights and ESG Considerations
Companies should recognize the rights of employees, customers, suppliers, and the
broader community.
Environmental, Social, and Governance (ESG) factors should be integrated into corporate
decision-making.
5.Disclosure and Transparency
Corporations must provide timely, accurate, and comprehensive disclosure of financial
and non-financial information. Key areas of disclosure include financial performance,
governance structures, risk factors, and sustainability initiatives.
6.Responsibilities of the Board
The board should provide strategic direction, oversee management, and ensure corporate
accountability.
Directors should act in good faith, with due diligence.
The board should maintain independence and have the necessary expertise to fulfill its
duties effectively.

Theories of corporate governance:

Agency theory:
The Agency Theory of Corporate Governance defines the relationship between principals
(shareholders) and agents (company executives, directotrs and managers). According to
this theory, principals delegate the work of running the business to the directors. The
theory highlights that the agent may be succumbed to self-interest, opportunistic
behaviour and fall short of expectation of the principal. The potential conflicts of interest
that arise when managers, who are entrusted with running a company. may not always
act in the best interests of shareholders.
This theory has been stated by Alchian and Demsetz(1972) and further developed by
Jensen and Meckling(1976)
Key Concepts of Agency Theory:
1. Principal-Agent Relationship – Shareholders (principals) hire managers (agents) to run
the company on their behalf.
2. Agency Problem – Managers may pursue personal benefits (e.g., excessive salaries,
perks, or empire-building) instead of maximizing shareholder value.
3. Information Asymmetry – Managers often have more information about the company's
operations than shareholders, making it difficult to monitor them effectively.
4. Agency Costs – These include costs incurred to monitor managers (e.g., audits,
executive compensation incentives) and costs due to poor managerial decisions.
5. Corporate Governance Mechanisms – To reduce agency problems, governance
structures like boards of directors, executive compensation plans, shareholder activism,
and regulatory oversight are put in place.
Solutions to Agency Problems:
Incentive Mechanisms: Performance-based pay (stock options, bonuses) aligns
managers' interests with shareholders' goals.
Monitoring Mechanisms: Strong boards, independent audits, and shareholder rights
improve accountability.

Stewardship theory:
Stewardship theory states that a steward protects and maximises the shareholders
wealth their performance. Stewards are company executives and managers work and
make profits for the shareholders. The stewards are satisfied and motivate when
organisational success is attained. It stresses on the position of the employees to act more
autonomously.
Key Aspects of Stewardship Theory:
1. Intrinsic Motivation: Managers are driven by internal factors such as personal
growth, achievement, and the satisfaction of contributing to organizational
success, leading them to align their actions with the company's objectives.
2. Trust and Empowerment: The theory emphasizes building trust between
shareholders and managers, advocating for empowering managers with
autonomy and authority to make decisions.
3. Collective Well-being: Managers are viewed as stewards who prioritize the long-
term success of the organization, considering the interests of all stakeholders,
including employees, customers, and the broader community.
Implications for Corporate Governance:
Adopting stewardship theory in corporate governance can lead to:
• Reduced Monitoring Costs: With managers acting as stewards, the need for
extensive monitoring diminishes, potentially lowering agency costs.
• Enhanced Organizational Performance: Empowered and trusted managers may be
more committed and effective, driving better performance and innovation.
• Long-term Focus: Encourages strategies aimed at sustainable growth and long-
term value creation rather than short-term gains.
Contrasting with Agency Theory:
• Agency Theory: Assumes potential conflicts of interest between principals and
agents, leading to the need for monitoring and control mechanisms to align
interests.
• Stewardship Theory: Assumes that managers inherently seek to act in the best
interests of the organization, reducing the need for stringent oversight and control.
 Models of corporate Governance around the world:
1. The Japanese model:
This model brings a new concept, that group of companies with common interest and
similar strategies. The managers responsibility clearly says itself in relations with share
holders and keiretsu (a network of loyal suppliers and customers). Keiretsu represents a
complex pattern of cooperation and also competition relationships, characterised by the
adoption of defensive tactics in hostile takeovers.
The characteristic pattern of governance is dominated by two types of legal relationship:
➢ Co-determination between shareholders and union, customers, suppliers,
creditors and government.
➢ Ratio between administrators and those stake holders, including managers
Key features:
❖ Interlocking ownership: Group of companies own’s each other shares, reducing
the threat of hostile takeovers.
❖ Bank dominated system: Major banks provide financing and play a governance
role.
❖ Long-term employment culture: Employees are secured with strong job and
internal promotions.
❖ Consensus-based decision making: Boards and management concentrates on
collective decision making.

2. The Anglo-Saxon Model – (Us,Uk,Canada,Australia) based on entrepreneurship

and private property
The Anglo-Saxon countries are characterised by the emergence of financial markets and
strong banking restrictions. It is also characterised by the dominance in the company
independent persons and individual shareholders. The managers are responsible to the
board of directors and shareholders. Financial markets dominate the allocation of
ownership and control rights into organisations. This model mainly considering the
transparency and access to Information, strengthening the relationship between
regulators and shareholders and promoting business ethics
Key features:
✓ Focus on shareholders: The primary objective is to maximizing shareholder
value.
✓ Dispersed ownership: Companies typically have widely held shares with many
institutional investors.
✓ Strong legal and regulatory framework: Laws like the Sarbanes-Oxley Act (USA)
and UK governance code enforce transparency.
✓ Board structure: Independent board members oversee management to reduce
conflicts of interest.
✓ Active financial markets: shareholders activism, takeovers and mergers are
common governance mechanisms.
3.The Continental European model-(Germany, France, Netherlands)
characterised by share-holders interest.
This model is characterised by high concentration of capital. Shareholders can
participate in the in the management and controlling activities. Managers are responsible
to wider group of stakeholders besides shareholders, such as unions, business partners
etc.
In the German system of governance, banks played a vital role in providing
financial assistance to most companies. Greater importance is given to the protection of
creditors.
Key features:
❖ Stakeholder approach: This model considers governance of multiple
stakeholders.
❖ Concentrated ownership: Companies often have controlling shareholders, such
as families, banks.
❖ Bank centric system: Banks play a significant role in financing and governance.
❖ Two tier board system: Both management and supervisory board system runs
daily operations.

Need for good corporate governance:

Corporate governance concept dwells in India from the arthashastra.20thcentury
witnessed the glory of Indian economy due to liberalisation, privatisation and
Globalization. This concept has emerged in India after the second half of 1996.
1. Enhances Investor Confidence
• Investors prefer well-governed companies because they ensure transparency,
accountability, and fairness.
• Good governance reduces investment risks and attracts both domestic and
foreign investments.
2. Improves Financial Performance
• Companies with strong governance often perform better financially, as they
make efficient decisions and manage resources well.
• It reduces fraud, mismanagement, and corruption, leading to higher
profitability and shareholder returns.
3. Strengthens Risk Management
• Good governance ensures proper internal controls and risk management
strategies.
• Helps companies anticipate and manage risks, including financial crises,
reputational damage, and regulatory penalties.
4. Protects Stakeholders’ Interests
• Corporate governance balances the interests of shareholders, employees,
customers, suppliers, and society.
• Ensures ethical decision-making and long-term sustainability instead of short-
term profits.
5. Ensures Compliance with Laws & Regulations
• Reduces the risk of legal penalties, fines, and reputational damage.
• Helps companies adhere to local and international laws, accounting standards,
and corporate governance codes.
6. Reduces Corporate Scandals & Fraud
• Prevents cases like Enron, Satyam, and Wirecard, where poor governance led to
fraud and financial collapse.
• Strong board oversight and ethical leadership prevent misuse of corporate
resources.
7. Enhances Corporate Reputation & Brand Value
• Well-governed companies enjoy a positive public image and strong relationships
with customers and partners.
• Reputation for integrity and transparency leads to long-term success.
8. Facilitates Access to Capital
• Companies with good governance find it easier to raise capital through equity and
debt markets.
• Lower borrowing costs as banks and investors trust well-managed companies.
9. Encourages Long-Term Sustainability
• Governance promotes corporate social responsibility (CSR), environmental,
social, and governance (ESG) initiatives.
• Ensures sustainable business practices, benefiting both society and the
environment.
10. Increases Board & Management Accountability
• Ensures that executives and directors act in the best interest of shareholders
and stakeholders.
• Prevents conflicts of interest, unethical leadership, and excessive executive
compensation.
Benefits of good corporate governance:
1.good corporate governance ensures corporate success and economic growth.
2.strong corporate governance maintains investors confidence, as a result of which,
company can raise capital efficiently and effectively.
3.It lowers the capital cost.
4.There is a positive impact on the share price.
5.It helps in brand formation and development.
6.It provides proper inducement to the owners as well as managers to achieve objectives
that are interest of the shareholders.
7.it minimizes wastages, risks, corruption and mismanagement.

Principles of corporate governance:

Corporate governance refers to the system of rules, practices, and processes by which a
company is directed and controlled. It ensures accountability, fairness, and transparency
in a company’s relationship with its stakeholders.
1. Accountability
Company leadership, especially the board of directors, must be accountable to
shareholders and other stakeholders for their actions and decisions.
2. Transparency
Organizations must provide clear, accurate, and timely disclosure of financial and non-
financial information to stakeholders.
3. Fairness
The rights of all shareholders, including minority and foreign shareholders, should be
protected equally.
4. Responsibility
Executives and the board of directors must act responsibly in managing the company and
making decisions in the best interest of stakeholders.
5. Integrity & Ethical Behaviour
A strong ethical foundation should guide all business activities, ensuring that company
policies and procedures align with moral and ethical standards.
6. Risk Management
A robust system for identifying, assessing, and mitigating risks should be in place to
ensure business continuity and stability.
7. Compliance with Laws & Regulations
Companies must adhere to legal requirements and corporate governance codes
applicable to their industry and region.
8. Stakeholder Engagement
Governance should consider the interests of all stakeholders, including employees,
customers, suppliers, and the community.
9. Board Independence & Effectiveness
The board should be composed of a mix of independent and executive directors who bring
diverse perspectives and expertise to decision-making.
10. Sustainability & Social Responsibility
Modern corporate governance emphasizes environmental, social, and governance (ESG)
considerations to ensure long-term sustainability and corporate citizenship.

Limitations of corporate governance:

1. Conflict of Interest
Board members and executives may prioritize personal or insider interests over
shareholders and stakeholders. Independent directors may not always be truly
independent in practice.
2. Costly Implementation
Maintaining a strong governance framework requires substantial financial and
administrative resources. Small and medium enterprises (SMEs) may struggle with
governance costs.
4. Weak Enforcement & Regulatory Gaps
Governance frameworks depend on effective enforcement, which varies across regions
and industries. Corruption, lobbying, and political influence can weaken governance
regulations.
5. Short-Term Focus
Pressure for quarterly financial performance can lead companies to prioritize short-term
gains over long-term sustainability. Shareholder activism may sometimes encourage
short-sighted decision-making.
6. Lack of Stakeholder Representation
Corporate governance often focuses on shareholder interests, sometimes neglecting
employees, customers, and society. Employee representation on boards is still uncommon
in many regions.
7. Risk of Fraud & Mismanagement
Even with strong governance structures, high-profile corporate scandals (e.g., Enron,
Wirecard) show that fraud can still occur. Executives may manipulate financial reports to
mislead investors.
8. Influence of Large Shareholders
Majority shareholders or institutional investors can exert excessive control, reducing
fairness for minority shareholders. Family-run businesses often struggle with governance
due to centralized decision-making.
9. Cultural and Political Differences
Corporate governance standards vary globally, making it hard to create a universal
framework. In some countries, governance structures may be influenced by political and
social norms.
10. Slow Decision-Making
Strict governance procedures can slow down decision-making, reducing agility in
dynamic markets. Bureaucratic governance structures may limit innovation and
responsiveness.

Generation of value from performance:

Meaning of generation of value from performance:
The generation of value from performance refers to the process of creating
measurable benefits, whether financial, operational, or strategic through effective
execution in business, personal development, or other fields. It revolves around the
idea that performance excellence leads to value creation for stakeholders.
Key Aspects of Value Generation from Performance:
1. Efficiency & Productivity – High performance in operations, workforce efficiency, and
optimized resource utilization lead to increased output and profitability.
2. Quality & Innovation – Superior performance in product development or service
delivery results in competitive advantage and customer satisfaction.
3. Financial Growth – Businesses that perform well in revenue generation, cost control,
and investment decisions create higher financial returns.
4. Brand Reputation & Trust – Consistently strong performance enhances brand value,
fostering customer loyalty and stakeholder confidence.
5. Sustainability & Long-term Value – Ethical and sustainable performance practices
create lasting societal and economic value.
6. Personal & Professional Growth – Individuals who consistently perform at high levels
increase their career prospects, skills, and earning potential.
Evolution of corporate governance:
1. Pre-Liberalization Era (Before 1991)/ prior to independence:
➢ India followed a socialist economic model, with the government playing a
dominant role in business.
➢ Public sector enterprises (PSEs) dominated industries, and corporate governance
was not a priority.
➢ The Companies Act of 1956 was the primary law governing corporate functioning.
➢ The Controller of Capital Issues (CCI) regulated stock markets, but there was little
emphasis on transparency and disclosures.
2. Post liberalization reforms (1991-2000):
➢ The 1991 economic reforms opened Indian markets, increasing competition and
foreign investments.
➢ The Securities and Exchange Board of India (SEBI) was given statutory powers in
1992 to regulate the stock markets.
➢ CII (confederation of Indian industries) developed a code for companies for public,
private, financial institutions or banks. CII concern towards small investors, the
promotion and encouragement of transparency within industry and business is
necessity to proceed towards international standards of disclosure of information.
➢ In 1999, the Kumar Mangalam Birla Committee recommended governance
guidelines. Clause 49 of the Listing Agreement, all listed companies were
mandatory to disclose annual reports to SEBI by the audit committees.
3.strengthening corporate governance (2001-2010):
The 2001 Enron scandal and 2009 Satyam scam pushed India to tighten corporate
governance norms.
➢ Reserve bank advised to review the supervisory role of banks and financial
institutions, to get feedback of their activities like compliance, transparency,
disclosures, audit committees etc.
➢ The Naresh Chandra Committee (2002) suggest changes in different areas like
statutory auditor and company relationship, procedure for appointment of
auditors, and determination of audit fees.
➢ Narayana Murthy Committee (2003) suggested improvements in independent
director roles, Director’s compensation and auditor accountability.
➢ SEBI revised Clause 49 in 2004, mandating role of independent directors, CEO-CFO
certification, and strict disclosure standards of Indian companies.
➢ The 2006 Companies Bill aimed to replace the outdated 1956 Act with modern
governance standards.

4. Legal framework on corporate governance (beyond2010– companies act

2013 and Present):

➢ The Companies Act, 2013 replaced the 1956 Act, introducing:

• Mandatory independent directors.
• Corporate Social Responsibility (CSR) provisions.
• Whistleblower protection.
• Stricter audit regulations.

➢ SEBI introduced Listing Obligations and Disclosure Requirements (LODR), 2015,

to streamline governance for listed companies. Also introduced standard listing
agreement of stock exchanges is for companies whose shares are listed on the
stock exchange.
➢ Institute of chartered accountants of India (ICAI) issued accounting standard
guidelines for disclosure of financial statements.
➢ Institute of company secretaries of India (ICSI) issued secretarial standards om
“meetings of board of directors and general meetings”

5. Recent Developments (2020-Present):

➢ COVID-19 led to digital governance norms like virtual board meetings.

➢ SEBI enhanced the role of independent directors (2021) to ensure their

effectiveness.
➢ The introduction of Environmental, Social, and Governance (ESG) norms is
shaping the future of corporate governance in India.